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.
Showing posts with label DOLLAR. Show all posts
Showing posts with label DOLLAR. Show all posts
Friday, May 8, 2009
Saturday, March 7, 2009
Desperately Seeking Dollars: Greenback Catches a Bid
This post first appeared on Minyanville.
And while the answer to this conundrum is indeed complicated, its roots lie in how economic participants react to economic crisis and, ultimately, to deflation.
According to Bloomberg, in banking panics past, lenders tended to focus on doing business at home, rather than abroad. This makes logical sense: Bankers want to begin by helping those in their own backyards. The ongoing spat between Western and Eastern Europe, with the latter begging the former for help, is evidence that saving one’s own skin tends to take precedent when times get tough.
As a result, countries heavily reliant on foreign lending tend to fare poorly when such currency “protectionism” takes hold. Despite profound troubles at Citigroup (C), AIG (AIG) and Bank of America (BAC) -- to name but a few US financial institutions swimming in shark-infested waters -- many believe our banks, and indeed our economy, will fare better than those around the world.
Furthermore, as an economy spins out of control, politicians respond by firing up nationalistic rhetoric, urging a country’s citizens to band together. The widely-discussed “Buy American” provision in President Obama’s economic stimulus plan is but one example of lawmakers asking the electorate to “turn inward” in the face of danger.
Returning to the dollar, in addition to investors betting on the American economy to outperform its international counterparties, ongoing deleveraging favors the American currency. Dollar-denominated debt must be repaid with dollars, and as debtors scrounge up greenbacks to pay back their creditors, dollars become more scarce, driving their value upwards.
Deflation, which goes hand-in-hand with deleveraging, encourages consumers to hold on to cash, since as prices fall their dollars stretch further tomorrow, than they did today. Housing is a perfect example -- why buy a home today that will be worth less tomorrow?
The dollar is now approaching a near-term high not seen since the last time equity markets plunged to new lows (last November). This echoes Toddo's persistent theme of "asset class inflation vs. dollar devaluation." It's no doubt policymakers and the Plunge Protection Team are acutely aware of this relationship -- it's now a question of when, and how, they'll act.
Stay tuned, as Mr. Practical is apt to say: Risk is high.
And while the answer to this conundrum is indeed complicated, its roots lie in how economic participants react to economic crisis and, ultimately, to deflation.
According to Bloomberg, in banking panics past, lenders tended to focus on doing business at home, rather than abroad. This makes logical sense: Bankers want to begin by helping those in their own backyards. The ongoing spat between Western and Eastern Europe, with the latter begging the former for help, is evidence that saving one’s own skin tends to take precedent when times get tough.
As a result, countries heavily reliant on foreign lending tend to fare poorly when such currency “protectionism” takes hold. Despite profound troubles at Citigroup (C), AIG (AIG) and Bank of America (BAC) -- to name but a few US financial institutions swimming in shark-infested waters -- many believe our banks, and indeed our economy, will fare better than those around the world.
Furthermore, as an economy spins out of control, politicians respond by firing up nationalistic rhetoric, urging a country’s citizens to band together. The widely-discussed “Buy American” provision in President Obama’s economic stimulus plan is but one example of lawmakers asking the electorate to “turn inward” in the face of danger.
Returning to the dollar, in addition to investors betting on the American economy to outperform its international counterparties, ongoing deleveraging favors the American currency. Dollar-denominated debt must be repaid with dollars, and as debtors scrounge up greenbacks to pay back their creditors, dollars become more scarce, driving their value upwards.
Deflation, which goes hand-in-hand with deleveraging, encourages consumers to hold on to cash, since as prices fall their dollars stretch further tomorrow, than they did today. Housing is a perfect example -- why buy a home today that will be worth less tomorrow?
The dollar is now approaching a near-term high not seen since the last time equity markets plunged to new lows (last November). This echoes Toddo's persistent theme of "asset class inflation vs. dollar devaluation." It's no doubt policymakers and the Plunge Protection Team are acutely aware of this relationship -- it's now a question of when, and how, they'll act.
