BigBull I think you should put VTS in that laggard group. I own a ton of GIFI as I think this is the next one to pop... Here is a WSJ article on the improving world economies and how that might hurt the dollar. Even though this article does not talk about oil directly I think it is bullish for oil prices...
August 19, 1999
Global Economic Rally Becomes
A Mixed Blessing for the U.S.
By JACOB M. SCHLESINGER and MICHAEL M. PHILLIPS
Staff Reporters of THE WALL STREET JOURNAL
WASHINGTON -- Just a few months ago, American policy makers
fretted that the world economy was flying on a single engine, the
turbocharged U.S. Now, they see signs that Europe and Japan and other
parts of Asia may finally be revving up again.
The brighter prospects for global growth are moving financial markets. The
dollar has fallen against the yen as well as the euro, as investors shift their
capital to increasingly attractive investment opportunities outside the U.S.
Wednesday, the dollar dropped to its lowest level against the yen in seven
months, in part because of a fresh batch of positive economic news out of
Tokyo.
President Clinton said in a recent
television interview that he wasn't
"particularly alarmed" by the dollar's
modest decline. He said that his
administration still supports a strong
dollar. But he also suggested that the
currency's recent softness is a price
worth paying for the benefits of
more-balanced world growth.
A stronger global economy provides
"a stronger market for our exports,
and reduces pressures on other
countries to dump surplus products
into our markets," says Treasury
Secretary Lawrence Summers. More broadly, Mr. Summers says that
recovery abroad means "a more stable and harmonious global economy, in
which disruptive shocks to financial systems are less likely."
Yet just as foreign turmoil produced both winners and losers in the U.S.
during the past two years, a rebound overseas would cause a new round
of gain and pain at home.
Exporters and producers who have been battered by cheap imports would
be among the beneficiaries. "It helps us because steel manufactured in a
foreign country will be used in that foreign country -- such as in Japan --
instead of being dumped in the U.S.," says Curtis "Hank" Barnette,
chairman and chief executive of Bethlehem Steel Corp., in Bethlehem, Pa.
But manufacturers and consumers who have been enjoying those cheap
imports would lose some ground. Rising import prices "put more pressure
on us to increase our prices, and put a little more squeeze on the profit
side," says Ira Silver, chief economist at retail chain J.C. Penney Co.,
which buys much of its apparel from developing countries.
Indeed, distress abroad has been a key factor in keeping inflation in check
over the past two years. Now, Federal Reserve officials cite the glimmers
of recovery overseas as they ponder raising the central bank's key
interest-rate target next Tuesday.
"We can't expect" foreign woes "to help as
much on the inflation front going forward,"
Robert Parry, president of the Fed's San
Francisco bank, said in a recent speech. A
global bounce, he added, would mean "the
risk of inflationary pressures begins to build" at
home.
Some economists are even raising the specter
of a "dollar crisis," in which the greenback's
recent dip turns into a crash. The fact that the
dollar has stayed so strong despite the ballooning trade deficit has been a
bit of a mystery; big trade deficits usually weaken a country's currency. In
a recent essay, Paul Krugman, the Massachusetts Institute of Technology
economist, raises the possibility that "the dollar is doing a Wile E. Coyote"
-- the hapless cartoon character who habitually ventures several steps
beyond the edge of a cliff before plummeting -- "and is destined to plunge
as soon as investors take a hard look at the numbers."
If that happens, the virtuous cycle in which the strong dollar helped keep
inflation and interest rates low and pushed investors toward the U.S. could
turn into a vicious cycle of decline. "A falling dollar could result in higher
inflation, higher interest rates and lower stock prices," says Ronald Talley,
an economist with forecasting firm WEFA Inc. That, in turn, adds Mr.
Talley, could "cause economic growth to slow significantly, adding to
downward pressure on the dollar."
While that scenario may be overly pessimistic, the fact that serious analysts
are even talking in such terms shows how much perceptions of the world
economy have changed this summer. Just five months ago, Mr. Summers
gave a speech surveying the global economic horizon, and the picture he
painted beyond U.S. borders was grim. He described a recent visit to Asia
as "sobering," noting continued problems in Southeast Asia and continuing
doubts about Japan. In Europe, he noted, "growth forecasts are being
revised downward," while Brazil's struggles were jeopardizing Latin
America.
