Given all the brouhaha about the US sawbuck, today’s’ topic for the Blogger’s take is:   What does the falling dollar mean to the US market and
economy?

It’s been 11 years since the last canaries employed in British mines were made redundant. Similarly, it’s been six months that the dollar has been de facto redundant in an analogous financial market role.

Global liquidity continues to drive equities in jaw-dropping style with investors largely ignoring the anxious tweet-tweet of the USD. The US economy might indeed make a faultless soft landing. Yet the future is not as riskless as equities imply; and the dollar is prudently reflecting its own loss of that religion.

-Rawdon, Capital Chronicle

~~~

Young adults may want to seriously consider how they might look in a giant
mouse costume. After the dollar’s slide in the last two months and with its
bleak prognosis going forward, some of the best career opportunities in the U.S.
will likely be found greeting visitors at Disneyland – guten tag, ni hao.

-Tim Iacono, The Mess That Greenspan Made

~~~

Economists, investors and analysts alike have been calling
for a structural adjustment in the dollar. The most common assumption is that the deficits (budget, trade and
current account) will eventually produce a lower dollar. The most recent decline in the dollar,
especially against the Euro, therefore looks to many as supporting this
thesis. It has become rare to find a
dollar bull and even harder to find arguments supporting a stronger dollar. We would caution those looking for a lower
dollar to at least look at the contrary case.
That being said the potential for a dollar adjustment lends
support to the argument for investors to maintain globally diversified
portfolios. That includes having
positions in a range of non-dollar currencies as a hedge against a dollar
decline. The ETF revolution has made
investing in currencies, and foreign equities even easier and cheaper. Indeed one could argue that holding currency
positions is in a sense a “natural
hedge
.”

Consumption, for each of us,
now includes a significant import component. 
Holding non-dollar positions can therefore help preserve buying
power.

We don’t know for certain whether the dollar will continue
to lose ground against the world’s major currencies. What we are certain of is that having a
portion of your portfolio overseas, and unhedged, remains the easiest way to
maintain real purchasing power.

~~~

The dollar decline matters. It is generally a negative; the benefits to US based multinationals notwithstanding. I am not in the camp that thinks the dollar will collapse causing some sort of economic Armageddon. As many others have rightly pointed out the dollar is too entwined in the global economy in terms of things bought and sold in US dollars and the ever growing reserve of dollars held around the world.

That being said there is a fairly clear visibility to the dollar sharing its role as world reserve currency with other currencies, like maybe the euro or a euro equivalent from Asia that we might see in our lifetime. Last spring both Norway and Iran explored trading oil in euros. We have heard about many countries either diversifying the reserves announcing plans to diversify in the future or dropping hints about diversification. Any action along these lines will be done in such a way as to try to minimize market dislocations. Dubai and UAE can just sell dollars without moving the market, China would not really be able to sell without hurting its own interests but could buy fewer dollars in the years ahead especially since they have allowed some appreciation in yuan and seem poised to allow more in the future.

I have been writing about this scenario on my blog for a while. I view this as happening over a period of several years with the result being a generally lower dollar than we are used to and generally higher rates than we have become accustomed in the years since the tech bubble burst. This would not be panic but merely discomfort.

-Roger Nusbaum, Random Roger

~~~

The US dollar is approaching support and once again bearish sentiment is rising.

Dollar_index

A Recent cover of the Economist highlights this renewed bearish sentiment. Magazine covers in general and Economist covers in particular have a nasty habit of marking major turning points. Remember that it was "The Incredible Shrinking Dollar" cover of Newsweek that marked the bottom of the US dollar in 2005 to within a week or so.

We also see big specs plowing heavily into both the British pound and the Euro, and an unwinding of those trades (which I think will happen) would be supportive of the dollar. On the other hand, we still see a carry trade in the Yen and Swiss Frank which has negative implication for both the US$ and US equities if and when that trade unwinds.

Of course the real situation is that all of these fiat currencies are eventually doomed as compared to gold. In the meantime the odds of more rate hikes by both the UK and Europe are probably overdone and it is interest rates differentials that matter most. If the expectation is for more hikes and Europe and the UK and cuts in the US, and that expectation does not happen, look for the US$ to rally. It may rally anyway based on current sentiment. To put my neck on the line I suspect the US$ will hold the 80 level (or perhaps do a headfake below then reverse). Longer term, the US$ is indeed toast but that can be quite a ways off from here.

