Here we are…already in mid September. You may recall that September 14th was the one-year anniversary of Lehman Brothers’ collapse. One year ago, Lehman Brothers became the largest bankruptcy in history, tipping the financial system into crisis mode. While the drastic measures taken last fall and spring in response to the system-wide reaction to the firm’s demise averted Great Depression 2.0, by just looking at the major market averages today you would think that problems in our economy have mostly been solved. But the fact of the matter is the rebound in stocks owes its existence in large part to questionable accounting changes, unprecedented sums of cash being pumped into the system with no clear strategy to later remove those funds, and investors’ renewed appetite for risk.
This later point is particularly troubling. It appears that investors haven’t learned a lesson from 2008, or 2000 for that matter. Many of these investors seem eager to make up for their earlier losses and are throwing caution to the wind to achieve that goal. They’re buying lottery tickets such as Citigroup, Fannie Mae and Freddie Mac, which have risen three- to five-fold, despite being bankrupt and still in operation only by dint of the government’s intervention. With investor sentiment (always a good contrary indicator) now about as high as it gets, it’s hard to see stocks making much in the way of forward progress.
Several factors are at work right now that could easily derail stocks: rising commodity prices, the weak U.S. dollar, a deteriorating employment picture and indications that the economy isn’t going to rebound swiftly could all do the trick. The bond market is signally loud and clear that these are very real risks not to be dismissed. But for now, given the momentum, the bubble that equities are in could continue. I can’t say with any certainty when this cosmic rise will end; it has definitely gone on far longer and carried stocks far higher than logic would dictate. But when it does end, watch out. You’re going to see a big stampede for the door.
Gold hasn’t sold off as it has the previous two times it briefly crossed the $1,000 mark. While a modest retreat wouldn’t be surprising here, the action in the metal shows there’s plenty of interest at current levels and it suggests prices could climb higher still. Adding to the bullish tone of the market, Barrick Gold, one of the most conservatively run gold companies last week announced last week that it’s closing its hedge book. The company issued more stock, (diluting existing shareholders in the process) and will take a stiff write-off in its earnings to pay for the move. I doubt management would take such steps if they didn’t think gold prices were headed much higher.
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Wednesday, September 16, 2009
Saturday, September 12, 2009
September Market Heading South
The first week after Labor Day is traditionally a time for investors to reassess the financial markets. Unfortunately, that has often meant trouble, as indicated by the fact that September historically has been the worst month for stocks, by a wide margin.
Fear and trepidation have been running much higher than usual concerning a possible swoon this month, particularly in the wake of both the 2008 disaster and the strong market advance of the last six months.
As usual, the markets are confounding expectations and predictions so far. Stocks worldwide have risen steadily if modestly all four days so far this week. What's more, U.S. stocks as well as many foreign equity markets are now trading at 2009 highs.
I've been more optimistic than most about the markets. Yet how could we not be surprised and impressed by the market's refusal to take a well-deserved rest?
Of course, it's way too soon to declare victory for September 2009. October presents challenges too.
Even so, I continue to believe that the huge amount of cash available to invest, sitting on the sidelines generating extremely low income, is a primary factor in global financial markets today. Here in the U.S., money-market funds currently hold almost $3.6 trillion. This is well above the abnormally high level of $2.9 trillion when stocks peaked in October 2007. It's also down less than you might expect from $3.9 trillion in January of this year. So there's an abundance of fuel.
Over time, though, we need more than money burning a hole in our pockets or purses. Last week, the improving corporate earnings likely are necessary for stocks to go much higher from here. I think it will be difficult for earnings to meet current expectations. The major obstacle is the struggling American consumer. Our economy, more than others, depends on consumer spending—70 percent of the total. By either necessity or choice, we're spending less and saving more.
Word came this week that Americans' consumer borrowing in July plunged by a record $21.6 billion from June, the largest monthly decline on record. It was the sixth consecutive month of declining consumer credit. Shrinking credit dampens consumption, which pressures economic growth.