Stay tuned, as Mr. Practical is apt to say: Risk is high.
Tuesday, January 27, 2009
Central Banks Fight For Survival
This post first appeared on Minyanville.
Instead, I think of a lumberjack, tenuously perched on the tip a log floating in a river, desperately trying to out-balance his foe.
Log-rolling, a sport invented by lumberjacks driving lumber downriver to sawmills, pits 2 competitors standing atop a log as it floats along the surface. Mirroring the other’s moves, each participant’s goal is to spin the other off the log into the water.
The Federal Reserve, and indeed central banks around the world, are pitted in a battle not unreminiscent of those dueling lumberjacks. Their adversary, however, is nothing so unintimidating as a single wood-chopper - they face an unwieldy, inconceivably complex national economy. Imagine herding cats - Tyrannosaurus-sized cats roaming around in packs of thousands.
Nevertheless, scores of economists, pundits and private citizens entrust their economic well-being to these monetary masters, however poor their record may be.
A piece in this morning’s Wall Street Journal entitled “Central Banks Are Creatures of Financial Crises” chronicles the history of central banks, asserting that they owe their existence to society's excesses. Asset bubbles beget dramatic financial crises, and benevolent central banks have been forced throughout history to protect the many from the bad actions of the irresponsible few.
Ultimately, however, central banks have a destabilizing effect on markets, encouraging reckless risk-taking and manipulating interest rates for the benefit of those same privileged few.
Initially established in 1913 to be a “lender of last resort,” the Federal Reserve has seen its power and influence grow. The establishment would have us believe that the Fed carefully maintains a prudent balance between inflation and growth, which we're told creates greater prosperity for all.
What we’re left to figure out on our own, however, is this: As central banks hold interest rates artificially low under the pretext of maintaining strong economic growth, paper money is devalued, and the wealth we do manage to accumulate gradually erodes in value. This is fine - so long as we don’t accumulate any wealth. Hence the perpetuatl belief that spending in vast quantities is our patriotic duty, though we support the national economy to our own detriment.
Issuing mountainous debt -- as the Federal Reserve is currently doing to “rescue” the financial system -- cheapens the value of the very dollars we now so desperately covet. Likewise, as the Treasury doles out guarantees and loans to the likes of Citigroup (C), Bank of America (BAC), Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG), General Motors (GM) and Chrysler, a host of non-elected officials were somehow given the power to take money out of the wallets of average Americans.
Main Street is now working harder for fewer dollars, and each one of those dollars is worth less than it was yesterday thanks to around the whirring sounds of central bank printing presses being run around the clock. As former presidential candidate Ron Paul is apt to ask “Is there any moral justification for deliberately devaluing the currency?”
Paul’s is not a new concern, that government issuance of massive debt isn’t any way to run a country. Thomas Jefferson wrote in 1816, "To preserve our independence, we must not let our rulers load us with perpetual debt. If we run into such debt... [we will] have no time to think, no means of calling our miss-managers to account but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers."
Even now, however, central banks are facing what could be their greatest test. The market, which they're perennially battling, is screaming for deflation. Assets of all types, long the beneficiary of loose monetary policy, are falling in value as Americans shun debt and hoard dollars to repay loans.
At stake is not just the economic well-being of a country, or even Main Street Americans. Central banks are fighting for their own survival.
Instead, I think of a lumberjack, tenuously perched on the tip a log floating in a river, desperately trying to out-balance his foe.
Log-rolling, a sport invented by lumberjacks driving lumber downriver to sawmills, pits 2 competitors standing atop a log as it floats along the surface. Mirroring the other’s moves, each participant’s goal is to spin the other off the log into the water.
The Federal Reserve, and indeed central banks around the world, are pitted in a battle not unreminiscent of those dueling lumberjacks. Their adversary, however, is nothing so unintimidating as a single wood-chopper - they face an unwieldy, inconceivably complex national economy. Imagine herding cats - Tyrannosaurus-sized cats roaming around in packs of thousands.
