The trouble with truth is, it’s hard to find. It takes real effort and critical thought. When it comes to money, markets and the economy, the search seems almost impossible. But we will never give up. We can't afford to.
Yesterday equity markets had another big green day, inspired primarily by a surprising revision to Q2 US GDP. The Commerce department moved the present “guesstimate” up to 3.3% from the previous 1.9%. The crowd roared. The details are not so inspiring though, especially when one notes the sources of the upside surprise. A large impact came from a massive wearing down of inventories from about 62 billion to 49 billion in the quarter. Liquidating existing inventories is not a sign of business confidence or economic expansion. It is a sign of the on-going contraction. Personal consumption was revised slightly upward to 1.7% but it is important to note that notwithstanding the large impact of the stimulus package in Q2, US personal consumption failed to stay above 2% (in 2007 it averaged about 2.3%) and continues to grow at the slowest pace since 1991.
Another primary source of the upward revision was exports in Q2. RGE Monitor points out the vulnerability of the export story going forward:
“Canada, Europe and Mexico are the biggest export destinations for the U.S. Now with this reassessment of the global outlook, Canada, Europe (as well as Mexico) navigating towards a downturn and the USD in strengthening mode against the EUR and the CAD the support of exports might go missing in the next few quarters. Moreover, personal consumption will not benefit from the stimulus package anymore and its growth might very well turn negative.”
Today we also see that India's economy grew at the slowest pace since 2004 last quarter as decade-high inflation and increased borrowing costs damped consumer spending.
And now we can understand the urgency of the “decoupling” chant at this point in the cycle. The US hopes that its export partners can continue to consume and buy from them even while their own domestic consumers fall flat in their traces. Watching in horror as the tidal wave of US housing and credit swells and spreads around the world, many pray that somewhere (anywhere) on the planet there are consumers who can keep on ordering massive amounts of goods. I am reminded of the market scene in the musical Oliver Twist, when everyone is running around with baskets of their goods and wares singing “Who will buy?”
This is a global slowdown just as 2002-2007 was a global expansion before it. There is no magic bullet to get rid of debt and excess capacity. The answer is pay down what we have spent, save more, consume less, slowly work down inventories, become more resourceful, more frugal, more innovative. All these habits are better in the long run. In the short run they will continue to play out as the on-going global contraction in consumption. But US consumption led the world through the expansion and into the contraction. It is likely that the rest of the global laggards will need the US to lead us out.
And maybe it’s the lawyer in me, but I can easily make up compelling arguments for why the U$ should weaken from here just as easily as strengthen from here. But the point not to be missed in all our well-penned thoughts is that the U$ is rallying and has been now for many months. In the end that is the point that many gold and commodity perma-bulls are missing at their peril. The US dollar is not rallying because I say so. It is a leading macro-economic indicator. It reflects the sum total of the dollar-weighted vote in the world. If the trend turns down again in the future, we will note that too. But it is rallying now…because it is.
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