Tom, I don't really have an opinion on your question.
Message 19663224
I'm still sort of half assed playing it (a few gold juniors and Cdn$) tentatively and by default. But, I'm on bust alert (just groping along, slowly shifting toward the bust side of the equation) on all these playbook "excess liquidity" themes. Obviously I consider gold part of the same "long something" play.
I think folks will be caught offside sooner rather than later though. I just don't know the precise moment. Maybe we will get a clue, but I doubt it. From personal experience I reflect back to early 2000 when I got involved in the same kind of call. I was shorting stocks then, but you know I can't even remember when the market rolled over. As I recall I even dismissed it as "another dip". Then I noticed everything (the shorts) was gradually working. Markets just don't ring a bell I'm afraid, but LOL.
The CI piece describes the excess liquidity playbook perfectly. The problem will come with this playbook when the punch bowl is watered down some. I've written a lot about that recently, so go back and read my posts here if your wondering what I'm talking about.
CI:
"But perhaps more importantly, given the global economic and financial imbalances of the moment, the declining dollar has spawned the creation of excess global liquidity in a manner never experienced in any post recessionary environment on record. And that liquidity is largely being created in Asia. As Japan has literally printed Yen that have been sold against the dollar in an effort to buoy the dollar/yen relationship, the monetary base in Japan has exploded over the past few years. The same deal goes for the process by which China has pegged their currency to the dollar. It is plainly obvious that we find ourselves in a period of incredible global liquidity creation. In essence, the ultimate global reflationary effort. From our standpoint, the precious metals and commodities markets are reflecting the very real negative fundamentals of a declining dollar. Alternatively, the financial markets are reflecting excess domestic and global liquidity. Because this has been going on for a few years, market participants appear to have become quite complacent about the longer term implications of a weak domestic currency. Ironically, the weaker the dollar becomes, the less profitable exporters to the US become. Alternatively, as commodity prices increase, the more expensive becomes the cost of global production to those export driven economies. Quite simply, this is not the picture of a virtuous circle of global economic expansion. In fact, quite the opposite. This is the picture of imbalance. As we stand from afar and look at the global markets and real economy, we see the following going up in price: stocks, real estate, energy, gold, GDP, broader commodity prices, and bonds. For all of these asset classes to move higher in almost synchronous fashion, we can come up with no other explanation than excess liquidity on a global basis. For now, there is really only one thing going down - the US dollar. So although history suggests that at some point a declining dollar will negatively affect US equities and fixed income markets, is excess liquidity holding back or delaying this assumed rational reconciliatory path? As we look ahead into 2004, which of the following three will be the most powerful in terms of influencing the pricing of various asset classes - a declining dollar, excess global liquidity, or foreign flows of capital into US dollar denominated fixed income assets?
Although we believe the dollar is a huge key to the future of the US financial market, drawing simplistic conclusions regarding shorter term dollar and global currency movements is anything but shooting fish in a barrel as we move ahead. Factors offsetting the academic ramifications of a dollar decline are both many and powerful at the moment. Massive global liquidity creation and the continued significant flows of foreign capital into US dollar denominated assets have largely offset the negatives for US financial assets. And of course the Catch-22 is that our large trade deficit has supported the flows of foreign capital back into US dollar denominated financial markets. As crazy as this may sound, if our trade deficit were truly to contract meaningfully ahead, we would expect foreign flows of capital into the US to likewise contract, clearly pressuring US fixed income prices. But we're not there yet. Certainly the foreign community could also decide to place their capital elsewhere in the global sphere, but foreign purchasing of US financial assets has much less to do with investing than with promoting and sustaining their export driven economies. We need to remind ourselves that over the short term, anything can happen when it comes to currencies. But we see no way around a continued dollar decline as long as the US continues to "create" an unlimited supply of dollars. Quite simplistically, it seems pretty clear that the US is simply creating more dollars than is being demanded by the global financial community at the moment. We believe this simple comment explains a lot of the near term dollar decline as the foreign community is doing anything but shunning US dollar denominated assets as of now. But to everything there are limits. As we look ahead into 2004, if the rate of change in foreign buying of US financial assets slows, the impact of a declining dollar at that time will have serious consequences for US financial assets. In our minds, the flow of global capital is one of the major keys as to when a theoretical orderly decline in the dollar becomes something much more ominous for US financial markets and the real economy. Until that time, it's simply a good bet that current imbalances will continue to grow. Lastly, another clue as to when the foreign community will have "had it" with the dollar decline is when import prices start to rise quite noticeably. So far, the foreign community has eaten the profit eroding decline in the dollar as they export into the US. Low cost global sources of labor have been a big factor behind this ability of foreign exporters to conceptually ignore the dollar decline, but that only goes so far. At some point the declining dollar will cut into the foreign corporation profitability bone. As we move through 2004, we suggest keeping a very sharp eye on global capital flows, US import prices, and global money supply growth. We believe changes in these factors will foreshadow an end to the in place lag between a declining dollar and levitating US financial asset prices." |
