The US Dollar: the picture tells the story

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:
US Dollar Index graph
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.

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3 Responses to The US Dollar: the picture tells the story

  1. Anonymous says:

    I too have laid hope on the emerging markets of the world.. and those securities I have purchased have been severely punished in the last couple months as clearly I have caught several “falling knives” and not yellow happy-face balloons that I had at the time hoped for.
    It is amazing how much emotions can play such a huge role in our investment decisions that at the time seem to make such good sense. There's so much information coming into us from TV and newspapers, our personal financial advisers and blog writers many of whom are telling us what we want to hear.. only to once again seeing the market continue in letting the air out of our balloons.
    As human beings we are often so suggestible to these forces.
    Even this morning with the market up I too felt a certain subtle buoyancy.
    Short-lived again and I'm back down to planet earth.
    Unfortunately I'm new playing at this game and I ruefully justify my losses as “paying my dues” as I continue to soak up everything I need to learn before continuing to toss money around like I was at Vegas!
    But “better late than never” as you have suggested about getting out of the market and going into a wait-n-see hold position with cash/t-bills. (I'm not there yet but I'm workin' on it.)
    Keep us informed, Danielle. I know I am paying attention to you as I suspect more than just a few of your readers here are as well.
    bill (in washington, dc)

  2. Anonymous says:

    I cannot tell for the US consumer, whom I only contact via the biased feedback offered of US gov. statistics.
    But concerning Europe, the other solid leg of world end markets… I can tell you that the end consumer are on their way to stalling. Except for South of Europe and Britain, most of them reduce sail size when the wether changes. Sometimes even ahead of it.
    Spain and Britain consumers have waited a couple of months before getting to the brake (they were still sharp by Christmas 06). But they are now stopping the rough way.
    Which you could effectively consider a good point if Asia would take the lead. Since they are not, let us consider the significant players that will enter counter-cyclical pseudo-keynesian policies, Spain, UK and the US.
    Not a chance that these steps reverses the course of events. Inadequate steps, error on casting and wrong timing.

  3. Anonymous says:

    Great post! One thing I think is missing and that I haven't seen anyone discuss so far is that for China & India to increase their consumption consumption per capita to even a fraction of US or Europe levels (say 1/3 to 1/2) will mean that their income per capita should increase proportionally. This means loosing their only competitive advantage, cheap labour. On the long term I don't think that equation makes any sense. Something gotta give.
    On another topic I'm really happy that I've found your blog through Barry Ritholtz's The big Picture. I've been looking for a long time someone with the same intelligent and realistic view as Barry but from a Canadian perspective. I think I've found it :).

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