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Fear and trepidation have been running much higher than usual concerning a possible swoon this month, particularly in the wake of both the 2008 disaster and the strong market advance of the last six months.
As usual, the markets are confounding expectations and predictions so far. Stocks worldwide have risen steadily if modestly all four days so far this week. What's more, U.S. stocks as well as many foreign equity markets are now trading at 2009 highs.
I've been more optimistic than most about the markets. Yet how could we not be surprised and impressed by the market's refusal to take a well-deserved rest?
Of course, it's way too soon to declare victory for September 2009. October presents challenges too.
Even so, I continue to believe that the huge amount of cash available to invest, sitting on the sidelines generating extremely low income, is a primary factor in global financial markets today. Here in the U.S., money-market funds currently hold almost $3.6 trillion. This is well above the abnormally high level of $2.9 trillion when stocks peaked in October 2007. It's also down less than you might expect from $3.9 trillion in January of this year. So there's an abundance of fuel.
Over time, though, we need more than money burning a hole in our pockets or purses. Last week, the improving corporate earnings likely are necessary for stocks to go much higher from here. I think it will be difficult for earnings to meet current expectations. The major obstacle is the struggling American consumer. Our economy, more than others, depends on consumer spending—70 percent of the total. By either necessity or choice, we're spending less and saving more.
Word came this week that Americans' consumer borrowing in July plunged by a record $21.6 billion from June, the largest monthly decline on record. It was the sixth consecutive month of declining consumer credit. Shrinking credit dampens consumption, which pressures economic growth.
________________________________
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Friday, September 11, 2009
The falling dollar
The U.S. dollar tumbled to its lowest level in nearly a year this week. Several important trends explain and stem from the greenback's weakness.
First, the dollar decline represents a continued reversal of the flight to safety that occurred during the peak of the financial/economic crisis—September 2008 to March 2009. The perception is increasing, slowly yet steadily, that the global economy is improving. This encourages investors to sell dollars and invest in riskier assets in other currencies.
Second, positive economic news from Asia and, to a lesser extent, Europe, suggests that much of the rest of the world is on a faster recovery pace than the U.S. If so, many other nations will raise interest rates before the U.S. in order to prevent their economies from overheating. Stronger economies and higher interest rates tend to strengthen currencies.
Third, the U.S. government's massive stimulus program creates a flood of dollars, boosting the supply of greenbacks. It also raises the risk of higher inflation in the future.
Fourth, concerns have increased about the dollar's status as the world's reserve currency. While the greenback's preeminence is not immediately in doubt, it's likely that the rest of the world increasingly will seek other alternatives, perhaps eventually leading to a more internationally based currency system. For example, China is on track to become the first investor in a new series of notes issued by the International Monetary Fund.
Fifth, the dollar's value is declining not only against foreign currencies, but also against gold, oil and other commodities, which investors increasingly view as a store of value and hedge against a depreciating greenback. Gold crossed $1,000 per ounce this week for the first time since February.
The dollar is now trading where it was before the collapse of Lehman Brothers almost a year ago, accelerating global financial markets' downward spiral and fueling the rush into the U.S. currency as a safe haven.
In 2009, the dollar has declined 4 percent against the euro, but much more against the currencies of commodity-rich Brazil (20 percent), Australia (17 percent) and Canada (11 percent).
All of this is why I continue to maintain significant exposure to foreign equities, including the emerging markets, to benefit from both faster growth abroad and the long-term decline of the U.S. dollar.
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First, the dollar decline represents a continued reversal of the flight to safety that occurred during the peak of the financial/economic crisis—September 2008 to March 2009. The perception is increasing, slowly yet steadily, that the global economy is improving. This encourages investors to sell dollars and invest in riskier assets in other currencies.
