SELL USD at 110 - Global Strategy Note
By Steen Jakobsen - August 6, 2002
Saxo Bank
‘A lie gets halfway around the world before the truth has a chance to get its pants on’
Sir Winston Churchill
I am sure you all missed my weekly 'spin' on the market. Not! Despite several calls for me to cease
putting my views to the paper I am inclined to forward a few words.
There is a creeping feeling that the stock market as an indicator has been right all along (and the
yield curve wrong). The buzzword is now: Double Dip (which should not be mistaken with sauce
used for snacks!)
Several noted economists have been calling this scenario and last week’s revision of GDP data and
Q2 GDP data both CATASTROPHIC and this could be the proof for this negative outlook.
The US GDP data for 1999-2002 was revised. For 2001, the revision was 1.2% down! Meaning
there were now three quarters of negative growth in 2001 against the one 'officially' listed.
More importantly, if you take the GDP lower by 1.2%, the budget deficit to GDP and current account
deficit to GDP increase. Most likely the US current account deficit is now in excess of 5%!
The talk of double dip should not be a major surprise to the market as history shows that five in six
recessions for the past 45 years have contained a DD. In the 1970s and early 1980s there was even a
triple dip.
To me this decade is looking more and more like the 1970s. A period characterized by no return in
the S&P 500, rising commodity prices, Big Government and inflation.
Inflation threat
Most people will consider me mad saying inflation can become a problem in this low growth
environment, but remember I am talking about the next 10 years, not the next six months!
The world yield is at historic lows, the Fed is now under pressure to cut the discount rate from
1.75% to 1.25% or 1.00%!
The US government continues to spend money and the budget deficit is increasing minute by minute
(so much that the Debt Watch in New York has been restarted!).
This does not even take into account the fake CPI numbers. The upcoming August revision will be
monitored closely. There is bound to be an adjustment much higher in the ‘corrected’ numbers. CPI,
or more exactly inflation, is running at 3.0-3.5%, not 1.1%. The weaker US dollar will start to spill
over into a higher CPI very soon, so watch for inflation to gradually pick up.
Big Government
Big government 2000s style is MASSIVE military and domestic security spending.
I am amazed there have not been more calls for privacy protection from lobbyists, as the series of
wide-ranging laws, which violate both the privacy, and the principle of ‘freedom’ have been
enacted.
Bush seems to think that the ‘war’ against terrorism has to be finished. Constantly being reminded
how George Bush Senior failed to do the job, the cost and impact on the US domestic economy, are
not an issue for Bush. I think the best and the easiest way to understand the President is to imagine
that we are at war.
Thinking in war terms. President Bush will need to change his economic team ahead of the mid-term
election, as O’Neill makes Duisenberg look like a class act. The economic team in the administration
have been cheerleaders and with the recent revision of the 2001 data, O’Neill’s constant mumbling
about how "the U.S. economy is fine shape" looks even more silly.
Outlook
In the 1970s the bear market started with the high of January 1973 (121.74 S&P 500). From the high
it fell 50%, and it took until July 1980 to break the old highs of 1973. (7 years). I think we are in for
some of the same. With our high at March 2000, that puts the at September 2002 to January 2003
Many bears loves to compare 1929 with the present bear market - and graphically it’s a tempting
thing - but if the 2000s’ bear market should mirror the 1929 market in terms of length, we will reach
January 2003 before we get a significant base.
We need ‘some blood in the streets’ for this market to have found ‘cheap’ values. The July low was
not enough in technical or in psychological terms. We need the market to sell at ANY price.
John Kenneth Gailbraith, who wrote the classic 1929 Crash book, says: "The market never ends with
a whimper, it ends with a bang!".
The bang could be coming, and soon. There are many companies trading at a substantial discount to
their long-term potential, but the issue is not value, but cash.
The market is lacking cash flow as seen by the collapsing corporate bond market where giants like
AOL and ATT both pay more than 10% for their funding. With ZERO growth in the economy and
10% funding costs you are looking at some cruel prospects
Positions
EUR/USD: Short small, as Latin American capital flight into USD seems to roll the ball lower.
EUR/NOK: Short. Yield play.
AUD/USD: Short. Growth play. AUD is always an early growth indicator and should slip.
Long 10-yr notes. Core positions for the non-directional part of portfolio.
Long gold stocks, long BRKB, short LVMH Vuitton, SAP, SIE, IFX, QCOM
Long Leaps Put on FannieMae (NYSE: FNM) March 2003 60 strike
Steen Jakobsen |
