US Dollar and consumer spending is about to fall off the cliff

Foreign Exchange Outlook : We don’t like it that stock markets are the dominant factor in the currency market. It makes for weird effects and puts hard economic data and a sane perspective on the economy in a secondary position. This week we get a plateful of data, including PPI and CPI for October, along with the NAHB housing market index and Philadelphia Fed survey for November. But if some important company reports bad earnings, even good numbers would be overshadowed. It’s dumb and it’s dangerous. The one thing it may prevent us seeing in deflation in the US, as in the UK.

Deflation and fear of deflation has a funny effect on people. We simply do not understand a world in which prices fall, companies fail, and GDP contracts. Most of all, we don’t understand it when the US consumer stops consuming but if the outlook for employment is as dire as we see in the Empire State report yesterday, consumer spending is about to fall off the cliff. The domino effects reach into the darkest corners of the world.

This morning we get the Treasury report on capital flows for Sept, which was the evil month in
which Lehman was allowed to go under. The August report had shown an outflow of $400 million after an outflow of $33.6 billion in July, despite an increase in foreign purchases of long-term Treasuries and repatriation by US investors. Market News notes that over the past five years, US investors bought nearly $1 trillion in overseas stocks and bonds, more than in the previous 25 years, so there remains a lot to come home if that is what is happening. Some strategists say this is the important factor behind the US dollars rise.

For reasons we don’t like, the dollar exchange rate is likely to do okay in the near future. For some reason, the US dollar is not being punished for incompetent government. As long as stocks continue to slide and scare everybody, the US dollar is a safe haven. And in the perspective of “it’s worse elsewhere,” we have yet to see the worst occur in places like China and other emerging countries. India is still forecasting high growth next year, for example. These guys just don’t get it. When the US sneezes, the rest of the world catches not a cold, but pneumonia. At what point do we see geopolitical unrest arise because of slumping economies? If history is any guide, India and Pakistan should pick a fight with one another any day now.

Another factor is oil. Many countries have said $60 is the breakeven point at which social programs and subsidies have to be cut. Indonesia and Malaysia have already seen turmoil over this issue-what about Venezuela or Mexico?

Those who are long dollars should be careful what they wish for.

Bye for Now

Barbara Rockefeller
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