Nevertheless, scores of economists, pundits and private citizens entrust their economic well-being to these monetary masters, however poor their record may be.
A piece in this morning’s Wall Street Journal entitled “Central Banks Are Creatures of Financial Crises” chronicles the history of central banks, asserting that they owe their existence to society's excesses. Asset bubbles beget dramatic financial crises, and benevolent central banks have been forced throughout history to protect the many from the bad actions of the irresponsible few.
Ultimately, however, central banks have a destabilizing effect on markets, encouraging reckless risk-taking and manipulating interest rates for the benefit of those same privileged few.
Initially established in 1913 to be a “lender of last resort,” the Federal Reserve has seen its power and influence grow. The establishment would have us believe that the Fed carefully maintains a prudent balance between inflation and growth, which we're told creates greater prosperity for all.
What we’re left to figure out on our own, however, is this: As central banks hold interest rates artificially low under the pretext of maintaining strong economic growth, paper money is devalued, and the wealth we do manage to accumulate gradually erodes in value. This is fine - so long as we don’t accumulate any wealth. Hence the perpetuatl belief that spending in vast quantities is our patriotic duty, though we support the national economy to our own detriment.
Issuing mountainous debt -- as the Federal Reserve is currently doing to “rescue” the financial system -- cheapens the value of the very dollars we now so desperately covet. Likewise, as the Treasury doles out guarantees and loans to the likes of Citigroup (C), Bank of America (BAC), Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG), General Motors (GM) and Chrysler, a host of non-elected officials were somehow given the power to take money out of the wallets of average Americans.
Main Street is now working harder for fewer dollars, and each one of those dollars is worth less than it was yesterday thanks to around the whirring sounds of central bank printing presses being run around the clock. As former presidential candidate Ron Paul is apt to ask “Is there any moral justification for deliberately devaluing the currency?”
Paul’s is not a new concern, that government issuance of massive debt isn’t any way to run a country. Thomas Jefferson wrote in 1816, "To preserve our independence, we must not let our rulers load us with perpetual debt. If we run into such debt... [we will] have no time to think, no means of calling our miss-managers to account but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers."
Even now, however, central banks are facing what could be their greatest test. The market, which they're perennially battling, is screaming for deflation. Assets of all types, long the beneficiary of loose monetary policy, are falling in value as Americans shun debt and hoard dollars to repay loans.
At stake is not just the economic well-being of a country, or even Main Street Americans. Central banks are fighting for their own survival.
Thursday, January 8, 2009
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.
Monday, January 5, 2009
Obama's Massive Tax Cuts
This post first appeared on Minyanville.
As Inauguration day nears, details of President-Elect Barack Obama’s huge economic stimulus package are emerging. In today's meeting with Congressional Democrats, Obama begins to lay out his vision for reviving the nation’s catatonic economy.
According to the Wall Street Journal, around 40% of what could be an almost $800 billion plan may come in the form of tax cuts. Rather than mailing rebate checks, as the Bush administration did last summer -- which by most accounts did little to boost real economic activity -- Obama wants to reduce tax withholdings to get more cash into the hands of middle-class workers with every paycheck.
The plan also calls for the widening of so-called “tax look-backs,” which allow companies to apply today's losses to future tax bills. The new proposal would let firms book losses against past tax payments, freeing up money for the current tax period.
To encourage businesses to buy new machines, factories and make other capital investments, Obama is considering allowing newly purchased assets to be more quickly depreciated. Along with tax breaks for hiring new workers and delaying layoffs, the new administration wants to discourage downsizing and prevent firms from delaying expansion plans.
These and other tax-specific initiatives would come on top of previously announced plans for heavy infrastructure investment. When news of the impending stimulus package began to trickle out toward the end of 2008, peddlers of all things metallic enjoyed a strong bounce into year-end.
Freeport McMoRan (FCX), the world's second-largest copper producer, is up almost 100% from its December lows, Nucor (NUE), America's largest steelmaker has bounced more than 90% since November and US Steel (X) is approaching levels not seen since last October. Still, these and other commodity-centric firms are well off highs seen just last summer.