Second, positive economic news from Asia and, to a lesser extent, Europe, suggests that much of the rest of the world is on a faster recovery pace than the U.S. If so, many other nations will raise interest rates before the U.S. in order to prevent their economies from overheating. Stronger economies and higher interest rates tend to strengthen currencies.
Third, the U.S. government's massive stimulus program creates a flood of dollars, boosting the supply of greenbacks. It also raises the risk of higher inflation in the future.
Fourth, concerns have increased about the dollar's status as the world's reserve currency. While the greenback's preeminence is not immediately in doubt, it's likely that the rest of the world increasingly will seek other alternatives, perhaps eventually leading to a more internationally based currency system. For example, China is on track to become the first investor in a new series of notes issued by the International Monetary Fund.
Fifth, the dollar's value is declining not only against foreign currencies, but also against gold, oil and other commodities, which investors increasingly view as a store of value and hedge against a depreciating greenback. Gold crossed $1,000 per ounce this week for the first time since February.
The dollar is now trading where it was before the collapse of Lehman Brothers almost a year ago, accelerating global financial markets' downward spiral and fueling the rush into the U.S. currency as a safe haven.
In 2009, the dollar has declined 4 percent against the euro, but much more against the currencies of commodity-rich Brazil (20 percent), Australia (17 percent) and Canada (11 percent).
All of this is why I continue to maintain significant exposure to foreign equities, including the emerging markets, to benefit from both faster growth abroad and the long-term decline of the U.S. dollar.
________________________________
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Friday, September 4, 2009
Watch out below
It’s amazing that stocks have held up they way they have. Ostensibly, the market’s advance has occurred in anticipation of the economy recovering, but for all the talk of “green shoots” a few months back, the evidence that the economy is indeed improving remains decidedly thin.
Yes, there may be signs of life in the economy here in the later part of the third quarter and the early going of the fourth quarter thanks to massive government spending and some inventory rebuilding, but we fear this will prove fleeting. This week’s ISM manufacturing index reading was good, for instance. I’ll remind you that this has been a credit-driven recession, however. Recoveries following such recessions tend to be slow drawn out affairs.
The credit market, which dwarfs the stock market, is unequivocally pointing to continued economic weakness. U.S. Treasury bills fell to their lowest level the other day in the 50 plus years records have been kept. Long-term yields, likewise, have failed to move higher as is normally the case coming out of recession.
Banks aren’t lending, period, which is why the money supply isn’t growing. And consumers are is such bad shape they aren’t likely to lend a meaningful hand with the recovery anytime soon. Early indications point to the back-to-school shopping season tuning into a bust. Credit card defaults ticked down ever so slightly in July, after five months of record highs, prompting some to see signs of hope. But while things appear not to be getting any worse for now, defaults typically track unemployment which is set to rise further in the coming months. The U.S. dollar continues to trade near its lows for the year. The buck appears to be marking time before heading lower. And the only thing likely to cause a temporary reversal would be a big selloff in equities which would bring about a resumption of the safety trade.
Rising commodities, and in particular oil, is another threat to the recovery. While some event is likely to be seen as the trigger for a setback in equities, keep in mind the market may simply collapse under its own weight. Valuations are quite steep, trading at an extremely high multiple of 2010 profits—profits that will require GDP growth of 5 percent or more to achieve. Keep in mind that profits have fallen short of expectations by a wide margin in five of the last eight quarters, so I see little reason for Wall Street to get things right in the coming year.
Wall Street isn’t alone in its (misguided) enthusiasm. Measures of investor sentiment have surpassed the levels that prevailed at the market’s top in October, 2007. Taken as a group, small investors are typically far too bullish at tops and overly bearish at bottoms. Corporate insiders, meanwhile, can’t sell their company stock fast enough. According to the tracking service Trim Tabs, insiders have been net sellers of a record $105.2 billion is shares during the past four months. Perhaps they know something about their companies’ prospects that the little guy has missed. I can’t pinpoint when the selloff will occur: It may get underway at any time, or stocks may hang in there for a couple of weeks before retreating. I am confident, however, in predicting that it will be a spectacular rout. So watch out below...
