The Greenback's Bounceback Power
By GENE EPSTEIN
You may have heard this classic bit of wisdom before: When a bull market
makes the front page of the New York Times, sell short.
But so far the newspaper of record hasn't bestowed that honor on the recent
rally against the U.S. dollar by the euro and Japanese yen.
Even more fittingly, the domestic and international editions of The Wall Street
Journal ran a front-page story on the dollar's imminent demise early this
month. And in many other venues, from the media to the investment houses,
the talk has been not about whether the greenback can make a comeback,
but on how the world will cope once the funeral is over.
So maybe the time is ripe to buck the trend, fight the tape, and damn the
financial torpedoes in the process. Is it just possible that the euro and yen are
headed for a fall and that, conversely, the dollar is due for a major rebound?
Carl Weinberg, chief economist at the Valhalla, NY-based High Frequency
Economics -- a brilliant guy who closely follows Europe and Japan, and also
knows a lot about the U.S. -- believes that very thing.
In Weinberg's view, the euro should start looking toppy at 96.5 cents, with a
probable destination of 90 cents or lower. Thursday, the euro traded at
around 94.4 cents. Meanwhile, Weinberg expects to see the yen start heading
south by June 28, a date whose significance is revealed below.
This brave economist will have full say in a minute, once we clear away a few
prejudices about the dollar in general and the euro in particular. To begin with,
Wrightson Associates chief economist Louis Crandall, with no strong outlook
either way, believes this is a rather strange time for the dollar to be laid low.
"The U.S. economy has hit a soft spot after a strong first quarter," observes
Crandall, "but its growth prospects still put Europe and Japan to shame. It
may be that the weak performance of the dollar is an over-reaction to the
transitory weakness in GDP growth."
Here's another irony: Claims to the contrary notwithstanding, so far there's no
real evidence that foreign investors have lost interest in U.S. markets. On a
monthly basis, the Treasury reports purchases and sales by foreigners of U.S.
stocks and bonds. Buys continue to exceed sales, as they have for many
years -- one reason why the dollar has been strong. Although still positive,
January and February came in quite weak, which emboldened the dollar
bears. But a surge in March erased the impression that the first quarter was
weak overall.
March, regrettably, is the most recent month available, so it's pretty much all
we have to go on. However, this Thursday we'll know more about the first
quarter, after the Bureau of Economic Analysis reports on the U.S. "capital
account" -- which not only draws on the Treasury data, but also includes such
major items as direct investment.
Now, take a closer look at the chart on this page, noting first that the
perversities of market measurement require the yen scale to be inverted.
While the euro exchange rate straightforwardly measures the number of cents,
or dollars and cents, it takes to buy one euro, the yen exchange rate tracks
the number of yen required to buy one dollar; so the fewer yen it takes to buy
a dollar, the stronger the yen becomes, and vice versa.
As the chart shows, the yen has been in a long-term down trend for the past
two years, and began to rally in February. But the euro has followed a very
different pattern.
The recent spate of bullish stories on the euro often admit that such forecasts
have a long and dismal history. In fact, they've been pouring forth ever since
the currency first fell below $1.00 in January 2000, and never looked back.
(In January '99, this newly introduced euro -- tied to a basket of 11 European
currencies, later to become 12 -- began trading at $1.18.)
But what the stories don't point out is that this recent rally is also a case of
déjà vu. One thing new about the euro is that the currencies it essentially
comprises are finally (as of January of this year) no more; the German mark
and French franc are now relics of the past, and European shoppers now
carry nothing but euros in their wallets. But while that new thing was supposed
to bolster the currency in some new way, you can't see it in the price action.
Thursday, the
currency was
traded at
around 94.4
cents. Two
previous rallies
did even better
than that. The
euro reached a
high of 96.5
cents on June
16, 2000,
before going
into a long
swoon to 82.7
cents by
October 25 of that year. Then it made another try, reaching 95.4 cents on
January 5, 2001, only to fall back again to 83.7 cents by July 5 of that year.
That was followed by a more fitful attempt, with the euro reaching 93.1 cents
on September 19 in the wake of 9/11. Now it's trying again.
But okay, no one says the euro won't succeed this time. No one, that is,
except for the above-mentioned Carl Weinberg, bearish on the both the euro
and yen.
Let's have him start with the euro:
"If you listen to the Europeans," says Weinberg, "America's economic
recovery is flawed and will fail. The Yanks spend too much, save too little,
and can't afford to finance their own consumption. But there's no real
evidence that the U.S. economy is in danger of faltering, or that growth in
Euroland will amount to much this year. So I think the euro's rise is more of a
speculative move, driven by hot money, than a shift based on fundamentals."
Euroland's gross domestic product rose at an annualized rate of 0.8% in the
first quarter; the current quarter should remain stagnant, and Eurolanders
would be lucky to see growth average 2% through the next few quarters, says
Weinberg. In the U.S., by contrast, first quarter GDP rose by 5.6%, and
should run 3%-4% over the first few quarters.
Wage costs adjusted for productivity -- called unit labor costs -- have been
declining in the U.S., which is good news for profits. In Europe, productivity
growth can't keep up with wage growth, so unit labor costs have been rising.
The S&P 500 has declined this year, but the German DAX and French CAC,
both comparable to the S&P, are down by even more. Returns on European
bonds have run slightly lower than on U.S. bonds.
