Only comfort is that when in long bull markets, isn't it usually lots of small steps up and then big one day drops? Just the opposite it seems of the general markets that get lots of little drops broken up by euphoric buying panic days.
I remain,
SOROS
The Dollar Bounce
The Daily Reckoning
London, England
Wednesday, January 5, 2005
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*** Reflecting and putting things in perspective...sticking to our beat...
*** Jolly, parasitical spending continues...the "good times" keep on coming...
*** The rarity of deflation...the swirling waters of debt...tough questions...and more!
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Today, at noon, London will fall silent again. For three minutes, all of Europe will keep quiet in honor of the 150,000 people killed by the "Death Wave."
Since the New Year has barely begun...we are still in a reflective mood. We wonder what it all means...
Why should we care what happens on Wall Street today, when so many bodies lie rotting in the tropical sun? We have been trying to come to grips with the scale and balance of things. More people die from AIDS in Africa each year, says a colleague. Nobody gets too excited about that...
And that's the point of having money, anyway...so you can vacation in Thailand in the winter!
In Britain, the papers have all gone a bit gaga, in their typical mad and reckless way. Did the Americans give too little aid, too late? Was the White House stingy? And here come the celebrities, opening their wallets and their mouths! But where was Tony Blair? They ask how could the British Prime Minister could take a vacation at a time like this ...as if he should fly to the beaches of Thailand, blow the breath of life into putrid lungs himself, and bring the dead back to life!
But that is what the media does - turn the sorrow of millions into a public spectacle.
But money is our beat...and we will stick with it. There's nothing particularly amusing about a real tidal wave...
But, oh, a tidal wave of debt - that's another matter!
We have been writing about the Great Mystery - why do bonds not sell off, as the dollar falls?
The underlying reason, we think, is that the world is headed into deflation - a credit contraction - that will help hold up prices on solid, fixed-return securities. Commodities are low already. Gold is correcting - down to $429. The economy is still not creating many new jobs. And TIPS, the inflation-adjusted 10-year securities offered by the government, trade at a narrow premium over regular 10-year notes; if there is inflation ahead, the bond market still doesn't see it.
But there's also a more immediate explanation: The foreigners are still buying U.S. bonds. Each day, nearly $2 billion worth of U.S. current account deficit flows out of the United States - which must be absorbed by foreigners and somehow make its way back to the United States to balance the books. But each day, according to figures provided by Stephen Roach, foreign central banks, chiefly, buy more than $2 billion worth of U.S. securities. This is what keeps the dollar from collapsing altogether. It is also why U.S. bond yields remain low, and why Americans are able to continue borrowing at such low rates.
Macro-economists, such as Roach, wait for the current account deficit to correct. One nation cannot live for long at another nation's expense, they point out. But the United States continued its jolly, parasitical spending in 2005, at an even faster pace than 2004. A drop in the dollar seemed to have little effect. As long as the foreign central bankers continue to buy U.S. bonds, the good times will roll on.
But there's another way to correct the imbalance in the world's current accounts. A slump, a slow-down, a recession in America would reduce consumer spending. Instead of borrowing and spending, people would cut back. They might even save. The dollar might fall a little...or a lot. But what would correct America's current account deficit would be a huge fall-off in demand. Instead of buying things they don't need with money they haven't got, Americans would begin holding onto the money they do have...and leaving the things they don't need on Wal-Mart's shelves and China's loading docks.
Foreign investors will need higher real yields to continue buying U.S. dollar securities, says Roach. But they might get them in an unexpected way - by falling rates of price inflation...just as in Japan. Deflation is rare...and strange. As prices fall, real rates of return on savings go up. Buyers hesitate; if they wait to make a purchase, their money will be more valuable...and the price of the thing they are buying will be lower. The slump gets worse... Then businesses go broke. Jobs are lost. People at the margin can no longer make their mortgage payments. House prices drop. Stocks collapse. Look out!
We are just guessing, of course, that a tidal wave of debt is headed our way in 2005. The year ahead will tell its own tale in its own good time...and maybe we will be wrong...but we would stay off the beach anyway.
dailyreckoning.com |