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Yes, there may be signs of life in the economy here in the later part of the third quarter and the early going of the fourth quarter thanks to massive government spending and some inventory rebuilding, but we fear this will prove fleeting. This week’s ISM manufacturing index reading was good, for instance. I’ll remind you that this has been a credit-driven recession, however. Recoveries following such recessions tend to be slow drawn out affairs.
The credit market, which dwarfs the stock market, is unequivocally pointing to continued economic weakness. U.S. Treasury bills fell to their lowest level the other day in the 50 plus years records have been kept. Long-term yields, likewise, have failed to move higher as is normally the case coming out of recession.
Banks aren’t lending, period, which is why the money supply isn’t growing. And consumers are is such bad shape they aren’t likely to lend a meaningful hand with the recovery anytime soon. Early indications point to the back-to-school shopping season tuning into a bust. Credit card defaults ticked down ever so slightly in July, after five months of record highs, prompting some to see signs of hope. But while things appear not to be getting any worse for now, defaults typically track unemployment which is set to rise further in the coming months. The U.S. dollar continues to trade near its lows for the year. The buck appears to be marking time before heading lower. And the only thing likely to cause a temporary reversal would be a big selloff in equities which would bring about a resumption of the safety trade.
Rising commodities, and in particular oil, is another threat to the recovery. While some event is likely to be seen as the trigger for a setback in equities, keep in mind the market may simply collapse under its own weight. Valuations are quite steep, trading at an extremely high multiple of 2010 profits—profits that will require GDP growth of 5 percent or more to achieve. Keep in mind that profits have fallen short of expectations by a wide margin in five of the last eight quarters, so I see little reason for Wall Street to get things right in the coming year.
Wall Street isn’t alone in its (misguided) enthusiasm. Measures of investor sentiment have surpassed the levels that prevailed at the market’s top in October, 2007. Taken as a group, small investors are typically far too bullish at tops and overly bearish at bottoms. Corporate insiders, meanwhile, can’t sell their company stock fast enough. According to the tracking service Trim Tabs, insiders have been net sellers of a record $105.2 billion is shares during the past four months. Perhaps they know something about their companies’ prospects that the little guy has missed. I can’t pinpoint when the selloff will occur: It may get underway at any time, or stocks may hang in there for a couple of weeks before retreating. I am confident, however, in predicting that it will be a spectacular rout. So watch out below...
________________________________
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Friday, August 28, 2009
Energy Consumption is Getting Out-of-Hand
Data Centers are information factories that run the digital world. They are utilized by just about every segment of the economy including the financial sector, the industrial sector, education, technology and even the web hosting providers. Outside of the US government, companies like Google, Yahoo! and MSN control and maintain some of the most sophisticated state-of-art data centers in the world. Unfortunately, data centers are energy intensive facilities that require tens of MegaWatts of energy to operate. These data centers house hundreds of server racks and networking equipment that are designed to consume more than 25KW of power per hour. Surging demand for data storage is forcing data centers to upgrade to faster and more densely packed server systems. This high density computing environment becomes a great challenge for the cooling system. A typical facility can support approximately 1MW, but instead they are forced to handle power requirement that can be > 20 MW. Nationally 1.5% of US Electricity consumption was attributed to data center use in 2006. That power usage number is expected to double by 2011. Because of the significant data center building boom in the past 5 years, power and cooling constraints in existing facilities are strained and cannot keep up. As a result, the rising cost of ownership is getting out of control. Cost of electricity for computing and supporting infrastructure now surpasses capital cost of the IT equipment.
The US Department of Energy has established power reduction goals in conjunction with Green Grid partnership. By 2011, the goal is to achieve a 25% energy savings overall in U.S. data center. This equates to approximately 10.7 billion kWh or equivalent to electricity consumed by 1 million typical U.S. households. By reducing power usage, we are able to contain carbon emissions and reduce greenhouse gas emissions by 6.5 million metrics tons of CO2 per year. This potential energy savings between 20-40% are realizable and with more aggressive strategies, we can achieve better than 50% savings in energy usage.