The bulls counter that the key point is not that the U.S. is still performing
better than Europe; it's that the gap in performance has narrowed. Of course,
parries Weinberg; that's why he doubts the euro will trade in the 85-cent
region, as it did in fourth quarter 2000; 87-90 cents is more like it.
"The technicians tell me that the next big objective level for the euro is 96.4
cents," he comments. "I look for the euro to bounce off that level and retrace."
In Weinberg's view, the yen is an easier case. Starting with the fundamentals,
the strength in Japan's first-quarter GDP growth was another example of déjà
vu. First-quarter growth in 2001 was nearly as strong -- only to be followed
by three straight quarters of contraction. Weinberg expects much the same
this year. True, the Nikkei stock index is still up for the year, but the steep
slide over the past few weeks is surely cause for worry.
So, then, why the rebound from the yen's long-term slide against the dollar,
and why the expected reversal by June 28? Simple, says Weinberg: The G-8
Summit meeting is set for June 26-28.
As he explains, "Japan's Finance Ministry has driven the yen stronger by
requiring that big pools of money defer overseas investment until after the G-8
Summit. This project has gotten a bit out of hand, however, prompting the
FinMin to slow the yen's rise with intervention."
The point of the whole thing? "Japan's Prime Minister Koizumi-san will want
to brag that his country is not seeking to boost its exports with a cheap yen
policy. But after the Summit, until the mark-to-market at the fiscal midyear in
September, the yen will be guided lower." Japan's companies will want to
mark their foreign assets with a cheaper yen, making those holdings more
valuable in yen.
Weinberg says the main risk to his forecast is that foreign investors will shun
U.S. markets out of fear of more accounting scandals, a concern he has heard
on his travels abroad. But otherwise, the euro might once again fall back into
the eurinal -- and the yen may never glimpse the rising sun.
E-mail: gene.epstein@barrons.com
______________________________________________________
The flaw in this guy's thinking is that people will always go to the paper currency that is depreciating the least. Look at the entire globe. Japan, Europe, Latin America, and now the US -- all the paper currencies are depreciating. The US is in perhaps one of the worst situations because of the amount of money that has been flooded into the markets in recent years -- fear of depression in the early 90's, Y2K fears, terror fears, etc. But other parts of the world are beginning to lose complete confidence in all paper currencies, and they are beginning to buy more and more gold and silver. Many buy other physical assets (land), but most of that buying in the US has been done because of low interest rates and has been done out of debt rather than simply diversifying one's assets. The debt issue is a whole other major problem which will make this so much worse. Anyway, usually, the more money there is in the system, the less value it has. And the US has so much money in the system, that people are realizing that the value is going down. Look how much a dollar buys today compared with the past.
The error I see in this guy is the assumption that everything is just the same as it always has been, and people will continue to trust some government's monopoly money to hold its value. For the past year, countries where the currency value is declining, they are buying gold and silver. Someone knows something. Hedging is being cut back. People are just beginning to purchase gold and silver. I think the Central Banks are sweating bullets. If people lose confidence to a great degree (and the beginning of that process has begun), they will buy gold and silver. The Central Banks are about out of playing their bluff by telegraphing their disdain for what is happening by selling gold and highly publicizing it. At some point, the mass public buying will put the banks at the point of having to cover their bluffs before they are called completely out of the game flat broke. Just because the Euro, the Yen, and other world currencies are declining in value, does not mean that the dollar must gain anymore. Greenspan has put the US money system in jeopardy. You cannot live like there's no tomorrow forever. At some point, you have to pay up and begin again or quit completely. You can bluff for a long time if you are really good and the people you are playing with (the average US citizen) are really greedy or gullible, but we are now at the point that the masses are beginning to see they were played for suckers. When they begin to buy gold and silver in quantity with some of that declining paper money instead of continuing to give it all to the mutual fund managers (who will continue to be shown to be a real part of the scam involving corporations), you will see all paper monopoly currencies fall. If there were no confidence crisis, perhaps Greenspan could continue to flood the system with more money to keep people borrowing and spending. That has been the solution through the 1990's. Afterall, the ONLY thing that gives this monopoly money any value is the faith of the citizens in the government and the corporations. That faith has been damaged severely with Enron, Tyco, Imclone, Wcom, etc. etc. etc. And, these are only the beginning, because one universal truth ALWAYS remains the same -- "where there is smoke, there is fire". And there is a major fire raging within corporations and the government. The people will soon see how they have been lied to and played for the fool by dangling a tiny portion of the riches before them while the insiders robbed vast amounts of their wealth. The Clinton philosophy of live for today and screw those that come after me has set up the US for major deflation or inflation or both, and there is no way out of it anymore. People worldwide will gravitate to gold and silver because it is the only standard for value that there is. The governments could make ownership completely illegal, but that would open up a pandora's box which I don't think they want to deal with at all.
If you doubt the mess the world (and particularly the US) is now in, read Alan Greenspan's own words written in 1966. You can come to no other conclusion than he succumbed to the same pressures he accused the Fed of in the 1920's. That, or he also got caught up in the Clinton philosophy of "grab all you can and forget the future of others yet to come". Read his words carefully, and I think you will be buying gold and silver and those companies that mine it.
I remain,
SOROS
WORDS of ALAN Greenspan from 1966:
"A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.
But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.
When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.
With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.
Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." |
