US$ bears can wring their hands and forecast doom all they like, but the chart of the US $ over the past 6 months should silence its critics:
Meanwhile in the mirror opposite direction, commodities of all stripes and the Canadian dollar are tumbling as they must, down, down, down.
Much hope has been laid at the feet of China and India over the past five years; hope was that their enormous populations would fuel enough demand to abolish the business cycle and carry the global economy indefinitely. In Canada this hope became widely held optimism that our economy would continue to expand by selling our exports to Asia notwithstanding the contraction in western world demand. Central to this thesis, was the argument that the centre of the demand boom, over the past few years, has been Asia.
But the centre of the 2002-2007 boom never was Asia. With a national savings rate at 35% of its GDP, Chinese domestic consumption is the lowest of any economy in modern times. In fact, per capita, western consumers in Europe and North America have historically been 10 times better at consuming than China and India. At best, China is a country of consumers in training. So far most are still concerned with basic necessities like food, shelter and personal security.
Asia merely aided and abetted this late-great-boom, giving the world tons of cheap finished products. The epicentre of the super-demand was western consumption fuelled by 50-year-lows in interest rates, insane lending and mindless spending. Now that all the major western economies are slumping, consumers are putting on much needed brakes.
As I have said for the past couple of years, a major support to commodities and the Canadian dollar has been the falling U$ over the past 7 years. Commodity bulls that insisted parabolic price spikes were justified by demand from Asia are finding out the hard way that “hope” is a four letter word.
The rest of the world is now realizing that they too have been mesmerised by the consumption dance. All over consumers are faltering, economies are weakening and de-levering is quickening the pace of decline.
Since few countries are fiscally solid, or prepared for this slow-down, realization dawns that if the US is in trouble, the rest of the world’s smaller economies will likely suffer even more.
Whether the US dollar will enter another weakening cycle in the time ahead is a point open for debate. In the meantime though, its trend is decidedly up. Bears beware.
Cory’s Chart Corner
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