The catch is that companies must be willing to fork out the money today to perform the retrofits. Because paybacks are short (i.e. between 1 to 3 years) companies can regain all of their investments while maintaining the potential to extend life and capacity of existing data center infrastructure. But this also could allow for more IT equip – raising total energy use. Thus, innovative power reduction techniques must be utilized in order to keep energy consumption in-check. We all need to chip in and save a little energy everyday.
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The US Department of Energy has established power reduction goals in conjunction with Green Grid partnership. By 2011, the goal is to achieve a 25% energy savings overall in U.S. data center. This equates to approximately 10.7 billion kWh or equivalent to electricity consumed by 1 million typical U.S. households. By reducing power usage, we are able to contain carbon emissions and reduce greenhouse gas emissions by 6.5 million metrics tons of CO2 per year. This potential energy savings between 20-40% are realizable and with more aggressive strategies, we can achieve better than 50% savings in energy usage.
The catch is that companies must be willing to fork out the money today to perform the retrofits. Because paybacks are short (i.e. between 1 to 3 years) companies can regain all of their investments while maintaining the potential to extend life and capacity of existing data center infrastructure. But this also could allow for more IT equip – raising total energy use. Thus, innovative power reduction techniques must be utilized in order to keep energy consumption in-check. We all need to chip in and save a little energy everyday.
________________________________
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Friday, August 21, 2009
U.S. Dollar is on Shaky Ground
In recent days, several well-noted investment authorities called the public’s attention to the future Dollar demise. Warren Buffet, perhaps the most famous investment guru of our time, chose The New York Times to express his worries.
In an op-ed piece called “The Greenback Effect,” Buffett concentrated on the consequences of our unprecedented levels of debt and loose monetary policy. His opinion should not surprise you: he thinks that these policy actions, while necessary, will have destructive inflationary side effects down the road.
Fiscally, Buffett says, we are in uncharted territory. Federal debt levels are going up, and, while we may not have reached the tipping point yet, sooner or later the ballooning national debt is going to call into question our country’s ability to honor all this debt. This will inevitably impact the value of the dollar.
As everything he does, Buffett makes understanding the numbers seem easy: Even if other sovereign nations buy $400 billion worth of Treasuries, and Americans saved $500 billion and invest them in Treasuries, the Treasury Department would still need another $900 billion to finance the rest of the $1.8 trillion it’s issuing this year. The flood of dollar supply will threaten to erode its value. Our beloved Dollar is on shaky ground.
Another argument was brought up by PIMCO, the manager of the world’s largest fixed income fund. The declining value of the dollar, they argue, will be caused by the loss of its status as the world currency. Our readers know that we have been concerned about this possibility for a while. China, joined by other countries, has been calling for a creation of new global currency to serve as a reserve currency.
These worries can be confirmed by the way gold, the ultimate dollar hedge, has been acting. Despite the dramatic decline in end-use demand (for jewelry, electronics and the like), which in the last quarter fell to the lowest level in six years, gold prices were relatively stable. One of the reasons: a dramatic increase in investment demand. Investors bought more than 222 tons of gold in the period, a 46 percent increase year-over-year, as they opted for safety.
Further helping the case for gold is the fact that central banks, traditionally the largest suppliers of gold, are now engaged in less selling. In the first six months of the year, the banks have only sold 39 tons of gold, the lowest amount since 1944, and about a 73 percent reduction compared to the same period last year. For the first time since at least 2000, according to the World Gold Council, central banks were net gold buyers. In a recent renewal of a Central Bank Gold Agreement signed by 18 central banks, the annual gold sales limit was set at 400 tons, a 20 percent reduction from the previous limit. Going forward, we can expect to see a reduced supply on the gold market from the so-called official sector, giving the metal additional support.