-Mike Shedlock, Global Economic Analysis

~~~

Europe looks set to raise rates Thursday, but ironically, this now may
little effect, as the bogus “conundrum” is in full effect. In other
words any uptick in rates simply is used to set that currency up as a
target of carry, from the low interest currencies like the Yen and
Swiss Franc. This has gotten so pervasive, that I even wonder what the
effect will be, when and if, the Fed signals (as I expect) on Dec. 12,
that the market has it all wrong about rate cuts. Same question needs
to be asked, if the BOJ moves in a coordinated attack on Dec. 19th.
Although Riskloves have been warned, there is a fair chance that the
effect will once again be nominal.

I’ve been increasingly asked how the end game of this lunacy plays out.
One prospect I’ve theorized on is the collapse of the carry trades. The
problem with that one is that it seems the increase in the Swiss Franc
and the Yen needs to be quite large, a la 1998. A rally in the Euro
against the Yen and Swiss actually benefits the Riskloves, and that is
what’s happened of late.

This allows Riskloves to stem any losses they experience shorting yen
against the USD. In other words, the Yen needs to increase
substantially against all the liquidity recipient currencies, not just
slightly against the USD.

Although the carry trade will surely blow up, I’m not sure if it’s the
horse before the cart. As or more likely will be that some fusionable
material blows this Rube Goldberg machine up. There is a whole universe
of Ponzi finance units as candidates for it. This is something that
could happen at any moment, and out of the blue, like an earthquake.
The other scenario is a series of smaller quakes as unsustainable
credit spreads on the dark matter just start blowing steadily out when
Joe Soccer Mom’s debt servicing checks fail to arrive in the mail (see
yesterday’s blog). That’s more a gravity theory, and recognizes the
obvious– that shit actually happens when debtors have no savings, and
lose jobs. I really don’t see the wait as too long on that score
either. In fact the Boyz are already late adjusting credit spreads on
that one, and have catching up to do. If you are a bear, that would be
the preferred outcome, as there is lots of gradual mileage to play on
the downside. May not be so lucky though. Could just happen in the
middle of the night, as one huge thud.

-Russ Winter, Wall Street Examiner

Category: Blog Spotlight

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “Blogger’s Take: The US Buck”

  1. V L says:

    It means everything will be more expensive and everything that we own will have less of intrinsic value (less of purchasing power).

  2. david says:

    As we all know, volatility in the currency markets are still near historic lows, even after the surge since Thanksgiving. I am expecting a carry unwind similar to what we had in early december 2005, however, alot of the savvy carry traders used the low volatility over the past several months to buy low delta options to hedge their carry risk. the thud might be a dud.

  3. Teddy says:

    Has anyone noticed that the standard of living for the MEDIAN family in this country has gone down over 50% since Laffer’s supply side (Voodoo) economics became the bible for this country. In 1984, it took only 3-4 times the MEDIAN family income to buy a house in major metro areas, now it’s 10 times. Debt does matter and it’s not dark matter or voodoo.

  4. blam says:

    It’s hard to say what the Goldman (US Treasury) and the Fed have in store for us.

    The biggest mistake to be made is trying to “invest” on fundamentals.

    This is the end of the most corrupt regime since reagan and the damage is still being inflicted.

  5. Macro Man says:

    Actually, Teddy, in the 42 largest US metropolitan areas, the average house is priced at 4.6 times median income.

    There are a few cities in the US where the price: income ration exceeds ten, but by the same token there are twenty where that ratio is less than three.

    My name or url below for more details

    http://www.demographia.com/dhi-ix2005q3.pdf

  6. Teddy says:

    Macro Man, I’m talking about the most populated cities (major metro)like Atlanta, Boston, Chicago, Las Vegas, Los Angeles, Miami, NYC, Phoenix, San Diego,San Francisco, and Seattle.

  7. alexd says:

    VL I disagree. Things that are local are unlikely to be more expensive, although foreign content from countries whoose currency is non -dollar linked will be higher. As far as what our stuff is worth ugh, no. A falling dollar is inflationary and stuff will rise with it. I remember a few decades ago when the dollar was falling and a bmw was an investment since you could get more dollars for it after a year than when you got it.

    Companies that export from here will likely find demand go up since their products will be cheaper. Oil and gold, and appreaciating foreign currencies, foreign real estate (buy it now) will be attractive.

    What it means to me is that I am still going to look for what I consider extreme value/ growth plays here, but am looking more and more outside of our shores for appreaciation of my wealth since I would rather have my sales filled by the effect of the falling dollar than try to sail into it’s headwinds.

    Draw long term trend lines on charts of gold, uranium, and foreign currencies and ride the wave.

    But most importantly stay healthy and show the people that you love that you love them. The last suggestion is non dollar denominated!

  8. me says:

    “the U.S. will likely be found greeting visitors at Disneyland”

    I guess he missed the part where Disney is laying off 2-% of the animators.

  9. jkw says:

    House prices are not the same as standard of living. Since the early 80′s, people have gotten computers, cell phones, better cars, better kitchen appliances, and all sorts of useful electronics. In an economic sense, the standard of living that a median income will buy has gone up dramatically over the past 20 years. The main way that the American standard of living has dropped over the past 20 years is through increases in levels of stress. People are working longer hours in order to get the median income. Companies are starting to notice that this is most people’s major complaint (see Best Buy’s ROWE program for an example of what might be done about it).

  10. RW says:

    Those interested in a contrary case for the dollar by someone who trades currencies for a living see http://tinyurl.com/ylt4wy

    Not so much bullish as technical: A good read.

  11. M.Z. Forrest says:

    I’m not sure the car is the best measure of the American standard of living. Does the typical family own two vehicles because they are particularly wealthy or do they own two vehicles because they are necessary to facilitate the employment of Mom and Dad? Very few cities in this country have a fully functional transit system. Even in the city the size of Milwaukee, there are only 3 or 4 taxi stands that consistently have taxis.