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This "remarkable" coexistence reveals how the dollar has been losing
purchasing power even as intensifying capital inflows into the US financial
system inflate its foreign exchange "rate." The process is ultimately
inflationary for an economy whose money creation role is increasingly
determined by a reckless financial oligopoly.
And it is coming to a head, perhaps as early as this week, seeing that
the big question has been answered; which will happen first, a reversal
in the dollar or a collapse in the Euro? Although the Dollar Index chart
above is a trade-weighted index2, its strength is mostly
attributable to multi year lows in the pound and the Euro. Personally,
I did not think that we would need to bring down Europe before we realized
what in the heck was really going on. Perhaps I overestimate the interests.
More frightening, however, is the possibility that I have underestimated
their barbaric arrogance instead.
Dollar bulls ecstatically proclaim that foreigners will continue to
finance the US trade deficit so long as Americans can continue to produce
the kind of economic performance that they have been claiming credit
for, and so long as the Clinton administration's claims - to have eliminated
the budget deficit - prove creditworthy. As this political and financial
deception continues to delude investors with charts like the one above
on the left, the European Central Bank has begun to maneuver its defense
systems into place. Three days ago they announced the intent to begin
converting their dollar income profits back into Euros. A small move,
but undoubtedly it was the intelligent thing to do for anyone with too
many dollars.
More importantly, the consequent market reaction must have also answered
any lingering doubts that Mr. Duisenberg may have had about where the
investing public stands, with regard to confidence about the "external
value" of the Euro.
What everybody knows is that this is the big test of the internal strengths
(or weaknesses) of the Euro monetary fabric via economic arrangements
made between individual members of the EMU. What no one knows is whether
the structure will hold up? It is, after all only the first test, and
even here there is conspicuous dissention. Noteworthy is that German
politicians have loudly demonstrated their desire for a weaker Euro,
while the ECB has quietly established its contrary desire to preserve
soundness in the currency. What does this all mean for your money?
Artificial growth versus real growth
Say what? Customarily, the prospect for an economic slowdown concomitant
with an energy crisis should produce a weaker currency, but that was
in the day when Milton Friedman envisioned the free-floating exchange
rate system as a self-correcting mechanism. Then again, I guess there
also used to be a day when people would not believe everything they
heard from the government when it came to forecasting anything, let
alone lower oil prices. How can an inflating dollar exchange rate be
self-correcting when it endows the already profligate consumer with
ever more global purchasing power to accentuate unstable economic imbalances
with, and which the free-floating exchange rate mechanism ought to correct?
Some may say that the rising exchange value of the dollar is all it
takes to correct an overheated economy, but they would be those who
have yet to hear about the stimulative effects to demand, of the virtuous
(read virtual) circle. It has been my observation, on the other hand,
that the price mechanisms of various markets have been misfiring due
to inappropriate, if not unprecedented, dollar inflation. In the end,
any capital inflows into the US have to be inflationary because their
mere existence will encourage the creation of more money supply, without
due respect for moral hazard or Fed Policy. It may not work in Japan,
but it does here, and in these times. From what we can tell, European
capital flows have largely been flowing into higher risk Asset Backed
Commercial Paper this summer, or more precisely, finance company and
general consumer debt.
I will try to explain why. The deteriorating technical condition of
US stock markets, a curiously rising negative sentiment toward third
quarter public earnings announcements, an escalating energy crisis,
domestic political uncertainty, and even some longer term dollar uncertainty
have forced the majority of these fresh funds into the short end of
US money markets, in the process, normalizing the yield curve. This
week will be particularly interesting as traders await US inflation
data, monthly US trade data, and news from the G7 on a number of rising
trade tensions as well as any potential disagreement on oil prices and
exchange rate policies.
One
wedge down, three to go. Could Intel's bearish chart resolution foretell
the composite's fate?
So even though tight money policy reigns at the Fed and undoubtedly
the US banking sector, through some degree of moral suasion, short duration
credit issuance by finance companies continues to overwhelm eager foreign
capital. In other words, the US money market isn't what it used to be.
Capitalists aren't to blame. They are only reacting to the market's
signals, which are telling them that their customers want to spend more
dollars, which already over inflated global purchasing power is evidently
on the rise again - at least for anything that doesn't contain anything
real. Is this the virtuous circle? Perhaps to some, but to others it
is a step in the wrong direction, a fact that may become more apparent
shortly.
If an escalating oil crisis is not enough to expose the new reality
(as opposed to the new economy), perhaps collapsing stock prices and
a fast approaching recession might do the trick. Already, some of the
old economy companies, like McDonalds that still calculate their profit
in cash rather than stock, have noticed that the inflating dollar is
beginning to deflate the dollar denominated value of their global assets.
And as far as we know, most shares on Wall Street are still priced in
dollars.
Stock
Bulls Got Their Wake Up Call Last Week
Raymond James' market call last week perhaps deserves credit for deciding
the point of recognition, at least for all of us who were still not
quite aware of the bear market. This point theoretically arrives during
the second phase of a primary bear market, and although it may come
as a surprise to many, it doesn't normally include a bifurcated market.
Nevertheless, stocks began to slide almost immediately after Mr. Ralph
Bloc's announcement on CNBC, on rising volumes. If so, what are employers,
which have become dependent on the issuance of stock options to finance
labor costs, going to do from now on? How many companies are going to
be able to grant higher cash remuneration if at the same time their
own sources of financing are drying up, and they suddenly discover that
they are not actually running a self-sufficient business entity? For
many, many companies, presumably in that category, the news going into
this week is not good.
More Misinformation
Persistently bullish analysts, who claim that rising oil prices will
not batter the US economy, should have their license to steal taken
away from them! What they mean is that oil prices can now rise to higher
ground before affecting the US economy in the way that they used to.
Yet even this is a dangerously unqualified conjecture. They are missing
the point. Not only have we no idea at what level oil prices will finally
exhaust the overextended US consumer, but we have no idea what the dollar
denominated price of that oil will be in the near future.
If Wall Street refuses to believe that the dollar-biased exchange rate
mechanism is misfiring on us because we have a reckless (maybe even
imperialistic) monetary system, at least they ought to remember that
we are on a floating exchange rate regime, not a fixed one. And as long
as policy makers do not adjust to this new reality and headlines encourage
consumers not to worry, nobody will take the tough medicine required,
preventing an energy crisis from actually falling on our lap (tops).
Indeed, the artificially strong exchange rate (external value) of the
US dollar continues to obscure the reality that economic demand is way
out of sync with energy supply, a fact that itself has become more evident
in the Dollar price of oil. If this financial spin weaving is allowed
to continue, it will engender an economic crisis like nothing we have
ever seen before, in my very humble opinion.
Sincerely,
Edmond J. Bugos
1. Total Return Index; weighted by relative annual consumption of a
basket of commodities.
2. Against a basket of currencies that represent major trading partners
of the US.
The GoldenBar Global Investment Climate is not a registered advisory
service and does not give investment advice. Our comments are an expression
of opinion only and should not be construed in any manner whatsoever
as recommendations to buy or sell a stock, option, future, bond, commodity
or any other financial instrument at any time. While we believe our
statements to be true, they always depend on the reliability of our
own credible sources. Of course, we recommend that you consult with
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and barring that, we encourage you confirm the facts on your own before
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