Oil rallied sharply yesterday as the Department of Energy reported that U.S. oil inventories fell by more than 8 million barrels during last week. It was the biggest weekly drop in more than a year. Imports now stand at the lowest level since last September.
U.S. oil demand has also improved, according to the American Petroleum Institute. July oil product deliveries fell 3 percent compared to year-ago levels, slowing the rate of decline by half compared with the first half of the year. July crude oil production for the U.S. dropped for the first time since October as pipeline maintenance slowed production in Alaska. The average utilization rate at U.S. refineries, at 84 percent of capacity, in July was at the second highest level since November, and remained nearly 20 percentage points above the average utilization rate across all U.S. manufacturing industries. Overall, the action in oil prices is just a reminder of how responsive they are to even small signs of a potential demand increase.
________________________________
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In an op-ed piece called “The Greenback Effect,” Buffett concentrated on the consequences of our unprecedented levels of debt and loose monetary policy. His opinion should not surprise you: he thinks that these policy actions, while necessary, will have destructive inflationary side effects down the road.
Fiscally, Buffett says, we are in uncharted territory. Federal debt levels are going up, and, while we may not have reached the tipping point yet, sooner or later the ballooning national debt is going to call into question our country’s ability to honor all this debt. This will inevitably impact the value of the dollar.
As everything he does, Buffett makes understanding the numbers seem easy: Even if other sovereign nations buy $400 billion worth of Treasuries, and Americans saved $500 billion and invest them in Treasuries, the Treasury Department would still need another $900 billion to finance the rest of the $1.8 trillion it’s issuing this year. The flood of dollar supply will threaten to erode its value. Our beloved Dollar is on shaky ground.
Another argument was brought up by PIMCO, the manager of the world’s largest fixed income fund. The declining value of the dollar, they argue, will be caused by the loss of its status as the world currency. Our readers know that we have been concerned about this possibility for a while. China, joined by other countries, has been calling for a creation of new global currency to serve as a reserve currency.
These worries can be confirmed by the way gold, the ultimate dollar hedge, has been acting. Despite the dramatic decline in end-use demand (for jewelry, electronics and the like), which in the last quarter fell to the lowest level in six years, gold prices were relatively stable. One of the reasons: a dramatic increase in investment demand. Investors bought more than 222 tons of gold in the period, a 46 percent increase year-over-year, as they opted for safety.
Further helping the case for gold is the fact that central banks, traditionally the largest suppliers of gold, are now engaged in less selling. In the first six months of the year, the banks have only sold 39 tons of gold, the lowest amount since 1944, and about a 73 percent reduction compared to the same period last year. For the first time since at least 2000, according to the World Gold Council, central banks were net gold buyers. In a recent renewal of a Central Bank Gold Agreement signed by 18 central banks, the annual gold sales limit was set at 400 tons, a 20 percent reduction from the previous limit. Going forward, we can expect to see a reduced supply on the gold market from the so-called official sector, giving the metal additional support.
Oil rallied sharply yesterday as the Department of Energy reported that U.S. oil inventories fell by more than 8 million barrels during last week. It was the biggest weekly drop in more than a year. Imports now stand at the lowest level since last September.
U.S. oil demand has also improved, according to the American Petroleum Institute. July oil product deliveries fell 3 percent compared to year-ago levels, slowing the rate of decline by half compared with the first half of the year. July crude oil production for the U.S. dropped for the first time since October as pipeline maintenance slowed production in Alaska. The average utilization rate at U.S. refineries, at 84 percent of capacity, in July was at the second highest level since November, and remained nearly 20 percentage points above the average utilization rate across all U.S. manufacturing industries. Overall, the action in oil prices is just a reminder of how responsive they are to even small signs of a potential demand increase.
________________________________
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Wednesday, August 19, 2009
Stocks Confound Expectations
Stocks are supposed to go down, but they don't want to just yet.
