Hi ild, <<Dollar Adjustment Is Cyclical So Far>> Yes, so far, but the fuse of 20-30% kaboom is lit.
<<The dollar has to depreciate by at least another 10% … for the adjustment to go beyond the cyclical boundary>> Yup, the tipping point probably at this level.
<<Hence, if one argues for a weak dollar, it has to be more than directional. The magnitude of the adjustment is what counts>> I am counting at least total of 20-30% within my patiently waiting time horizon of 24-36 month, a fair annualized return.
<<No 'Sell US' Scenario Yet>> Well, yes and no. No serious selling as yet, because there is still a net buy, but the early birds have been busy since mid-2001, and the Chicken Little types since mid-2000. By the time Andy says <<Sell>>, it would be a bit late for my comfort.
<<The case for a weak dollar rests on the huge current account deficit that the US incurs>> I believe this is wrong. The case, in its entirety, rests on … relative
(a) confidence in political leadership at the top
(b) fiscal responsibility at the grassroots level
(c) monetary prudence at the FED level
(d) price levels at home and in US (PPP and expected returns vs. risk)
<<I beg to differ. A 'sell US' scenario is far from developing. While the US equity market is losing its appeal, US fixed-income instruments remain attractive to Asian investors, who fund most of the US current account deficit>> and so the retreat has begun.
<<Short-term rates are near zero in both China and Japan>> Yup, because the actual weakness of the US position allows both to print away without fear of capital flight increasing.
<<Ten-year government paper yields less than 2% in Japan and 3% in China. The US 10-year Treasury is still yielding above 5%>> and yet the USD is falling.
<<The oil producers are unlikely to withhold funds from the US. They are all dependent on the US for political survival>> and these oil producers may not survive in any case, thus part of the problem in the equation.
<<Is There a Dollar Bubble?>> Yes, look at PPP and look at what caused the rise of the USD in the first place, namely Nasdaq + consumption bubbles wrapped in an accounting and liquidity bubble.
<<The real value of the dollar against major currencies has appreciated by about one-third since its bottom in May 1995>> and so my ‘give-back’ target of about 20-30%. The bubble always gives all back.
<<Demand for dollars in the world is not primarily driven by its appreciation potential. Ethnic Chinese within East Asia hold most of the dollars offshore.>> Yes, he be talking about folks like Jay …
Message 14861804
<<Ethnic Chinese apparently measure their wealth in US dollars and consider holding other currencies as speculative>> Yes sir, he is right.
<<There are complicated historical, social and political reasons for this strong dollar preference>> Yes, but
<<which would only change with fundamental political changes in the Chinese societies in East Asia. This is a distant prospect>> does not have to be true. The wealth is denominated and kept in large part in USD because we have little faith in the local governments where we live (China, Malaysia, Singapore, Hong Kong, Taiwan, Philippines, Indonesia, Thailand … Trinidad and Tobago). And we are beginning to feel edgy about the US in the same way.
<<Chinese in Hong Kong and Taiwan hold thousands of dollars per capita in foreign currency deposits>> Yup, down to the Rolex-wearing lady that sells fish.
<<China … $100>> but multiplied by … and if folks prefer their savings in monetary gold when they are allowed to own it, in 36 months.
<<The development of China could increase demand for dollars in East Asia by US$2 trillion over the next 10 years alone>>
Not so fast, not if US does as the Pentagon wants, stop selling high-tech goodies to China. Not if Australian food replaces Indiana corn during trade war. Not if Japanese factories that has been transplanted to China starts turning out the stuff that China had purchased from the US (chip manufacturing equipment). Not if Sino-Russian trade and cross-border investments heats up. Not if …
Anticipation is a survival trait.
Oh, yes, and not if the US starts having to buy a lot more from China but denominated in non-US currency, or that such USD proceeds are exchanged for other currency.
<<In addition to the unique demand for dollars among Chinese, the dysfunctional banking systems of Japan and China are the other equally important factor. Interest rates are exceptionally low in these economies due to inefficient capital allocation, which has probably increased the savings rates there. The higher interest rate in the US has served to lure Asian savings there>>
I think Andy is limiting his imagination here. After Argentina, I would have thought folks distaste for the banking system extends to their USD savings account as well. Most of China’s private foreign exchange savings are with onshore banks (even if the cash is offshore), and so folks may switch to metallic savings when allowed, especially if the interest rate stays low.
<<We could characterize the dollar strength as a bubble in the sense that, when Asian structural problems are solved, the dollar demand will weaken substantially and, hence, the dollar value against East Asian currencies will decline. But, only banking reforms in China and Japan would bring about such an outcome>> Not true. The US is doing its best effort in bringing down the USD construct through degradation of …
(a) confidence in political leadership at the top
(b) fiscal responsibility at the grassroots level
(c) monetary prudence at the FED level
and all the problems in Asia is making the relative price levels at home and in US (PPP and expected returns vs. risk) more favorable at home.
<<in our view. The dollar's fate doesn't really depend on what is happening in the US>>
… I believe Andy is very wrong on this point.
<<The US dollar is basically the proxy for renminbi under China's pegged exchange rate>> Yes, and thus the danger, especially as China, having feasted on (took exports from) Thailand, Philippines and Indonesia, is starting to snack on Taiwan, while eyeing Korea and aging Japan in the pantry. By the time the structural adjustment, hidden within a cyclical movement, is complete, the world will have changed, seemingly overnight. Remember how surprised folks were when the Berlin Wall came down, marveling, ‘oh whoa, how fast did that happen’, when the true answer was 45 years.
<<As the region's currencies appreciate, the stock markets will obviously struggle>> yes, and I am very excited about the prospects in my neighborhood, almost giddy with bullish anticipation, otherwise known as optimism.
<<Two factors could change the liquidity outlook. First, global investors may put more money into East Asia>> Well, maybe, if they dare. I suspect the truth will be that the first bargain hunting money coming into the region will be overseas Chinese money returning home.
<<Second, restructuring acceleration could lead to more asset sales to foreign direct investors>> I hope there will be at least some FDI, because my operating business depends on them.
Chugs, Jay |
