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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (6223)	5/12/2004 2:13:24 PM
From: CalculatedRisk	Read Replies (1) \| Respond to of 116555

Mish, we’ve discussed this before but it is worth revisiting: given the trade imbalance, and under normal macroeconomic scenarios, the dollar should fall significantly against the Euro and other currencies. One would expect to see $1.30 to $1.40 per Euro or higher, and maybe we will over the next few months. The alternative would be a US interest rate a couple of points higher than our trading partners. A high interest rate wouldn’t lower the trade deficit directly, but would attract foreign investment to keep the dollar stronger than usually expected given the trade imbalance. Of course, high interest rates would put the US economy into recession (if not depression) and lower US demand, and thereby lower the trade deficit. So far, neither of these scenarios (weak dollar or high interest rates) is occurring. We can look at the details of the trade deficit to see why: as much as 75% of the deficit would not be impacted by a weaker dollar! Of the $46B deficit, $13.7B is due to oil imports. With more global demand (especially China) a weaker dollar has not reduced the cost of oil. In fact OPEC and others have wised up to that game, and appear to mark to the Euro when the dollar is falling. Another $19.5B of the deficit is with various Asian countries, primarily China ($10.4B) and Japan ($6.7B). China is fixed to the dollar, so a weaker dollar does not help. Japan was defending the dollar although I haven’t seen anything on this lately. Just Oil and China account for half the deficit and this will not be impacted by a weaker dollar, only a weaker economy. I think this is another argument (along with the incipient housing slowdown) that a US recession is coming. Best to all.

To: mishedlo who wrote (6223)	5/12/2004 2:14:30 PM
From: Tommaso	Respond to of 116555

Well, that is very interesting. I am not sure that contrarian thinking is as useful in the bond market as it is in the stock market. No one guarantees the fundamental principal value of a stock, so stocks are much more subject to psychological shifts than bonds. But I guess it's true that if there are huge short positions against bonds, that should support bonds as the positions are unwound. At the same time, huge volumes of bonds have been sold and owning these trillions of dollars of debt does constitute an enormous long position. Maybe the way to look at the bond shorts is as if they are insider selling. I mean, a lot of people in the United States know that we are hoodwinking the rest of the world by living off the credit it is extending to us. We are like the insiders of a very badly run company. Selling bonds short is making a bet against our own finanacial system. But of course, I don't know who these holders of bond short positions are. Am going back to Heinz's response for a second read now.