World stock markets declined sharply Monday. The trouble started in Shanghai, where the benchmark index fell 5.8 percent, its biggest loss since November. The Dow Jones industrial average's 2 percent decline that day actually understated the weakness here in the U.S.
The widely stated reason for the tumble was renewed worries about the strength of the global economic recovery. But there doesn't have to be an official reason. In my view, it was simply a matter of overdue profit taking.
After all, news on the economy has actually been improving. And the profit taking lasted just one day. U.S. stocks have since made up for Monday's lost ground. At today's market close, the S&P 500 was actually slightly higher than its closing level last Friday.
My long-term view for both U.S. Treasury securities and the dollar is unfavorable. In both cases, it reflects concerns about the massive amount of debt in the U.S., exacerbated by the necessary but costly government programs to bail out the troubled economy and financial system. This makes our government debt securities and our currency relatively unattractive.
For Treasury issues, there are also worries about the large quantity of them held by foreign investors. It's generally in the interest of these investors to support their large Treasury stakes. But there are also signs that they want to diversify away from Treasury issues, and that they won't be as willing to buy as much as before even as new issuance will jump in order to fund our mounting debt.
But sometimes short-term trends run counter to the long-term ones.
China and Japan, the world's largest creditors to the U.S., bought longer-term Treasury notes and bonds at a record rate in June. It's also worth noting that demand for Treasury securities has risen from U.S. households, which have finally started to save more after years of spendthrift behavior.
China and Japan were heavy sellers of short-term T-bills in June. But total foreign net buying of Treasurys excluding Treasury bills hit $100.5 billion in June.
So while we continue to worry that the U.S. government's aggressive stimulus program will eventually fuel inflation, this is not yet a major concern for foreign buyers.
In June, yields on Treasury notes and bonds hit their highest levels for the year, with the 10-year yield briefly climbing above 4 percent. That yield has now fallen to below 3.5 percent amid strong buying. Yet investors supposedly are turning more bearish on Treasuries based on the belief that yields will rise (will lower prices) as the economy gradually improves
Meanwhile, the dollar benefited in 2008 as a safe haven amid a risk-averse, global flight to quality during the economic crisis. But as the world's investors regain a taste of risk, they tend to move out of dollars and into other vehicles that offer better profit potential, particularly in a recovering economic environment.
For the dollar, the direction is more clear: down. While demand for Treasury issues has remained relatively strong despite perceived economic improvement, that same factor is putting pressure on the greenback
The Dollar Index, which the Intercontinental Exchange (a publicly traded global electronic marketplace) uses to track the dollar against six major currencies, is now at its lowest level in almost a year. Stronger economic data tend to weaken the dollar as investors became more comfortable buying riskier, higher-yielding assets elsewhere.
A potential catalyst for a higher dollar would be if the Federal Reserve were to start raising short-term interest rates again. But that's not in the cards yet.
The big picture for the world's economy is this. First, many emerging-markets economies are doing well. Second, the economies of many more mature nations stabilized in the second quarter. The U.S., however, continues to lag, although growth is expected to return in the current quarter.
The Organization for Economic Cooperation and Development said this week that its 30 members, developed-market nations, collectively should start to grow sooner than previously expected. But the group's economic recovery will probably still be weak.
The OECD said its member countries stabilized in the second quarter, led by export growth in Germany and Japan. The OECD's report said that gross domestic product (GDP) of the OECD's major seven countries (Canada, France, Germany, Italy, the U.S., the U.K. and Japan) slipped 0.1 percent from the previous quarter between April and June after dropping 2.1 percent in the first quarter. The U.K. and Italy lagged the most behind, followed by the U.S. at a 0.3 percent drop.
The outlook from Europe, where the OECD is based, is much the same as it is here. For example, the International Chamber of Commerce there said that high unemployment rates and rising public debt in many countries bring concerns about a sustained recovery in the global economy.
