Jay,
<< Hello Pezz, You tended to, or at least seemed to, deliberately ignore the macro and devote much of your SI time to the here-and-now next trade. This has served you well (and me:0), especially since the officialdom has been hell-bent on releasing the liquidity deluge to float all ships, even the Amazons and United Airlines, and others with great big gashes in them.
Investment and speculation in 2003 was easy , in hindsight. It was as easy as 1999, whereby one merely needed to buy something, anything, whether tech, emerging market, energy, or commodity, real estate or bonds, or near-money gold or further away non-USD cash, and they all went up. Easy money tends to have that effect:0)
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Message 19545992
Trade Barriers and the Dollar
Cumberland Advisors, Inc.
(A Subsidiary of Millennium Bank, Malvern, PA.)
614 Landis Ave.
Vineland NJ 08360-8007
(Tel) (800) 257-7013
NOVEMBER 24 - The announced import restraints on Chinese-made lingerie will not create one single new job in the U.S. nor will it dramatically impact our payment imbalances. Less than half of 1% of America's imports from China are covered. Substitutions from other countries are easily arranged. It may raise prices slightly in the ladies departments of the major retailers like Wal-Mart.
So why did the Bush Administration engage in what Barron's Alan Abelson called the "brouhaha over bras" or "brahaha?"
There is a lot of history which proves that trade barriers raise prices for consumers, lessen efficiencies, impair business profits, invite retaliation and eventually cost jobs. There is no long term history anywhere which proves the opposite.
Trade barriers may be arguable if they involve sensitive items needed for national defense. When that happens, we pay the higher cost in order to keep a secure production facility within our country for times of war. But Chinese lingerie? Really!
This is not about textile imports. It's all about currency and the Bush administration's weak dollar policy.
Remember the old adage: "be careful what you ask for." Bush's weak dollar policy is destined to succeed. We may not like all of the consequences.
In time and on their own timetable, the Chinese will revalue their currency out of economic necessity, not because of pressure from China bashing.
China's economy is steaming and inflating. That's why they will revalue the Renminbi. Estimates range from a doubling against the dollar on the high end to up 30% or so on the low end. No one expects the dollar to strengthen against the Renminbi.
Few expect the dollar to strengthen against any of the world's hard currencies. The real question is by how much will it weaken. And will it be orderly? We think not. By the way, in 2004 we expect the euro to breach 1.25, a new all-time high against the dollar. That will be a 50% reversal in value in only a few short years.
Why shouldn't the dollar weaken? America is keeping its short-term interest rate below the inflation rate by printing money and providing it in unlimited quantity. When the cost of money (1% interest rate) is below the inflation rate (2%) the use of the money is free. In fact, today it is subsidized by the 1% difference. We are also running a current account deficit of about 5% of our GDP; it is still rising. We have zero net national savings because of the federal deficit; that is not likely to change. With facts like these, why would anyone want the greenback?
In addition our federal agency paper is under political attack. Fannie Mae and Freddie Mac are constantly in the news. Restatements of earnings even when positive are destabilizing and hurt credibility. They're seen as additive to the market volatility of federal agency paper. We have entered the era when all Government Sponsored Enterprises have a political sword over their heads.
Foreigners presently hold more federal agency paper than treasuries. In the latest reports we have started to see net selling. Why shouldn't they sell? Wouldn't you?
U.S. policy is diminishing the outlook for the U.S. dollar and for our ability to borrow more dollars at these present low interest rates. Since that policy is not about to change, we will have to pay more to keep attracting new dollars.
Our fear is that this will not be orderly; instead, it may become a cascade, which will shock the bond markets. One analyst describes the bond market as a "coiled spring" (Jonathan Fuerbringer, Sunday's NY Times Business Section). We agree.
Cumberland's volatility studies now show that bonds have become more volatile than stocks. In technical terms this prolonged period of low interest rates has increased the duration of the entire bond class because of the compression of yields. By definition that means higher risk to the market price.
We expect bonds to sell off sharply and yields to rise quickly when the eventual turning point arrives. There may not be time to gradually realign a portfolio.
That means investors have two choices. They can stay short and defensive to wait it out. This requires discipline. It means not chasing higher yields by going longer on the yield curve or down to lower credit quality. Or investors can chase the higher yields now and try to be nimble and trade out of them before the inevitable higher rates arrive. To do that you need to be able to read tomorrow's newspaper today.
-- David R. Kotok |
