taken from MDD thread, excellent US$ central points
TrezSecy ONeil is a lousy poker player
the USdollar is nowhere near done dropping
loss of confidence in Greenspin has accelerated
big tugofwar going on
US corporations want decline in US$
WallStreet wants steady US$
PrezBush has pledged support to WallSt
the currency market is the biggest nobullshit market in the world
first casualty is US$, second is US stocks
it might even hit US bonds (doubtful)
/ jim
Today was an interesting day for the stock market to say
the least. Not only did the major stock market indexes close below their critical support levels, but the dollar dropped due to worries in the international market. We are seeing the downward momentum in the stock market pick up and I believe that today marks the beginning of what will be a long grind down to the April lows, with the likelihood that they'll be broken. Let me recap the day and then explain the significance of the dollar to you.
Last night before I went to bed a press release by the IMF, the world's largest and most influential quasi-private consortium of international bankers, flashed on the news wire. The IMF took note of the fact that the United States current account deficit(which is a combined reading of the amount of foreign debt the US owes, the trade deficit, and foreign capital inflows into the US) has reached an unsustainable level in the face of a slow economy and that the dollar was in danger or experiencing a rapid drop in value on the international market. Immediately after the press release went out the dollar began to trade down and is still continuing to do so as I write this..
Let me explain why the dollar is important. The value of the dollar is measured against that of other currencies on the international market and all of the world's currencies fluctuate against each other. One way to think about this is that currency traders grade each country's economic and political stability by valuing their currencies. During the past 10 years the dollar has risen faster than any other foreign currencies because the United States economy was seen as a safe haven as the rest of the world economy experienced lackluster growth.
A high dollar has several effects. It lowers the cost of imports into the United States, because a highly valued dollar can buy more foreign goods. However, it harms American exporters - manufacturers - because it makes our goods more expensive to foreigners. It also attracts foreign capital into the US financial markets, including the stock market, as foreigners use the dollar as a safe haven. This is part of the current account deficit and the danger that a falling dollar could mean to the US stock market. If the dollar drops in value than foreigners will find that the assets they own with US currency will depreciate in value and they'll be tempted to get out of the US stock market. Americans in the US stock market will in turn anticipate this and sell too. In fact the threat of a falling dollar was the main cause of the 1987 stock market crash.
A falling dollar could also create inflation by causing the price of imports to rise. This latter fact would bring a stop to the Federal Reserve interest rate cuts and easy money policy. It would completely reconfigure the investment environment.
But there are also good aspects of a falling dollar. A falling dollar would help US exporters sell their goods overseas and would help stimulate that part of the economy. In fact the CEO of GM recently told the Bush administration to consider allowing the dollar to drop to help the economy. So has the US Association of Manufacturers.
Overall I think a falling dollar would be a good thing. It is more important to see our industrial base get back in order than it is to see the stock market go up. The market would eventually follow. However, the Bush administration has been receiving warnings from Wall Street interests and big bankers not to let the dollar drop. Articles and editorials have appeared on a daily basis in the Wall Street Journal and other financial media warning Bush not to let the dollar drop. Bush and his Treasury Secretary, Bill O'Neill, have stated that they agree with Wall Street and disagree with the factory owners on Main Street on this issue..
Despite these warnings, the dollar has already begun to drop and has been in a steady decline over the summer. Although most Americans have been told over and over again by the financial press that the US economy is going to recover this year and that they should just trust Alan Greenspan, investors overseas don't believe this and they are telling us this by selling the dollar short on the international market.
Last night's article by the IMF brought this to the attention of anyone who closely watches the financial markets and I knew that the threat of a falling dollar would bring selling pressure on to the US stock market. Before I read the IMF article I had already knew the market was in trouble due to the way it has been trading lately. So I went to bed last night expecting a nasty down day today.
When I woke up I turned on the television and had expected to hear the reporters on CNBC talk about the IMF and the dollar. Instead I heard reporter Maria Bartiromo say, "we should have strength in this market the next few weeks because of new liquidity in the market." She then went on to give a list of stocks that different Wall Street analysts said that you should buy now. It was an incredible disconnect from reality. Then the market opened up a few points and sold off in the morning, causing anyone who believed her and followed her advice to get caught holding the bag.
The market broke its support levels that I warned about last week. At 2PM Bush's Treasury Secretary was scheduled to appear on CNBC to talk about the dollar. The DOW and the Nasdaq both rallied into the announcement as some people hoped that he would say something that would make the dollar go up. But he didn't.
The reporter started out by asking him some soft ball questions about Bush's tax cuts. And then she asked about the dollar. O'Neill got incredibly nervous and said, "one of the things that I have learned in this job is that there is no upside in talking about the dollar, except to say we have a continuing and continuous policy." He then cut off anymore discussion about it.
Old Fred, who works as our secretary, was watching too. He doesn't know much about the stock market or currency trading, but at 76 he is wiser than most anyone I know. After O'Neill talked about the dollar he made the comment that "he looks like he just stole something and doesn't know where to hide it."
The markets then continued their slide and finished at lows for the day.
Watch the dollar carefully. If it continues to fall more selling pressure will hit the US stock market. I said a few weeks ago that a crisis of confidence in the powers of Alan Greenspan to turn the economy around would spark a drop in the financial markets. That is exactly what we are now seeing the beginning of.
Expect to see the market fall down to the April lows within the next few months. This drop will be interrupted by one day wonder rallies that cause everyone on TV to call a bottom. We won't get a bottom until the VIX index hits fear levels(the mid 30s) and that is going to take more selling and more time. |
