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Strategies & Market Trends : ahhaha's ahs -- Ignore unavailable to you. Want to Upgrade?

To: ahhaha who wrote (4483)	6/3/2002 3:54:39 PM
From: ahhaha	Read Replies (1) \| Respond to of 24758

No Safe Haven: Dollar's Slide Reflects Wariness About U.S. June 3, 2002 - THE WALL STREET JOURNAL By Jacob M. Schlesinger and Craig Karmin The dollar appears to be beginning a long-anticipated slide, and that could keep U.S. stock prices in the doldrums and put upward pressure on interest rates. The dollar's decline against the euro, the yen and other major currencies signals a slackening of global investors' seven-year ardor for the American economy, which helped to propel this country's bull market of the late 1990s. This is the popular myth which doesn't have much support in the data. A growing number of global money managers have begun to find other parts of the world more appealing, which threatens to reduce the more than $1 billion a day that foreigners have been sending to the U.S. in recent years. Please tell me where that it is. "A love affair is dying," Morgan Stanley investment strategist Barton Biggs observed after a recent trip through Europe. A sustained fall in the dollar would have other consequences. The impact would probably be an uptick in inflation, by boosting import prices and making it easier for domestic manufacturers to raise their own prices. On the positive side, it also could bring an increase in exports that would boost overall growth. This is the the lesson Wall Street finally learned. Problem is, it's finally wrong. The value of a nation's currency is a weather vane, showing the direction the winds of international capital are blowing. When investors send more money into the U.S. than they take out, the dollar strengthens because investors need dollars to buy U.S. assets. This is false. Currency relative pricing isn't governed by capital flows, but by relative economic efficiency. The sole efficiency criteria in a world dominated by competitive markets is the rate of inflation. The US has the lowest rate in the world at scale and this is due to productivity, a productivity that is driven by effort rather than WinXXX technology. The capital flows follow way after the efficiency factors are well established. The weather vane now seems to be turning: The dollar last week traded at a six-month low against the yen and near a 16-month low against the euro. Currency fluctuations have time dimensions lasting years. From '82 to '85 the dollar soared while interest rates plummeted. It then took 5 years to fall back to previous levels. No rational explanation can be given for this fluctuation. Although the dollar has seen ups and downs before, the significance for markets could be far greater this time because the U.S. has become dependent to an unprecedented degree on foreign capital. Any sign that overseas investors are losing appetite for U.S. investments has bigger implications than in the past. This is another prepared myth that has been circulating the Wall street rags for years. How is the US dependent on foreign capital? Is that the capital that sent the NAZ into the bubble? Is that the capital the US needs to keep the T Bond from declining? More myths. T Bonds prices like currencies are not determined by capital flow, but by expectations for future inflation. End of an Era? A continuing fall in the dollar could signal the end of an era that began around the mid-1990s when the American economy was seen as invulnerable. The escalating infusion of capital and the rising dollar were key to the virtuous cycle of American prosperity. That wasn't what was stated as key during that period. It wasn't because it wasn't key and because the dollar had gotten off a weak binge during the '95 - '97 bull market in stocks. Foreigners sent money to the U.S. assuming they could get better returns than anywhere else. U.S. companies used that money to buy new high-tech equipment that helped fuel the productivity boom that raised the economy's growth rate, corporate profits, and stock prices -- making the U.S. an even more attractive place to invest. The rising dollar made returns even higher for foreigners when they converted gains into their own currencies. This is the Wall street view. It's flat wrong. Only 1/3 of productivity gains can be attributed to technology. The increase was primarily due to more effort being made by humans. From July 1995 through February, the dollar rose nearly 50% in value, measured against a basket of currencies of U.S. trading partners that is monitored by the Federal Reserve Board. The dollar had dropped in half between 1985 and 1997. It had no impact whatsoever on inflation or anything else. Money moved into the U.S. in gale force. In 1997, the U.S. imported a record net $254 billion in foreign capital in all forms, according to the Commerce Department, twice the record set during the 1980s expansion. "Imported" is a misleading term because the money wasn't brought in to fund financial transactions dealing with the economy. It came into the Treasury market as a matter of factoring. It is now leaving that market. So what? If foreigners hold less of our debt, then we pay them less interest. That has more consequence than does these capital flows which don't enter into the economic equation. The interest is a pure loss to our economy but the factoring is zero sum game. And last year, foreigners sent $455 billion net to the U.S. Data for this year's first quarter are scheduled to be released later this month. The seemingly invincible dollar encouraged foreigners to keep buying U.S. stocks, bonds, companies, factories and real estate. It also helped contain inflation by reducing import prices and making it harder for U.S. manufacturers to raise prices. Rising import prices don't lead to inflation unless unions undermine their competitive position by using the import price increases to raise wage demands. For various reasons that isn't the threat like it was during the '80s and and '90s. Even then, between '85 and '97 which saw a 50% drop in the dollar, there was little or no inflationary impact. The effect now of the falling dollar is to cause Americans to buy American and this raises output value more than it raises costs from import price increase. Consider, maybe the foreigners will hold the line on price to remain competitive. The domestic constraint is unutilized American productive capacity. What happened that changed a situation where a falling dollar causes prices to rise more than output which was well-characterized a year ago in this thread? The Japs pumped, and that has made all the difference as the BOJ feared. It makes the world's premier efficient producer a little less efficient, and more of a buyer than a seller. A rising yen makes American goods more attractive, and American capital flowing there from the rising yen, alleviates the Japanese capital crunch. continued.