une 17th, 2002
The Greenback's Bounceback Power
By GENE EPSTEIN
You may have heard this classic bit of wisdom before: When a bull market
makes the front page of the New York Times, sell short.
But so far the newspaper of record hasn't bestowed that honor on the recent
rally against the U.S. dollar by the euro and Japanese yen.
Even more fittingly, the domestic and international editions of The Wall Street
Journal ran a front-page story on the dollar's imminent demise early this
month. And in many other venues, from the media to the investment houses,
the talk has been not about whether the greenback can make a comeback,
but on how the world will cope once the funeral is over.
So maybe the time is ripe to buck the trend, fight the tape, and damn the
financial torpedoes in the process. Is it just possible that the euro and yen are
headed for a fall and that, conversely, the dollar is due for a major rebound?
Carl Weinberg, chief economist at the Valhalla, NY-based High Frequency
Economics -- a brilliant guy who closely follows Europe and Japan, and also
knows a lot about the U.S. -- believes that very thing.
In Weinberg's view, the euro should start looking toppy at 96.5 cents, with a
probable destination of 90 cents or lower. Thursday, the euro traded at
around 94.4 cents. Meanwhile, Weinberg expects to see the yen start heading
south by June 28, a date whose significance is revealed below.
This brave economist will have full say in a minute, once we clear away a few
prejudices about the dollar in general and the euro in particular. To begin with,
Wrightson Associates chief economist Louis Crandall, with no strong outlook
either way, believes this is a rather strange time for the dollar to be laid low.
"The U.S. economy has hit a soft spot after a strong first quarter," observes
Crandall, "but its growth prospects still put Europe and Japan to shame. It
may be that the weak performance of the dollar is an over-reaction to the
transitory weakness in GDP growth."
Here's another irony: Claims to the contrary notwithstanding, so far there's no
real evidence that foreign investors have lost interest in U.S. markets. On a
monthly basis, the Treasury reports purchases and sales by foreigners of U.S.
stocks and bonds. Buys continue to exceed sales, as they have for many
years -- one reason why the dollar has been strong. Although still positive,
January and February came in quite weak, which emboldened the dollar
bears. But a surge in March erased the impression that the first quarter was
weak overall.
March, regrettably, is the most recent month available, so it's pretty much all
we have to go on. However, this Thursday we'll know more about the first
quarter, after the Bureau of Economic Analysis reports on the U.S. "capital
account" -- which not only draws on the Treasury data, but also includes such
major items as direct investment.
Now, take a closer look at the chart on this page, noting first that the
perversities of market measurement require the yen scale to be inverted.
While the euro exchange rate straightforwardly measures the number of cents,
or dollars and cents, it takes to buy one euro, the yen exchange rate tracks
the number of yen required to buy one dollar; so the fewer yen it takes to buy
a dollar, the stronger the yen becomes, and vice versa.
As the chart shows, the yen has been in a long-term down trend for the past
two years, and began to rally in February. But the euro has followed a very
different pattern.
The recent spate of bullish stories on the euro often admit that such forecasts
have a long and dismal history. In fact, they've been pouring forth ever since
the currency first fell below $1.00 in January 2000, and never looked back.
(In January '99, this newly introduced euro -- tied to a basket of 11 European
currencies, later to become 12 -- began trading at $1.18.)
But what the stories don't point out is that this recent rally is also a case of
déjà vu. One thing new about the euro is that the currencies it essentially
comprises are finally (as of January of this year) no more; the German mark
and French franc are now relics of the past, and European shoppers now
carry nothing but euros in their wallets. But while that new thing was supposed
to bolster the currency in some new way, you can't see it in the price action.
Thursday, the
currency was
traded at
around 94.4
cents. Two
previous rallies
did even better
than that. The
euro reached a
high of 96.5
cents on June
16, 2000,
before going
into a long
swoon to 82.7
cents by
October 25 of that year. Then it made another try, reaching 95.4 cents on
January 5, 2001, only to fall back again to 83.7 cents by July 5 of that year.
That was followed by a more fitful attempt, with the euro reaching 93.1 cents
on September 19 in the wake of 9/11. Now it's trying again.
But okay, no one says the euro won't succeed this time. No one, that is,
except for the above-mentioned Carl Weinberg, bearish on the both the euro
and yen.
Let's have him start with the euro:
"If you listen to the Europeans," says Weinberg, "America's economic
recovery is flawed and will fail. The Yanks spend too much, save too little,
and can't afford to finance their own consumption. But there's no real
evidence that the U.S. economy is in danger of faltering, or that growth in
Euroland will amount to much this year. So I think the euro's rise is more of a
speculative move, driven by hot money, than a shift based on fundamentals."
Euroland's gross domestic product rose at an annualized rate of 0.8% in the
first quarter; the current quarter should remain stagnant, and Eurolanders
would be lucky to see growth average 2% through the next few quarters, says
Weinberg. In the U.S., by contrast, first quarter GDP rose by 5.6%, and
should run 3%-4% over the first few quarters.
Wage costs adjusted for productivity -- called unit labor costs -- have been
declining in the U.S., which is good news for profits. In Europe, productivity
growth can't keep up with wage growth, so unit labor costs have been rising.
The S&P 500 has declined this year, but the German DAX and French CAC,
both comparable to the S&P, are down by even more. Returns on European
bonds have run slightly lower than on U.S. bonds.
The bulls counter that the key point is not that the U.S. is still performing
better than Europe; it's that the gap in performance has narrowed. Of course,
parries Weinberg; that's why he doubts the euro will trade in the 85-cent
region, as it did in fourth quarter 2000; 87-90 cents is more like it.
"The technicians tell me that the next big objective level for the euro is 96.4
cents," he comments. "I look for the euro to bounce off that level and retrace."
In Weinberg's view, the yen is an easier case. Starting with the fundamentals,
the strength in Japan's first-quarter GDP growth was another example of déjà
vu. First-quarter growth in 2001 was nearly as strong -- only to be followed
by three straight quarters of contraction. Weinberg expects much the same
this year. True, the Nikkei stock index is still up for the year, but the steep
slide over the past few weeks is surely cause for worry.
So, then, why the rebound from the yen's long-term slide against the dollar,
and why the expected reversal by June 28? Simple, says Weinberg: The G-8
Summit meeting is set for June 26-28.
As he explains, "Japan's Finance Ministry has driven the yen stronger by
requiring that big pools of money defer overseas investment until after the G-8
Summit. This project has gotten a bit out of hand, however, prompting the
FinMin to slow the yen's rise with intervention."
The point of the whole thing? "Japan's Prime Minister Koizumi-san will want
to brag that his country is not seeking to boost its exports with a cheap yen
policy. But after the Summit, until the mark-to-market at the fiscal midyear in
September, the yen will be guided lower." Japan's companies will want to
mark their foreign assets with a cheaper yen, making those holdings more
valuable in yen.
Weinberg says the main risk to his forecast is that foreign investors will shun
U.S. markets out of fear of more accounting scandals, a concern he has heard
on his travels abroad. But otherwise, the euro might once again fall back into
the eurinal -- and the yen may never glimpse the rising sun.
E-mail: gene.epstein@barrons.com |
