Precisely, Maurice, and in similar fashion, capital is seeking escape, from where they are being treated poorly.
Chugs, Jay
apogeeresearch.com
"Stephen Roach assesses the far-flung effects of a depreciating dollar, while we train our sights on inflation; ISI finds little sunshine in a sea of economic gloom as hopes for a swift recovery fade away.
-- A New Kind of Crisis
Just as it took a while for people to appreciate the ramifications of the equity-market collapse in early 2000, the same goes for the dollar's depreciation. Even if a short-term reprieve were to materialize, the greenback's decline is looking less like a temporary blip in its upward march and more like the long-awaited (by some) bear market. A useful big-picture analysis comes from Morgan Stanley's Stephen Roach, who points out that, in other periods of turmoil, such as the Long-Term Capital Management debacle and the Asian crisis in 1997-98, the dollar and the U.S. markets played their usual safe-haven role. But not this time. The once-comforting images of “dead presidents” are no antidote for the daily media images of corrupt CEOs. Foreign investors, not to mention open-minded U.S. investors, are seeking safer safe havens (see Paul Kasriel's report elsewhere in this issue). International turmoil or no, the falling dollar makes it clear that the U.S. is no longer the only destination for foreign capital.
In addition, the large U.S. current account deficit, combined with what Roach's team at Morgan Stanley argues is a saturation point for foreign holdings of dollar-denominated assets (two sides of the same coin, more or less), make for a particularly vicious cycle. Just to keep the dollar from wobbling under the weight of the current account deficit, the U.S. needs to attract an astonishing 75% of the world's capital. If the U.S. comes up short, as it has recently, the falling dollar makes imports more expensive, thereby shrinking the trade deficit. That's not a bad thing, of course, as long as it doesn't happen so fast as to cause chaos in the financial markets. But the effects of a falling dollar extend beyond a much-needed current account correction. In something of a domino effect, the dollar decline inhibits the U.S. from playing its role as consumer of last resort.
As for the interest rate outlook, Roach believes that the vulnerability of the U.S. economy will make the Fed very reluctant to tighten credit. (We agree, but think that the deflationary risks may be overstated.) He even thinks there's a 40% probability of still more easing (Fed Governor Laurence Meyer hinted as much in both The Wall Street Journal and the Financial Times this week). One thing is for sure: As Roach says, "the era of the omnipotent central banker may have drawn to a close." Amen.
-- Inflation: Is It Really Dead?
Yet one more problem facing our esteemed central bankers, we think, is the risk of higher inflation. Whether bullish or bearish, though, most analysts barely seem to notice it (reason enough for us to pay some attention). Maybe their ho-hum attitude isn't surprising, given that the GDP deflator increased by a mere 0.45%, annualized, over the past two quarters, while the PCE deflator, one of Greenspan's favorites, increased by only 0.7% year-over-year in the first quarter. These indicators might well provide a clue to near-term Fed action. But when it comes to inflationary pressures lurking on the horizon, a less benign picture is painted by the median CPI compiled by the Cleveland Fed -- a gauge conveniently ignored by Chairman Greenspan. As the name implies, it uses a weighted median value of the components of the CPI, thus effectively ignoring the outliers, whatever they might be, instead of just stripping out food and energy costs or anything else that happens to be going up. Although the headline CPI was flat for May and up only 1.2% year-over-year, the median CPI rose 3.6% year-over-year. In addition, the CPI less food and energy increased 2.5% year-over-year. Even Laurence Meyer -- who told the FT that "the data [have] not even begun to support a [rate increase] in September" -- admits to being worried about rising inflation next year. One might think of it in terms of global risk aversion. If the Fed is still creating lots of money, but people are no longer happily buying stocks, real goods (even gold, for example) have to take up the slack. In any event, if there are real inflationary pressures, the Fed will have to address them sooner or later.
-- Capital Spending and the "U"
Even the perennially optimistic ISI can't overlook the fact that while a few economic barometers are moving out of their recent "soft spot," others are still showing weakness, including consumer confidence, surveys of retailers and home builders, the oil-rig count and heavy-truck sales. The latter two would be expected to rise in a capital-spending recovery. They aren't, and that merely reinforces the cheerless message that the all-important capital-spending outlook isn't particularly promising, either. Indeed, even though ISI's survey of "Old-Economy-type capital goods companies" has bounced back from last month, it remains at depressed levels -- 36.8 on a scale of 100. ISI concludes that, "although profits have turned up, the stock market's decline is making already cautious CEOs even more reluctant to lift capex."
Throwing more cold water on hopes for a strong recovery is the index of leading economic indicators. The LEI is still moving higher, but it has lost some momentum. After increasing at an annualized rate of 8.4% in the three months ended February, the steepest increase since 1983 and the cause for much premature celebration, growth in the index slowed to a 0.9% rate in the three months ended May. Recall that stocks peaked in March, which coincides with the downshift. John Lonski of Moody's points out that both the leading and coincident indicators bear a stronger resemblance to the sluggish 1991 upturn than to the robust recovery in 1983. The graph below compares the average monthly gains at the beginning of each recovery. Even though Lonski is still relatively optimistic about the outlook for corporate profits, we can't help but see the LEI's fading strength as yet another signal that the hoped-for swift recovery is looking increasingly sluggish." |
