The Daily Reckoning
Weekend Edition
March 8-9, 2003
Paris, France
By Addison Wiggin
dailyreckoning.com
MARKET REVIEW: Banana Republic
Two events in the last three months signal a "tipping point" has been reached - and the US dollar may have already embarked on a 6-9 bear market.
The first event, passed with some notice in the financial press, but not nearly as much as is probably warranted. Paul O'Neill the last "strong dollar" guy at the Treasury resigned. The second has received a lot more press, especially here at the Daily Reckoning: The now infamous Bernanke speech of November 21, 2002.
A recent report called 2003: The Decline Of The Dollar conducted by our friends at the Everbank World Currency Research Unit shows quite clearly that trend reversals in the value of the U.S. dollar usually last several years. For example, in the 30-year period since the dollar was taken off the gold standard in 1973 and became "free floating," we've had only four major currency trends:
Weak dollar 1972-1978 (6 years)
Strong dollar 1979-1985 (6 years)
Weak dollar 1986-1995 (9 years)
Strong dollar 1996-2001 (5 years)
Weak dollar 2002-???? (? years)
Because the current weakening only began in February of 2002, the cycle could still have a number of years to run. The dollar could fall significantly from it's early 2003 level, before it reaches anything lows experienced in 1995, 1988 or even as far back as 1980 and 1974.
The last time the US actively pursued a "weak dollar" - back in 1985 - the dollar plunged precipitously. In a nutshell, here's what happened. In response to (then) record trade imbalances created by a strong dollar in the 1980s, the United States, the United Kingdom, Germany, Japan, and France (the "G-5") met at the Plaza Hotel in New York City. The "Plaza Accord" led to a concerted effort to reduce the value of the dollar. The dollar finally began to fall in late 1985.
But once the fall began, it only took about 11 months to reach a major low.
The dollar then remained weak until 1995 when Treasury Secretary Robert Rubin announced a "strong dollar policy." Rubin's "policy" was more like an attitude, but the Clinton administration repeated the position so often that traders and investors began to fear they would intervene at any sign of dollar weakness.
As a result, the dollar strengthened from 1996 into February 2002. After the bull market 1996-2002 the US has again experience a record current account deficit... but this time it's worse! The number has reached over 5% of GDP and is the largest trade imbalance in US economic history.
Now that the Bush administration has effectively changed the policy again -as evidenced by the resignations of O'Neill and appointment of Bernanke to the Fed - one question remains: Are we in for a similar plunge to pre-bubble era lows?
Well, it's certainly possible. A quick glance at a dollar chart for the last 30 years and you almost feel certain of it. Indeed, since Bush took office, the dollar has dropped 20%. And this weak saw 4-year lows against the Euro. On Friday morning you could buy a dollar ten worth of goods with one crisp euro.
It used to sound so much better when we said that sentence in reverse. Enjoy your weekend all the same.
Cheers,
Addison Wiggin,
The Daily Reckoning
P.S. But here's what could be a more shocking figure: foreign direct investment in the US has dropped 85% since the bubble peak in 2000. And according to Floyd Norris of the NY Times, for the first time since 1995, Americans have invested more in foreign markets than foreigners have invested in the US. Foreigners have all but stopped buying American stocks too. Which means, in order to keep up appearances, Americans must now borrow the money it needs... to the tune of some $1.3 billion a day.
"The United States," Norris quotes a commentator from breakingviews.com, "is taking on the financial characteristics of a banana republic." |