In an interview last week, Mr. Summers sounded more upbeat: "While
there are still substantial risks and strains, there has been a significant
amount of repair."
Hopeful signs are sprouting everywhere. German manufacturing orders
rose much faster than expected in June. So did Italian industrial
production. French car sales jumped in July, along with a broader
recovery in French household spending. "Overall, the outlook for
economic activity in the euro area is more favorable now than it was a
month ago," the European Central Bank said in a report earlier this week.
European growth now is being fueled, in part, by rising exports to an
improving Asia.
In Asia, meanwhile, Japan's gross
domestic product surged at an
eye-popping 8.1% annual rate in the
quarter ended March 31. The yen's
sharp rise Wednesday was helped
by a report that Japan's crude-steel
output in July was up 5.2% from a
year earlier -- the first
year-over-year increase in 20
months.
Malaysia's stock market rallied last
week when Morgan Stanley Capital
International reinstated the market
on its international index, rewarding
Kuala Lumpur for easing capital controls imposed during the financial
crisis. In South Korea, factory output is now soaring compared with a year
ago, when its manufacturing sector was in decline.
Even the world's remaining trouble spots aren't considered so worrisome
these days. While Brazil's January devaluation of its currency helped push
Latin America into recession, the country this week shocked bearish
analysts by reporting that its economy grew by nearly 1% in the second
quarter. And the regionwide downturn is now expected to be short, with
analysts forecasting that all the major Latin economies will return to
positive growth next year.
A Marked Improvement
All told, the general view is that global growth is improving, although not at
explosive rates. After expanding by a sluggish, inflation-adjusted 2.1% last
year, the world economy will grow by 2.8% this year and 3.5% next year,
Merrill Lynch & Co. forecasts. That's still below the heady 4% pace in the
two years before Asia imploded, but a marked improvement.
"The signs are encouraging," Giuliano Amato, Italy's Treasury and budget
minister, said recently. Still, he stressed that "there's no reason to pour
rivers of champagne."
Indeed, the rosy scenario comes with several caveats. Many economists
fear the latest rebound in Japan, still the world's second-largest economy,
could prove to be a sort of "dead-cat bounce," a short-term artificial gain
from an unsustainable deficit-spending binge. Japan "has not gone from
bust to boom," a Merrill Lynch study argues. At best, it "is no longer the
black hole of the world economy." Japanese officials fear that optimism
could become self-defeating -- that the yen's strength could choke off a
nascent recovery by slowing exports.
Attitudes about Europe also can shift wildly. Last month, financial markets
were still rife with talk of a "euro crisis," as the new Continental currency
was then plunging against the dollar. American officials privately grouse
that Japan, Europe and Asia have yet to make the deep structural reforms
Washington believes are required for long-term growth.
And so far, the changes in currency markets, while noticeable, haven't
been jarring. The dollar was trading at 111.91 yen in late New York
trading Wednesday, down nearly 10% from a summer peak of 122.58 in
early July. But Wednesday's low was still well above the 108.88 yen the
dollar touched in mid-January. The euro was valued at $1.0522
Wednesday.
At that rate, the dollar was about 4% weaker than it had been in mid-July,
when a euro bought just $1.0138. But the dollar is still stronger than in
early January, when the euro was worth $1.1874. In fact, the U.S. stock
market's rally earlier this week helped push the dollar back up a bit against
the euro.
Turning Point
Yet if some kind of recovery in the two key overseas areas sticks, it will
mark a significant turning point for the world economy. As Europe has
struggled with monetary union and Asia has suffered from collapsed
financial bubbles, the U.S. for two years has been the world's buffer
against global recession -- or worse. To fulfill that role, the U.S. has "run
quite a large trade deficit" in order to "help our friends in Asia and Russia
get through this crisis," President Clinton said earlier this month on the
Public Broadcasting Service's "Nightly Business Report."
