Will the US Dollar Survive?

This post first appeared on Minyanville.

Battle lines are being drawn. Sides chosen. Allegiances cemented.

But this war won't be waged with bullets; instead, it will be fought with words and ideas. The dollar wars are heating up.

Just a few weeks ago, the governor of the People's Bank of China, Zhou Xiaochuan, made unambiguous comments about his country's desire for a single, international currency. Gone, he said, were the days when the money of choice for global trade was that of a single sovereign nation. Russia, along with a host of other nations only moderately friendly to the US, expressed similar sentiments.

Today, firing back against the single-global-currency crew, Saudi Arabia, Bahrain and Qatar reaffirmed their support of the dollar. Bloomberg reports the 3 Gulf nations have no plans to abandon their US dollar pegs, applauding its resilience in the face of crisis.

Last summer, as the dollar tanked and inflation soared, experts feared these and other countries would push the dollar from its place atop the currency hierarchy. But amid signs that the US economy may no longer be in freefall -- and the rapid repayment of dollar-denominated debt -- the greenback has rallied more than 10% off its July 2008 lows.

Geopolitical grandstanding aside, the fate of the dollar and American corporate profits are inextricably linked. Corporate profits and jobs are also closely linked.

Big multinationals like Wal-Mart (WMT) and IBM (IBM) earned windfall profits by converting international revenue into dollars at favorable rates. As the greenback lost value over the last decade, those euros, pesos and reals earned abroad translated into bigger and bigger numbers when tallied here at home.

The dollar's recent strength has turned a windfall into a headwind. In the past month, MasterCard (MA) and McDonald's (MCD) blamed weak profit figures, in part, on the strengthening US currency.

And that's the high-wire act currently being performed by Federal Reserve Chairman Ben Bernanke and other US monetary and fiscal bureaucrats: A weak dollar buoys corporate profits, even as it keeps prices rising at home. Strengthen the dollar to combat inflation, and exports -- along with profits -- slump.

We've reached the critical juncture. After 18 months of running the printing presses around the clock to keep our economy out of the morgue, the relative wisdom of the Fed's ways will become increasingly clear.

At stake isn't just bragging rights on the global economic stage, but the integrity of the little green bills that keep the global economy running - the same ones each of us still uses to buy bread.

China Shuns Treasuries

This post first appeared on Minyanville.

China, now the biggest holder of US government debt, is going on a buyer's strike.

As a flight from risky financial assets pushed Treasury yields close to nil -- and as the once-red-hot Chinese economy dried up -- China's appetite for Treasuries has waned. If the trend persists, it could lead to higher borrowing costs at a time American consumers can barely afford the mountanous debt they already have.

The New York Times reports China's government is keeping more of it's vast cash reserves at home, choosing to invest in its own infrastructure rather than plow money into an investment earning them virtually nothing. Chinese banks, once encouraged to invest money abroad and actively lend to foreign borrowers, are now being urged to keep that money within their own borders.

Lower demand for US debt would lead to lower bond prices, pushing up yields. And since the Treasury market typically sets the benchmark for private borrowing, this would translate into higher rates for mortgages, credit cards and other types of consumer debt.

It's no coincidence that as Chinese appetite for American debt dried up last year, the Federal Reserve began to aggressively buy the assets China no longer wanted. Heavily invested in Treasuries, along with mortgage-backed securities issued by Fannie Mae (FNM) and Freddie Mac (FRE), China's voracious appetite for US debt is being supplanted by that of our own government.

Few experts however, expect China to abandon Treasuries altogether. Such a drastic move would effectively destroy the US economy, which would in turn be disastrous for China, not to mention the rest of the world. Still, each time the government bails out a company like General Motors (GM), Citigroup (C) or AIG (AIG) its standing with debt holders slips.

The timing couldn't be worse for the incoming administration. Promising to keep the deficit upwards of a trillion dollars for the foreseeable future, President-Elect Obama is counting on new debt issuances to finance his aggressive stimulus plan.

Without Chinese demand, Obama will be forced to rely on the Federal Reserve to be the buyer of last resort. As the Fed prints money to buy our own debt, however, each of the precious dollars Obama is pumping into the economy is worth less and less.

If this all sounds eerily familiar, it should.

A certain financial deviant, now a household name, ran a massive Ponzi scheme by repaying early investors with the money of the most recent suckers. His actual holdings were worthless - much like debt issued by a country teetering under the weight of its own massive, bloated balance sheet.

