US may be less vulnerable to the woes of globalization than the eurozone

Foreign Exchange Currency Outlook :

Yesterday and overnight in Asia, foreign exchange traders were beguiled by the difference in GDP growth rates in the eurozone (0.2% in Q2) compared to the US (1.5%). While the US may have gotten a boost from tax stimulus checks in Q2 and that’s a one-time thing, the stimulus can’t account for everything. Besides, Europe has a booming export sector and while the US export sector is no slouch (and the US is in fact the world’s largest exporter, with China coming up fast as Number 2), exports do not account for such a big percentage of the economy in the US. Some exporters say the global slowdown is already starting to hit US orders, but the effect on the overall economy should be minor.

In other words, the US may be less vulnerable to the woes of globalization than the eurozone, especially those woes that originate in the US, like the subprime paper meltdown. Well, this only goes to show what we have been saying all along—the US economy is fundamentally more robust and flexible than any other economy in the world.

It can weather the most horrendous problems that would strike others to their knees—bad management everywhere (from Orange County to Enron to Fannie/Freddie), a giant budget deficit with no will to address it, dicey accounting practices and undercapitalized banks, and let’s not forget Bush and the two-front war.

The US is in almost as bad shape as when those idiots in Congress closed down the government and TreasSec Rubin had to borrow from the Exchange Stabilization Fund to avoid default on US Treasuries. In the end, the chief outcome of that debacle was the Monica Lewinsky affair and a curiously short-lived hatred of Republicans like Newt Gingrich. In short, the US is shrugging off all these awful conditions as it always does, and the economy keep rolling along. The election is 80-some days away and the Republican candidate says there is nothing wrong with the economy—no recession. The Democratic candidate would throw the public a $1000 bone but let’s be realistic, all the real action is under the Fed (which didn’t exist when the Constitution was written and has unknown powers today). This business of the Fed running practically everything should be very frightening, however noble and well-intentioned the Fed govs may be today. Power corrupts.

The financial press is full of stories about the global slowdown, including the top story of the WSJ. It doesn’t say anything new. The FT writes, “While the world fretted about whether the US economy was about to hit the wall, the eurozone had already bumped its head against the brickwork.” What the sellers of newspapers fail to understand is that the US never hits the wall. The US is astonishly resilient. It can overcome just about anything. In fact, we can’t imagine anything it cannot overcome, including full-out nuclear war. The US may no longer be the can-do country it once was, but it is still more ingenious and self-sufficient than others. We continue to think the end is in sight, perhaps by this time next year. Greenspan puts it at mid-2009, but even if it goes on for another year to mid-2010, so what? It’s a cyclical event, not the end of the world.

This is why the US dollar is going up, despite low interest rates, rising inflation, and other terrible conditions. It’s simply confidence in the US comparedto other countries. The dollar is going up because other currencies are going down. As noted above, traders and investors don’t necessarily love the dollar—they are just getting worried about conditions in other countries and thus their currencies.

And currencies are falling now in part because once a trend gets going, it takes a major Event to stop it.

Unfortunately, we can imagine plenty of unforeseen events with the power to do that—assassination, terrorist attack, Israeli-Iran war, a hurricane that drives up the price of oil again, and so on. Most of these are off-the-wall, except the oil issue.

We expect the Treasury capital flow report this morning to reflect ongoing inward portfolio investment in the US. Nobody will ever forecast the flow level (it was $44 billion last time but subject to heavy revision). As long as the inflow is roughly the same as the trade deficit (about $60 billion), nobody much cares. Even when inflow was very low some months last year, or certain categories show an outflow, the news gets shrugged off as due to some investing classes needing liquidity and where better to get it than the US? This pretty much makes the argument that the US is a dandy place to put your money—you can always get it back, and fast. In short, the TICS report will not be a factor today.

End-of-week may be a factor, though, especially in August when so many people are supposedly taking vacations. We may see some position-squaring. But historically, August and September are always big-move months in Foreign Exchange, and we do not expect the move to peter out over the next two weeks. Some folks look at the Friday close as the single most important number, and whatever it is today, it’s going to be vastly lower than a week ago (1.5010).

It’s getting to be time to bet the ranch.

Bye For Now

Barbara Rockefeller.

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