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US "Turkey" Dollar getting Stuffed

Undoubtedly all you turkey & stuffing eaters have now recovered from your holiday treats and indigestion and now grudgingly found your way back to the office, or wherever happens to be ones gainful place of employment. Albeit not before going out and blowing $8 billion dollars on the holiday shopping. US consumers, it seems, have not quite registered what's happening in the markets, or, maybe they have and just uttered "Aw, shucks, those foreigners ought to pull us out of our debt hole again. They've been doing it for ages". Yes, we have, to the tune of approximately $2.5 billion per day in investment inflows. Meanwhile, my darting eyes keep following the USD Index ....now venturing into 81 territory at this writing. If that isn't enough to scare the Americans, then nothing is. Most do not know what the USD Index is, let alone watch it. To my mind it's basically a health barometer - and the USD health looks rather sickly.

Everywhere I read articles are talking of the Dollar Demise. The ECB may just stand to the sidelines and let this current USD slide play out. They certainly have not stepped in yet. And the Asians are certainly fed up with buying the USD. The Chinese Yuan fixed USD-pegging does not look ready to change anytime soon....so exports keep rolling. The USD has been, historically, not where it is now since 1991, Q3 1992 and Q1 1995. This is "pain territory" - only question is whose pain ?

And on a weekly basis it has been falling about the last 12 weeks, rather unprecedented to my mind.

Yesterday's article- which I urge you to read and which is in the DINL news link section -- from Stephen Roach of Morgan Stanley did catch my attention though because although I can logically agree with the argument he puts forth, I cannot agree with it in reality. The notion that the world is fundamentally trade imbalanced is of course correct. Americans consume too much and save far too little. It's as simple as that. The Asians produce too much via massive labour advantages and a so-called under-valued Yuan, thus producing a double advantage over the West and the US in particular. Equally, the Asians may also save too much, as Mr. Roach points out.

Where I diverge from Mr. Roach is in the psychology of the solution. Getting the Americans to save more, at their own behest, is to my mind purely wishful thinking. That is like asking a junkie to not get high any more while giving him free access to the drug of choice. Americans of this generation wouldn't know how to handle a 30s style market crash like our parents and grandparents did. Likewise, mantras of "don't consume anymore dear US consumer" but here's all the most illogical credit card and 0% financing schemes we can think of, so please, don't consume, just save. Come on Stephen, it ain't gonna happen. Meanwhile, asking the Japanese or Chinese consumer to not save and to spend more is going against an entire philosophy of life and culture to the asian mindset. It's embedded into their brains - save, buy only when you can pay cash, etc. In effect, it's like asking a guy in Texas cattle country to eat rice balls and raw fish - it ain't gonna happen.

So where does this leave us ? I think it leaves us with bad tasting medicine. What is that? Keenly rising US interest rates, if the Fed was serious about battling a weak dollar. If they are not serious, then much higher inflation - the Fed will simply continue printing dollars. And if Bush does do a Social Security reform by taking out more debt, then save your dollars for toilet paper, or good winter kindling-starter in the fireplace - nothing burns slower than a tight wad of 20s. I think Greenspan has just called out the chimney sweeper to make sure the kindling will get plenty of fresh oxygen down the chimney flute... And finally, dear US government, don't expect hoards of Europeans flocking through NY air terminals with wads of Euros ready to buy USD goods -- word is out about Homeland Security Rent-A-Cop grunts...and we don't like to be manhandled and mal treated. At least that is the word I keep hearing on the street from Euro travellers. What a way to start the week off - Let's hope things will brighten up a bit this week. See you tomorrow...

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