Keepin' It Real Estate: Chinese Investors Smell Blood in California

This post first appeared on Minyanville and Cirios Real Estate.

Speculators have been flocking to California for centuries. Gold, computers, absurd dot.com start-ups, real estate - if it’s an asset, it’s probably boomed and busted in the Golden State.

The bursting of the latest bubble -- real estate -- is still in progress, as foreclosures push up inventory and drag down prices. Nevertheless, for every speculator that got burned on the way down, reinforcements are flooding the state with new money, hoping they’ll be lucky enough to pick the bottom.

In a trend that's just beginning to emerge from the smoldering ashes of California's housing market, the next wave of buyers could be armed with armloads of cash that’s red, rather than green. The Chinese are coming.

The Los Angeles Times paints a colorful picture of “Caravans of cash-rich Chinese in Hummers and Lincoln Navigators weaving through American neighborhoods in recent months, looking for foreclosures and other bargain properties to buy.”

What used to consist of small-scale, individual trips by wealthy Chinese buyers to scout for properties have turned into massive, safari-like operations. According to the Financial Times, SouFun.com, the biggest real estate website in China, received over 300 inquiries within days of announcing a home-prospecting trip to California.

For now, the groups are focusing on areas with existing Chinese populations, making San Francisco and Los Angeles prime targets. Almost 20% of San Franciscans hail from China; parts of LA, specifically the UC Riverside area and the San Gabriel Valley, boast large Chinese American communities.

And while not every potential Chinese investor is itching for a foreclosed tract house, a penchant for paying cash makes them desirable buyers in troubled markets. Big lenders like JPMorgan (JPM), Bank of America (BAC) (thanks, in part, to Countrywide) and Citigroup (C) have massive portfolios of foreclosed homes they’re trying to unload. Countrywide has over 6200 in California alone, up from 3900 just a year ago.

With mortgages increasingly tough to come by, banks are typically willing to knock 10% or so off the asking price for a cash bid. Countless sales have been falling through because the buyer can’t line up a loan, and cash is now king in the world of distressed home sales. This is no secret, and investors trying to snap up foreclosed properties at the courthouse steps tell stories of buyers showing up with millions of dollars in cashier’s checks at the ready.

Experts in China, however, are urging caution. Home prices in California are down 40% by some measures, but few expect the declines to taper off any time soon.

One tour operator told the LA Times he aims to give visitors a better sense of what life is like in America before they take the plunge: "What we sell is the culture, American culture."

And what better souvenir to take home from a trip to the US than a shiny new...house.

Sky-High Fares Here To Stay

This post first appeared on Minyanville.

Would-be travelers are keeping their fingers crossed the air will soon seep out of what many are calling a bubble in crude. Certainly, that will bring relief from sky-high fuel prices. Airlines can then drop all those silly fees. Life can return to normal.

If only it were that simple.

Earlier this week, Scott Kirby, President of US Airways (LCC), shed some light on the future of fare hikes and fees. Given its current cost structure, the airline needs to charge $700 per passenger per flight just to break even - well above its current average ticket price. Whether it's fare hikes or surcharges (for additional luggage, meals, pillows and blankets), prices are either going up or airlines are going down. Some believe both will come to pass.

Oil prices have remained stubbornly high, despite interventionist political rhetoric, offshore drilling proposals and ineffective summits in Saudi Arabia.

Then yesterday, a change in China's energy policy offered a ray of hope that surging global demand may begin to taper off. Chinese authorities are scaling back oil subsidies and pushing up domestic fuel prices. Analysts hope bigger tabs at Chinese pumps will slow what many believe is the unnaturally high demand such subsidies create.

But even if crude tumbles, it will offer little solace to travelers.

Not only has persistently high crude doubled fuel expenses over the last year and all but eroded the industry's already thin margins, but the lion's share of cust-cutting was undertaken after 9/11, leaving airlines with few options going forward.

Competitors like Northwest Airlines (NWA), United (UAUA) and Delta (DAL) are trimming the fat where they can, reducing capacity and canceling flights simply because they lose money each time a plane takes off.

Consider that the next time your flight is canceled due to “weather” just as the sun shines and a gentle breeze blows in off the putrid swamps of Secaucus, New Jersey. Yet another failed attempt to fly out of Newark International Airport.