Ultimately, dollars earmarked for businesses and consumers alike are being sent out with a single mission: To be spent. With consumer and business spending making up almost 85% of gross domestic product, it’s no wonder politicians are urging Americans to part with their precious pennies for the greater good.
As the sage Mr. Practical reminded us this morning, however, the true path to economic recovery is through saving, not spending. With each dollar the Federal Reserve prints to finance this massive deficit-spending program, our paychecks -- though they may be increasing in size -- are worth less every month.
Economic stimulus is all well and good, but handing out a currency that’s constantly being debased is akin to tires spinning in the mud: With each rotation, they just bury themselves deeper, and the task of unburying gets longer, more difficult, and infinitely dirtier.
As Inauguration day nears, details of President-Elect Barack Obama’s huge economic stimulus package are emerging. In today's meeting with Congressional Democrats, Obama begins to lay out his vision for reviving the nation’s catatonic economy.
According to the Wall Street Journal, around 40% of what could be an almost $800 billion plan may come in the form of tax cuts. Rather than mailing rebate checks, as the Bush administration did last summer -- which by most accounts did little to boost real economic activity -- Obama wants to reduce tax withholdings to get more cash into the hands of middle-class workers with every paycheck.
The plan also calls for the widening of so-called “tax look-backs,” which allow companies to apply today's losses to future tax bills. The new proposal would let firms book losses against past tax payments, freeing up money for the current tax period.
To encourage businesses to buy new machines, factories and make other capital investments, Obama is considering allowing newly purchased assets to be more quickly depreciated. Along with tax breaks for hiring new workers and delaying layoffs, the new administration wants to discourage downsizing and prevent firms from delaying expansion plans.
These and other tax-specific initiatives would come on top of previously announced plans for heavy infrastructure investment. When news of the impending stimulus package began to trickle out toward the end of 2008, peddlers of all things metallic enjoyed a strong bounce into year-end.
Freeport McMoRan (FCX), the world's second-largest copper producer, is up almost 100% from its December lows, Nucor (NUE), America's largest steelmaker has bounced more than 90% since November and US Steel (X) is approaching levels not seen since last October. Still, these and other commodity-centric firms are well off highs seen just last summer.
Ultimately, dollars earmarked for businesses and consumers alike are being sent out with a single mission: To be spent. With consumer and business spending making up almost 85% of gross domestic product, it’s no wonder politicians are urging Americans to part with their precious pennies for the greater good.
As the sage Mr. Practical reminded us this morning, however, the true path to economic recovery is through saving, not spending. With each dollar the Federal Reserve prints to finance this massive deficit-spending program, our paychecks -- though they may be increasing in size -- are worth less every month.
Economic stimulus is all well and good, but handing out a currency that’s constantly being debased is akin to tires spinning in the mud: With each rotation, they just bury themselves deeper, and the task of unburying gets longer, more difficult, and infinitely dirtier.
Wednesday, December 17, 2008
Fed Slashes Interest Rates; Nothing Happens
This post first appeared on Minyanville.
You can't say they didn't try.
Nevertheless, the Federal Reserve's drastic moves aimed at jumpstarting lending, highlighted by dropping interest rates to nil yesterday, just aren't working. To be sure, conditions are better than they were just months ago during the height of the financial panic, but a normally functioning credit market is likely still months away.
Bloomberg reports banks are still hoarding cash and shunning loans from their counterparts around the world, preferring instead to borrow from the Fed directly. The interbank lending markets are basically nonexistent.
The spread between LIBOR -- the London Interbank Offer Rate, which measures what big banks like JPMorgan (JPM), Bank of America (BAC) and Citigroup (C) charge one another for loans -- and Treasury bills still 6 times wider than it was last June.
Companies, specifcally ones with less-than-stellar credit ratings, are paying record amounts to borrow from skittish bond investors. In fact, never before have buyers of corporate debt demanded more yield on their investments, according to data compiled by Bloomberg.
