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The Eurozone
meltdown has sent capital pouring into (temporarily) safe haven currencies
like the US dollar, which rose by nearly 12% between October 2011 and August
2012.
This sounds
like a good thing for the US but it's not, because US multinationals lose big
when the dollar pops. Assume, for example, that you're making computers in
California and selling them to Germany, and the dollar goes up by 10%.
Suddenly your computers are 10% more expensive, which makes it hard to sell
as many as you expected. And those that you do sell are paid for with euros,
which are now worth 10% less than they were a few months ago. When you
convert those euros to dollars in order to pay your bills, your revenues are
10% lower than they should be. Your costs, meanwhile, are mostly in dollars,
so your profit ends up being far lower than you expected.
Now combine
this margin squeeze with an order slowdown in Europe and China, and extend it
to the whole S&P 500 and you get the following:
Firings
Reach Highest Since 2010 as Ford to Dow Face Sales Slump
Ford Motor
Co. (F) and Dow Chemical Co. (DOW) joined a growing number of companies
firing thousands of workers as sluggish U.S. growth and Europe's deepening
recession lead to a persisting slump in sales.
North
American companies have announced plans to eliminate 62,600 positions at home
and abroad since Sept. 1, the biggest two-month drop since the start of 2010,
according to data compiled by Bloomberg. Firings total 158,100 so far this
year, more than the 129,000 job cuts in the same period in 2011.
Falling
corporate profits and mass layoffs combine to lower federal tax revenues, which puts pressure on Washington to fix its
strong dollar problem. As yesterday's Wall Street Journal explained it:
Some
Hard Numbers for the Fed to Focus On
Wags in the
market were quick to label the Federal Reserve's latest open-ended stimulus
effort "QEternity," but all things have
to end. Trillions of dollars are riding on when that may be.
If the Fed is
taken at its word, it will err on the side of caution before winding down its
bond-buying program and will keep interest rates near zero until mid-2015.
Traders who track bets on interest-rate futures and swaps say the market
began to call the Fed's bluff last week, implying an earlier, late 2014
tightening of policy.
Instead of
when, Wednesday's statement following the Fed's latest two-day meeting may
shift the dialogue to what it would like to see happening before taking its
foot off the gas.
Charles
Evans, president of the Federal Reserve Bank of Chicago, said recently that
there should be no change as long as unemployment stays above 7% and
inflation below 3%.
That presents
another problem, though: The market takes official statistics with a grain of
salt, and so should the Fed. For example, the unemployment rate fell in two
months to 7.8% from 8.3%.
"How can
you have an explicit target over data that's so soft and subject to
revision?" asks Jim Vogel, interest-rate strategist at FTN Financial.
Conspiracy
theories by former General Electric Co. chief Jack Welch aside, any number of
official indicators can look very different well after their initial release.
But one number almost never subject to revision is corporate revenue.
That is
painting a scary picture, in contrast to a string of positive surprises
recently in economic data. Since peaking at more than 20% in the second
quarter of 2011, year-on-year growth in collective sales for the 10-largest
companies in the S&P 500 has been sliding. Last quarter, it went negative
for the first time since the recession, based on preliminary figures, falling
by 4%. If not for Apple Inc., the drop would be 6.5%.
More broadly,
63% of S&P 500 companies that have so far reported third-quarter results
have missed revenue forecasts, Thomson Reuters says.
Some thoughts
Can an
economy grow if its biggest corporations are shrinking? Maybe, but it would
take one hell of a housing boom along with a resumption of public sector
hiring, neither of which actually make a society richer. A home eats rather
than builds capital, no matter what your realtor tells you. And government
spending is almost never "investment". So replacing business
profits with personal and public consumption would raise reported GDP but in
reality would make us poorer and more indebted, setting the stage for a
bigger crisis down the road.
So the dollar
has to fall, thus shifting the strong currency burden to our trading
partners. Quantitative easing, of course, is designed partly as a currency
war weapon. But we've already fired that gun for three years: Federal debt is
rising by about $1.5 trillion a year, bank reserves are soaring, historically
low mortgage rates have produced a tsunami of refis...and
it's not working. The dollar, though off a bit this month, remains too high
for corporate comfort.
But QE is
pretty much all that's left, unless you count capital controls, which are
generally a disaster for multinational profits, and mass debt liquidation,
which is another word for capital "d" depression. So the next
administration will be left with no alternative but more of the same on an
even bigger scale. If $10 trillion doesn't do it, we'll try $20 trillion.
This is crazy
of course. But when you're staring into the abyss, crazy becomes a relative
concept.
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