Juggling Dynamite

As we warned that it would, the strong U.S. dollar is posing a triple threat to U.S. earnings.  Here is a direct video link.

Most importantly for stock prices, this is coming at a time when S&P earnings have been above trend for the past 4 years (not because of robust sales but mostly because of cost cuts in the 2008 recession and because corporations have been spending 90%+ of their net income to buy back their own shares to prop up earnings).  As we saw at all previous cycle peaks and most recently in 2000 and 2008: mean reversion in earnings is inevitable and hard on over-valued investment markets.

Actually the time for “big changes in banker pay” came years ago back in the 2008 collapse, but we will take the changes as soon as we can get them… After 6 years of token gestures and tinkering at the edges of needed reforms, this latest talk from the IMF has the smell of progress. See: IMF: time as come for big changes in banker pay.

It doesn’t take 2000 pages of legislation to change the incentives that have bankrupted the financial system, just 4 simple large strokes:

1. cut the line of credit between taxpayers (gov’t) and risk taking at financial firms by restoring Glass Steagall,
2. pay banker bonuses in bonds of the companies they manage, not in equity,
3. hold the executives personally accountable for the breaches of the corporations under their management,
4. claw back executive pay where they are found to have broken rules.

Financial system solved. Then its back to work on the global issues that are actually worthy of all our time and attention like energy, health, education, water, sustainable biosphere…

Gary Shilling’s monthly missive “The Robust Buck” (subscription only) takes a detailed look at the forces that have been strengthening the US dollar since 2008 and the negative effects this is having on commodity prices, exports and US corporate profits. Shilling also explains why the rising greenback is likely to continue for the foreseeable future based on its relative advantage in 6 key characteristics that have historically defined the dominant global currency:

1. Rapid growth in the economy and GDP per capita
2. A large economy
3. Deep and broad financial markets
4. Free and open financial markets and economy
5. Lack of substitutes (Bitcoin anyone? –70% in past 8 months, -20% in past 2 days.)
6. Credibility

No one is saying America does not have some large financial issues to address.  But in a world of captive capital and a global debt bubble, the contest is always “relative” to other options.

The chart below gives a 34-year long-term view on the Canadian dollar (purple) and the US dollar (red) since 1980.  The C$ continues to look expensive.