As Minyanville's Kevin Depew is apt to say, back on Main Street, everyday Americans "are getting shot from both sides."
Each time the Fed lowers interest rates, savers earn less on the money they sock away in the bank. This, combined with our ballooning national debt and struggling economy, are torpedoing the dollar, which has a punitive effect on those responsible enough to shy away from immediately parting with every penny they earn.
Washington is sending a clear message that the only way out of this mess is precisely what got us here in the first place: More spending. By providing paltry returns on savings and continuing to debase the currency, regulators and lawmakers alike are punishing responsible, conservative economic actions.
The trouble -- and why these fantastic efforts to rain money down on our broken economy will ultimately fail -- is that years of robust spending were driven by free and easy access to credit. Artificially low interest rates, loose lending guidelines, and a social mood that fostered spend-happy trips to the mall are a thing of the past.
Try though they may, bureaucrats cannot squeeze blood from the proverbial turnip. They spent the past 20 years hammering away at it, until finally the poor root couldn't take any more. It rolled over, returning to its shallow hole in the earth, to wait for brighter days.
The American consumer has followed suit.
You can't say they didn't try.
Nevertheless, the Federal Reserve's drastic moves aimed at jumpstarting lending, highlighted by dropping interest rates to nil yesterday, just aren't working. To be sure, conditions are better than they were just months ago during the height of the financial panic, but a normally functioning credit market is likely still months away.
Bloomberg reports banks are still hoarding cash and shunning loans from their counterparts around the world, preferring instead to borrow from the Fed directly. The interbank lending markets are basically nonexistent.
The spread between LIBOR -- the London Interbank Offer Rate, which measures what big banks like JPMorgan (JPM), Bank of America (BAC) and Citigroup (C) charge one another for loans -- and Treasury bills still 6 times wider than it was last June.
Companies, specifcally ones with less-than-stellar credit ratings, are paying record amounts to borrow from skittish bond investors. In fact, never before have buyers of corporate debt demanded more yield on their investments, according to data compiled by Bloomberg.
As Minyanville's Kevin Depew is apt to say, back on Main Street, everyday Americans "are getting shot from both sides."
Each time the Fed lowers interest rates, savers earn less on the money they sock away in the bank. This, combined with our ballooning national debt and struggling economy, are torpedoing the dollar, which has a punitive effect on those responsible enough to shy away from immediately parting with every penny they earn.
Washington is sending a clear message that the only way out of this mess is precisely what got us here in the first place: More spending. By providing paltry returns on savings and continuing to debase the currency, regulators and lawmakers alike are punishing responsible, conservative economic actions.
The trouble -- and why these fantastic efforts to rain money down on our broken economy will ultimately fail -- is that years of robust spending were driven by free and easy access to credit. Artificially low interest rates, loose lending guidelines, and a social mood that fostered spend-happy trips to the mall are a thing of the past.
Try though they may, bureaucrats cannot squeeze blood from the proverbial turnip. They spent the past 20 years hammering away at it, until finally the poor root couldn't take any more. It rolled over, returning to its shallow hole in the earth, to wait for brighter days.
The American consumer has followed suit.
Tuesday, November 25, 2008
Treasuries: Not So Safe?
This post first appeared on Minyanville.
And when the financial panic abates, the safety of Treasuries will cease to be the trade du jour. Slowly, risk appetite will return - and those late pulling their money from the Treasury market could face steep losses.
The Wall Street Journal reported yesterday that, since professional money mangers can’t park their millions in wobbly US banks, they’ve flocked to the security and liquidity of the Treasury market.
Government-backed bonds, despite offering essentially no yield, have attracted billions in “smart” money in recent months. As banks failed and credit markets all but stopped functioning, the Treasury market was the only game in town. Seeking the perceived safety of the US dollar, investors drove up Treasury prices and sent their yields towards nil.
But at some point, when the willingness to take on risk returns, investors could leave the Treasury market in droves. If this were to happen, whether it be today, next week or next year, that safe trade may no longer be so safe.
