The dollar…appreciation / depreciation in 2009?
2009/01/02 in currency
Making predictions about currency movements is difficult in normal times, and nearly impossible in todays crisis-laden environment. Fundamentally, the dollar should probably weaken, based on increased levels of national debt, and an increased need to print new money to finance bailouts, war, and upcoming fiscal stimulus packages. Yes, the dollar should fall in 2009…but, then again….it fundamentally should have fallen in 2008 (similar levels of debt, bailouts, and war financing), but there were overwhelming factors that covered up fundamentals, such as repatriation of foreign assets, the unwinding of the carry trade, and an increasing level of risk aversion, which is driving investors away from emerging markets and back to the “safe havens” such as Japan and the USA.
The crisis may have started (arguably) in the US, but ironically its the crisis that is driving money back to the US as investors flee “risky”-seeming foreign markets. As Stephen Jen (Morgan Stanley) puts it: ” Emerging-market currencies are poised for further losses as recessions force wealthier nations to rein in overseas investment”.
Is 2009 the year to bet on fundamentals finally pulling down the dollar? Im not so sure…All it would take is some massive defaults in emerging markets to scare investors back to the US.
Crisis-candidates:
- Argentina should face crisis. From a macro-economic policy position, Argentina is doing everything wrong…price controls, export taxes, nationalization of the pension system, energy price caps, currency controls, etc (although I made this same prediction of a crisis in Argentina a year ago, now I REALLLY believe it
. See recent Economist article on Argentina here - Brazil will not be that far behind (probably ok in 2009, but maybe crisis in 2010). While Brazil doesnt suffer from the policy mistakes of Argentina (actually, Brazil has done just about everything right), they will suffer more than most analysts predict from the global economic crisis. Commodity prices have fallen, and will not climb anytime soon. Credit (the engine of Brazil’s recent growth) has all but dried up. Foreign capital (which drove most of the recent stock market gains) has retreated to “safe havens” (back to the US, JPN, etc). But, perhaps most troubling is the slowing demand from China, which was recently a big buyers off Brazilian steel, and industrial commodities. My prediction for trouble in Brazil is heavily dependent upon my belief that China is about to slow, and slow dramatically (as the US moves from consumption to saving, a major long term trend that will severely impact emerging Asia, and hence the commodity providers such as Brazil).
- Russia, clearly is facing trouble. See my article here
- China…Ive been predicting trouble in China since I visited in June of 2007. Will 2009 be the year to finally prove me right? lets wait and see…
- Eastern Europe….man, what country is not facing dire trouble in 2009?
The list goes on and on….any / all of which could scare investors away from emerging markets and back to the greenback. As a result…Movement on the dollar is a tossup in my mind…and not worth making big bets on at this point.
If I were to speculate on currencies…
Instead…I’d be looking at countries on the edge of crisis. Look for global imbalances, balance of payments, current account deficits, etc…money is to be made by looking at what countries are artificially attempting to fight the flows of global finance by artificially propping up currencies, interest rates, etc.
If you could predict what will happen in spite of these countries efforts (and bet against them), I think this is where lots of money will be made in 2009.
a collection of my thoughts are posted here: http://blog.globotrends.com/2008/12/14/top-macro-trends-for-2009/
Gerald Spencer said on 2009/02/25
The dollar buying power or value is partly about psychology when it is backed by the “full faith and credit of the US government” rather than gold. This is the same as my definition of “Junk Bonds”. The US government does not go to banks to borrow money. The US government just buys a lot of paper and cranks up the presses to create more dollar bills, T-Bills, Government Bonds, etc. and deposits these items into banks (or the federal reserve) to pay for the checks that they give out to pay for their pork barrel projects, negative balance of trade, government payrolls, bailouts, entitlements, operations, social schemes, wars, new infrastructure, wealth re-distribution, mental health, imported consumer goods and etc.
When you go to anywhere in the USA to buy anything, look to see where is it made? Nothing is made in the USA anymore. When you buy $1,000.00 tools, parts, etc at Home Depot, they send maybe $500.00 to probably China to purchase these products from the people who worked to manufacture these items. The US only makes a very few things that people in other countries want to buy. The US Government no longer redeems US dollars for gold from our gold reserves at Fort Knox (since 1972). The US government does allow the Chinese (and other foreigners) to redeem these freshly printed paper dollars (that they earned by making the imported goods that we consumed) to purchase title to real estate, forests, industries, breweries, hotels, factories, casinos, financial institutions and everything else of value that is located in the USA. All of the other industrial nations that supply us with the products we import (so that we do not have to work to make anything) are allowed to redeem their dollars for US assets. What will be the buying power of the dollar when we have nothing left that the foreigners want for redemption of the dollars they earned by manufacturing the things that we imported and consumed????????? This is selling of our children’s legacy to foreign owners, and the US government calls it “Investing in America”. This is sort-of like selling our body parts to keep from working!!!!!
The current US government economic stimulation plan is to print up a bunch of new paper money, T-Bills, Bonds, and other similar paper securities for bank deposit (actually the Federal Reserve) to cover checks issued to US contractors to re-build and expand the US infrastructure (Pork Barrel Projects) in order to reduce unemployment. (also pay cash bonuses to the Wall Street forgers, welfare queens, Las Vegas Corporate Junkets, mortgages for big spenders with bad credit, etc.). This money will probably be spent on imported earth-moving machinery, imported materials (Steel, equipment, Pipe & Wire), new imported private airplanes, illegal alien labor, outsourced engineering, outsourced CAD drafting, etc., and the US workers will still be mostly unemployed? Any Economic Stimulus Spending also needs to prohibit any imported products (even if we no longer manufacture those products) from being purchased with these funds, and also prohibit all outsourcing of the Labor Required. This is a short term solution that will only economically benefit salesmen of foreign manufactured equipment, materials, etc., and the other people working in the distribution of imported things for our consumption, but the balance of trade will still be sending US dollars overseas to pay for the things that we import, and these dollars that we pay to foreigners for our imports are then spent to purchase title to our finitely limited US assets that are now becoming foreign owned. This stimulus spending will cause massive inflation to the point that it will soon take a whole day’s US wages to buy one loaf of US bread.
For More information:
http://www.spencerae.com/offshore.htm