The dollar is on a tear. And the world is scrambling to figure out what it
means.
Beginning with the always-interesting Martin Armstrong in a recent Financial
Sense interview:
"I know a lot of people that hate the dollar, but you have to understand
the dollar is really only the game in town. Yes, we have a big debt but that
debt is absorbed by central banks just having to hold reserves. They're holding
it in U.S. government debt. You can't hold debt of Greece. Debt of Germany
just went negative...France is in trouble as well as Spain and Italy...
You go to New York and it's all foreigners buying the top-end real estate;
same thing in Florida. China is the number one buyer of the highest priced
real estate in the U.S. Canada is the number one buyer of real estate as
far as the number of properties...
So, this is the trend as war develops more in the Middle East and also in
Europe and Asia. Capital has no place to go but the United States and this
is going to push the U.S. dollar up higher..."
Another positive take comes from Monty Guild, also on Financial Sense:
Investors,
Pay Attention: Causes and Implications of U.S. Dollar Strength
A rising U.S. Dollar has benefits, including higher demand for U.S. Treasuries,
lower borrowing costs for the Federal government, foreign demand for U.S.
assets (including stocks), lower commodity prices, and especially lower oil
prices, which will hurt Russia and benefit the U.S consumer by lowering the
cost of gasoline.
Overall, until any negative effects begin to manifest, a stronger Dollar
suggests money will continue to be attracted to the U.S. stock market, especially
stocks whose sales are primarily domestic, and not international, and particularly
for large-cap stocks. This has already begun; larger companies have been
outperforming small- and mid-cap companies since early summer. Investors
should focus on large U.S. companies that do not get a major share of their
profits from abroad. Stocks of companies that sell globally will see their
foreign earnings somewhat diminished by a lower value of their foreign currency
sales in U.S. dollar terms.
Caroline Valetkevitch at Reuters takes the other side, pointing out that some
of those negative effects are already manifesting:
Surging
dollar may be triple whammy for U.S. earnings
The suddenly unstoppable U.S. dollar is posing a triple threat to American
companies' profits: driving up the costs of doing business overseas, suppressing
the value of non-U.S. sales and, perhaps most worryingly, signaling weak
international demand.
The dollar has been on a tear, with an index tracking it against six other
major currencies notching roughly an 8 percent gain since the end of June.
Few analysts see its breakout performance stalling out anytime soon since
the U.S. economy stands on much firmer footing than most others around the
world, Europe's in particular.
For companies in the benchmark S&P 500, that's a big headwind because
so many are multinationals, and as a group they derive almost half of their
revenue from international markets.
"You will get some companies that have failed to meet expectations based
on the weakness we're seeing overseas, so it is going to be a source of disappointment," said
Carmine Grigoli, chief investment strategist at Mizuho Securities in New
York. Moreover, that weakness, especially in Europe, "is going to be critical
here," he said. "It's an important component of (U.S.) earnings going forward."
And while investors and analysts have begun to figure in the negative effects
of a fast-strengthening dollar with regard to the approaching third-quarter
reporting period, the risk to the fourth quarter and 2015 remains largely
unaccounted for.
For instance, third-quarter profit-growth expectations for S&P 500 companies
have fallen back to 6.4 percent from about 11 percent two months ago, Thomson
Reuters data showed. By contrast, the fourth-quarter growth forecast is down
just slightly, to 11.1 percent from a July 1 forecast of 12.0 percent. And
profit-growth estimates for 2015 have actually increased in that time from
11.5 percent to 12.4 percent.
"If you try and extrapolate out to the fourth quarter and how much that
currency effect is going to be, your guidance is probably going to come down
for a good slug of the multinationals on the S&P," said Art Hogan, chief
market strategist at Wunderlich Securities in New York.
WARNING FROM FORD
Ford Motor Co.'s disappointing forecast this week may be a hint of what's
to come. The No. 2 U.S. automaker cut its forecasts for pretax profit this
year, citing steeper losses in Russia and South America. "Not to extrapolate
too broadly from one company, but I think the negative sentiment . . .has
been pretty dramatic," said Michael James, managing director of equity trading
at Wedbush Securities in Los Angeles. Ford shares lost 10.7 percent last
week.