In the past 2 trading days, the dollar -- for which Treasuries offer a proxy investment -- has fallen sharply, giving up recent gains. Shorts rushed to cover profitable bets on falling asset prices - and commodities responded by spiking upwards.
Respectively, gold and crude oil jumped more than 2% and 7% yesterday, while companies for which the price of “stuff” is hugely important, like US Steel (X) and Freeport McMoRan (FCX), soared.
To be sure, one day does not a trend make, and despite the longer term deflationary pressures affecting the economy, the road to lower prices won't be without its share of speed bumps. The massive amounts of liquidity injected into the financial system by the Federal Reserve and multi-billion bailouts of financial giants like Citigroup (C) and AIG (AIG) are, in the short run, inflationary.
Since the greenback is being used around the world as the equivalent of financial toilet paper, a dollar just isn’t worth what it used to be. This in turn makes imports more dear and pushes up the price of commodities, many of which are denominated in dollars.
Longer term, however, deleveraging will require the accumulation of dollars to repay debts, driving up its value. The cost of stuff, in dollar terms, will fall. And while this may sound good for a shopping trip, economists fear deflation almost as much as socializing with the opposite sex at the company Christmas party.
To find out why, just put yourself in the position of a store owner, faced with the prospect of selling everything for less. Expansion plans: Postponed. New hiring: Next year. Computer upgrades: Not a chance.
Deflation is an economy's kryptonite.
And when the financial panic abates, the safety of Treasuries will cease to be the trade du jour. Slowly, risk appetite will return - and those late pulling their money from the Treasury market could face steep losses.
The Wall Street Journal reported yesterday that, since professional money mangers can’t park their millions in wobbly US banks, they’ve flocked to the security and liquidity of the Treasury market.
Government-backed bonds, despite offering essentially no yield, have attracted billions in “smart” money in recent months. As banks failed and credit markets all but stopped functioning, the Treasury market was the only game in town. Seeking the perceived safety of the US dollar, investors drove up Treasury prices and sent their yields towards nil.
But at some point, when the willingness to take on risk returns, investors could leave the Treasury market in droves. If this were to happen, whether it be today, next week or next year, that safe trade may no longer be so safe.
In the past 2 trading days, the dollar -- for which Treasuries offer a proxy investment -- has fallen sharply, giving up recent gains. Shorts rushed to cover profitable bets on falling asset prices - and commodities responded by spiking upwards.
Respectively, gold and crude oil jumped more than 2% and 7% yesterday, while companies for which the price of “stuff” is hugely important, like US Steel (X) and Freeport McMoRan (FCX), soared.
To be sure, one day does not a trend make, and despite the longer term deflationary pressures affecting the economy, the road to lower prices won't be without its share of speed bumps. The massive amounts of liquidity injected into the financial system by the Federal Reserve and multi-billion bailouts of financial giants like Citigroup (C) and AIG (AIG) are, in the short run, inflationary.
Since the greenback is being used around the world as the equivalent of financial toilet paper, a dollar just isn’t worth what it used to be. This in turn makes imports more dear and pushes up the price of commodities, many of which are denominated in dollars.
Longer term, however, deleveraging will require the accumulation of dollars to repay debts, driving up its value. The cost of stuff, in dollar terms, will fall. And while this may sound good for a shopping trip, economists fear deflation almost as much as socializing with the opposite sex at the company Christmas party.
To find out why, just put yourself in the position of a store owner, faced with the prospect of selling everything for less. Expansion plans: Postponed. New hiring: Next year. Computer upgrades: Not a chance.
Deflation is an economy's kryptonite.
Friday, October 31, 2008
Consumers Squeezed from Both Sides
This post first appeared on Minyanville.
One thing’s for sure. We’re all gonna be a lot thinner!
- Han Solo, Star Wars
American consumers are getting squeezed like aspiring Jedis in a Death Star garbage masher.