________________________________
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World stock markets declined sharply Monday. The trouble started in Shanghai, where the benchmark index fell 5.8 percent, its biggest loss since November. The Dow Jones industrial average's 2 percent decline that day actually understated the weakness here in the U.S.
The widely stated reason for the tumble was renewed worries about the strength of the global economic recovery. But there doesn't have to be an official reason. In my view, it was simply a matter of overdue profit taking.
After all, news on the economy has actually been improving. And the profit taking lasted just one day. U.S. stocks have since made up for Monday's lost ground. At today's market close, the S&P 500 was actually slightly higher than its closing level last Friday.
My long-term view for both U.S. Treasury securities and the dollar is unfavorable. In both cases, it reflects concerns about the massive amount of debt in the U.S., exacerbated by the necessary but costly government programs to bail out the troubled economy and financial system. This makes our government debt securities and our currency relatively unattractive.
For Treasury issues, there are also worries about the large quantity of them held by foreign investors. It's generally in the interest of these investors to support their large Treasury stakes. But there are also signs that they want to diversify away from Treasury issues, and that they won't be as willing to buy as much as before even as new issuance will jump in order to fund our mounting debt.
But sometimes short-term trends run counter to the long-term ones.
China and Japan, the world's largest creditors to the U.S., bought longer-term Treasury notes and bonds at a record rate in June. It's also worth noting that demand for Treasury securities has risen from U.S. households, which have finally started to save more after years of spendthrift behavior.
China and Japan were heavy sellers of short-term T-bills in June. But total foreign net buying of Treasurys excluding Treasury bills hit $100.5 billion in June.
So while we continue to worry that the U.S. government's aggressive stimulus program will eventually fuel inflation, this is not yet a major concern for foreign buyers.
In June, yields on Treasury notes and bonds hit their highest levels for the year, with the 10-year yield briefly climbing above 4 percent. That yield has now fallen to below 3.5 percent amid strong buying. Yet investors supposedly are turning more bearish on Treasuries based on the belief that yields will rise (will lower prices) as the economy gradually improves
Meanwhile, the dollar benefited in 2008 as a safe haven amid a risk-averse, global flight to quality during the economic crisis. But as the world's investors regain a taste of risk, they tend to move out of dollars and into other vehicles that offer better profit potential, particularly in a recovering economic environment.
For the dollar, the direction is more clear: down. While demand for Treasury issues has remained relatively strong despite perceived economic improvement, that same factor is putting pressure on the greenback
The Dollar Index, which the Intercontinental Exchange (a publicly traded global electronic marketplace) uses to track the dollar against six major currencies, is now at its lowest level in almost a year. Stronger economic data tend to weaken the dollar as investors became more comfortable buying riskier, higher-yielding assets elsewhere.
A potential catalyst for a higher dollar would be if the Federal Reserve were to start raising short-term interest rates again. But that's not in the cards yet.
The big picture for the world's economy is this. First, many emerging-markets economies are doing well. Second, the economies of many more mature nations stabilized in the second quarter. The U.S., however, continues to lag, although growth is expected to return in the current quarter.
The Organization for Economic Cooperation and Development said this week that its 30 members, developed-market nations, collectively should start to grow sooner than previously expected. But the group's economic recovery will probably still be weak.
The OECD said its member countries stabilized in the second quarter, led by export growth in Germany and Japan. The OECD's report said that gross domestic product (GDP) of the OECD's major seven countries (Canada, France, Germany, Italy, the U.S., the U.K. and Japan) slipped 0.1 percent from the previous quarter between April and June after dropping 2.1 percent in the first quarter. The U.K. and Italy lagged the most behind, followed by the U.S. at a 0.3 percent drop.
The outlook from Europe, where the OECD is based, is much the same as it is here. For example, the International Chamber of Commerce there said that high unemployment rates and rising public debt in many countries bring concerns about a sustained recovery in the global economy.
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