The onslaught of quarterly results begins soon, and the next two weeks bring
reports from U.S. companies with some of the highest levels of overseas sales.
Among them, fast-food restaurant operator Yum Brands, which derives roughly
77 percent of its sales overseas, is due to report on Tuesday, while results
from chipmaker Intel, with about 83 percent of its sales coming from overseas,
are due on Oct. 14.
Finally, Automatic Earth's Raúl Ilargi Meijer goes downright apocalyptic
in his recent The
US Dollar Is About To Inflict Carnage All Around The Planet, where
he quotes some representative reports:
"The weakening yen is starting to squeeze Japanese consumers as prices rise
for everything from Burgundy wine to instant noodles, threatening Prime Minister
Shinzo Abe's plans to revive the country's economy. The currency slid to
110 yen to the dollar yesterday, the lowest level in six years, making imported
goods and materials more expensive. Though inflation is one of Abe's monetary
goals, the yen's sharp slide undermines steps to boost consumer spending
and endangers public backing for his economic program.... Japan's GDP shrank
an annualized 7.1% in the April-to-June period, the most since the first
quarter of 2009."
"The yen's slide to a six-year low is amplifying a rout in emerging-market
stocks as investors shift their focus to Japanese companies with earnings
in dollars, according to Morgan Stanley. The MSCI Emerging Market Index tumbled
7.6% in September, the most since May 2012, led by China and Hong Kong. That
compares with a 3.8% drop for the Topix Index in the period. The yen depreciated
5.1% versus the dollar to the weakest level since August 2008 last month,
while a gauge tracking developing-nation currencies retreated 3.8%.
Net inflows to U.S. exchange-traded funds that invest in emerging-markets
tumbled 82% to $977.9 million in September, led by a 90% decline to China
and Hong Kong, data compiled by Bloomberg show."
"After ticking just above 110.00, USDJPY has been a one-way street lower
and that means only one thing... Japanese stocks are cratering. From Friday's
highs, The Nikkei 225 has crashed over 1000 points (despite Abe's promises
yet again of more pension reform buying of stocks). Of note, perhaps, is
that, Japanese investors bought a net $3.6 billion of foreign stocks last
week - the most since January 2009 - perfectly top-ticking global equities...
Well played Mrs. Watanabe."
"Inflation expectations in the US have just followed the eurozone by plunging
lower. Until very recently, the Fed and the ECB had been quite successful
at keeping inflation expectations in their normal range - this despite their
clear failure to control actual inflation itself, which has consistently
undershot expectations. Investors are beginning to realise that contrary
to their confident actions and assurances, the Fed and the ECB have failed
to prevent a dreaded replay of Japan's deflationary template a decade earlier
in the West."
Meijer's conclusion: "It's going to be carnage out there."
Some thoughts
Wow. If the world wasn't already interesting enough, a soaring reserve currency
definitely adds some spice.
There are clearly benefits to a strong currency. And in recent years a lot
of very smart people have made favorable foreign exchange trends a centerpiece
of their analysis, generally citing a strong currency as an investment positive.
But there seems to be a missing piece to that scenario, which is debt.
True, other things being equal a strong currency is a sign of (relative) confidence
and generally a good thing for a country that has its financial house in order.
Appreciating money makes its citizens' savings more valuable and its corporations
better able to snap up cheap acquisitions abroad. On balance, the strong currency
society gets richer.
But for an over-indebted country, where local savings are dwarfed by local
debt, a strong currency makes the debt burden even heavier, so the net effect
is negative. For a real-world test of this thesis, simply look at who had the
last batch of strong currencies. Between 2009 and 2013 that would be Japan
and Europe, which are now tipping into recessions that threaten to become something
much worse.
Which is why the dollar is soaring. Europe and Japan -- along with nearly-as-over-indebted
China -- need weaker currencies not to thrive, but survive. US policymakers,
while recognizing the downsides of a soaring dollar, no doubt see taking one
for the team (i.e., the global economy) as better than a list of alternatives
that includes widespread Depression.
Now the question is whether the strong dollar will do to the US what the strong
yen and euro did to Japan and Europe. That is, will America in 2015 be an island
of stability in a sea of chaos or will it be a yet another deflationary basket
case?