Recovery now would help work out some kinks in the U.S. economy that
have developed beneath the happy surface of the past couple of years. In
order to save the world, U.S. consumers pushed their own savings rate
into negative territory -- that is, households have been spending more than
they have been earning to pay for all those imports. At some point,
economists believe, that has to stop.
Trade weakness, meanwhile, knocked more than a percentage point off
U.S. GDP growth last year. While that hasn't been enough to crimp the
expansion, the pain has been concentrated among politically powerful
producers, like steelmakers and farmers.
The Federal Reserve's most recent survey of regional economic conditions
over the summer, while largely a picture of a prosperous nation, describes
how "cheap imports ... forced the closure of a 100-year-old [textile] mill in
Georgia and a 400-employee plant in Alabama." Also in Alabama, the
report noted, "a large ... steel producer has filed for bankruptcy because of
competition from foreign imports."
As a result, the trade imbalance has fueled some protectionist sentiments
that, if they heat up, could undermine the White House's attempts to
promote a more integrated global economy. Over the past year,
steelmakers have forced the administration to curb steel imports from
Korea, Brazil and Russia -- key struggling economies the U.S. has wanted
to keep afloat. The trade deficit, if unabated, will raise questions about
President Clinton's ability to promote a new world free-trade agreement
when talks open in Seattle this November.
Trade Message
With signs of revival overseas, the administration "is preparing to take a
victory lap," says Richard Medley, head of Medley Global Advisors, a
New York investment advisory firm. The message to Americans, he says,
will be: The massive trade deficit was a short-term strategic decision "to
make sure the world didn't sink into complete depression... . This is what
we wanted. This is how the world should have worked." To foreigners,
Mr. Medley adds, the White House demand will become: "Now it's time
for us to export more to you guys."
By several measures, American exporters are already getting some relief.
The trade deficit took only 0.75 percentage points off U.S. growth in the
second quarter, down from 2.2 points in the first quarter. Manufacturers
have reported growing export orders for six months in a row. Analysts
predict more of the same, especially if a weakening dollar makes U.S.
exports cheaper again.
Of course, some of the positive effects of slow growth elsewhere are
wearing off at the same time. Weak industrial production around the world
kept commodity prices low; now they're moving back up. Coca-Cola
Bottling Co. Consolidated, the country's second-largest Coke bottler,
cited higher aluminum costs in boosting can prices 1.7% in the second
quarter.
With other economies floundering, investment capital flooded into the U.S.
as the world's one clear haven, fueling the rise of the Dow Jones Industrial
Average and pushing interest rates down. Cheap mortgages pumped up
home sales and broader consumption, as low-rate refinancing put new
money in consumers' pockets.
Competition for Capital
Now analysts talk of a growing global competition for capital, in which
U.S. interest rates could rise and the stock market could fall, as investors
find returns improving elsewhere. That effect is exacerbated by a falling
dollar, which cuts the relative value of dollar-denominated holdings. Some
economists trace the recent rise in U.S. mortgage rates -- and the resulting
decline in mortgage refinancings -- to such a redirecting of capital flows.
Lower stock prices and less borrowing are ultimately expected to cut
consumer spending.
"Some builders are concerned that rising interest rates are affecting buyer
demand," says Charlie Ruma, a Columbus, Ohio, home builder who heads
his industry's national trade group. The home builders' monthly index of
industry conditions slipped in August for the second month in a row, as
30-year fixed mortgages rose above 8% for the first time in two years.
The changing world outlook means new risks to the U.S. If, as some Fed
officials fear, exports pick up before consumption slackens, the American
economy could overheat. If consumption and the stock market drop first,
the odds of recession rise.
It's also possible, however, that the winners and losers balance out, and
the expansion would continue, albeit in a different form. Consider
Minnesota Mining & Manufacturing Co. On the one hand, a weaker dollar
would "raise our costs of imported raw materials and semifinished goods,"
says John McDevitt, corporate economist for the company, based in St.
Paul, Minn. On the other hand, "there should be improved profit
performance next year" from higher sales overseas. The bottom line: no
profit squeeze and no price hikes.
"You can't paint this transition as all good or bad," says David Hale, an
economist at Zurich Kemper Investments in Chicago. "It's a redistribution
of growth." |