Hundreds of billions of dollars in losses have forced financial institutions around the world to rein in credit just when their clients need it most. Amid mounting job losses, falling home prices and high energy costs, consumers are finding it harder and harder to make ends meet.
For years, keeping the lights on was a cinch. If times got tough, getting more credit was as easy as sifting through stacks of junk mail and picking the best offer. Now, issuers are reducing limits, jacking up interest rates and discontinuing promotional offers.
The New York Times reports things could get worse. In the first 6 months of 2008, lenders wrote off around $21 billion in loan losses. Analysts say layoffs and a dim economic outlook could result in another $55 billion by the end of next year.
In an attempt to stem the bleeding, issuers like American Express (AXP) and Bank of America (BAC) are reluctant to give new cards out to anyone, let alone borrowers that seem even the least bit risky. Capital One (COF) is closing inactive accounts; it cut credit lines by almost 5% last quarter alone.
Spending money certainly isn’t getting any easier. And to make matters worse, saving it is getting tougher too.
Hitherto generous 401k matching programs are going by the wayside as companies hoard cash in preparation for lean economic times.
According to USA Today, General Motors (GM), which is hoping for a government bailout, announced last week it won’t match employee contributions to their 401k retirement accounts.
GM isn’t the first, and likely won’t be the last, company to cut costs in this way. Goodyear (GT), Dollar Thrifty (DTG) and real estate broker Cushman & Wakefield have all shut down their matching plans. Goodyear, for its part, actually shut the program down in 2003 and plans to start it back up again next year.
For consumers, this all adds up to one easy decision: Buy less stuff. This doesn't bode well for retailers, or any other company dependent on free-and-easy American wallets.
With credit nearly impossible to get, interest rates on savings accounts plummeting and wobbly banks suckling at the government teat just to stay afloat, Americans may soon resort to the age-old practice of stuffing cash under the mattress.
Who knows, as deflation takes hold and the dollar rallies, it may not be such a bad idea.
One thing’s for sure. We’re all gonna be a lot thinner!
- Han Solo, Star Wars
American consumers are getting squeezed like aspiring Jedis in a Death Star garbage masher.
Hundreds of billions of dollars in losses have forced financial institutions around the world to rein in credit just when their clients need it most. Amid mounting job losses, falling home prices and high energy costs, consumers are finding it harder and harder to make ends meet.
For years, keeping the lights on was a cinch. If times got tough, getting more credit was as easy as sifting through stacks of junk mail and picking the best offer. Now, issuers are reducing limits, jacking up interest rates and discontinuing promotional offers.
The New York Times reports things could get worse. In the first 6 months of 2008, lenders wrote off around $21 billion in loan losses. Analysts say layoffs and a dim economic outlook could result in another $55 billion by the end of next year.
In an attempt to stem the bleeding, issuers like American Express (AXP) and Bank of America (BAC) are reluctant to give new cards out to anyone, let alone borrowers that seem even the least bit risky. Capital One (COF) is closing inactive accounts; it cut credit lines by almost 5% last quarter alone.
Spending money certainly isn’t getting any easier. And to make matters worse, saving it is getting tougher too.
Hitherto generous 401k matching programs are going by the wayside as companies hoard cash in preparation for lean economic times.
According to USA Today, General Motors (GM), which is hoping for a government bailout, announced last week it won’t match employee contributions to their 401k retirement accounts.
GM isn’t the first, and likely won’t be the last, company to cut costs in this way. Goodyear (GT), Dollar Thrifty (DTG) and real estate broker Cushman & Wakefield have all shut down their matching plans. Goodyear, for its part, actually shut the program down in 2003 and plans to start it back up again next year.
For consumers, this all adds up to one easy decision: Buy less stuff. This doesn't bode well for retailers, or any other company dependent on free-and-easy American wallets.
With credit nearly impossible to get, interest rates on savings accounts plummeting and wobbly banks suckling at the government teat just to stay afloat, Americans may soon resort to the age-old practice of stuffing cash under the mattress.
Who knows, as deflation takes hold and the dollar rallies, it may not be such a bad idea.
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