Thursday, February 28, 2008

marching to parity

two dollars are marching to parity ... australia and singapore. it's worth noting we stand in the midst of a major internation correction of the dollar and the US economy in general. the rest of the world is looking at us now, seeing our economy is cursed with heavy debt and a business sector that has perfected the art of growing without hiring US workers.

the signs of this have been clear for years ... throughout 2003 and 2004, the media was abuzz with talk of a jobless recovery while a growing percentage of the working-age population left the workforce. at the same time our main demographic engine, the babyboomers are now leaving their peak earning years, while the next big generation is still 10-15 years from their main period of earning power. compared with countries like brazil, blessed with both a young population and growing oil revenue, the US is a hard sell.

the last traces of the post-cold war economic order and the age of volcker are just now fading out.

perhaps the best signal of this is the fact both the australian dollar and singapore dollar appear on track to hit parity this year. I am just starting to pay more attention to currencies technically.

I've normally just looked at stocks. on that front, I think the sp-500 has seen its top for the time being... it may retest the 1386-1400 level again, but that level has been confirmed as serious resistance.

there's definitely a lot more downside from here, but I'm not sure on the timing. there are some very strong bearish indicators to me, including :

1-a retracement to the first fib level on the sp500's fall from 12/24 to to 1/22.
2-it bounced off the 500 day moving avg on 2/1-2/2
3-the 200 dma is now falling for the more or less the first since the market rallied in march 2003.
4-the 50 dma has caught up with the sp-500 ... this is bad because it served as resistence twice in december when the current downtrend really began.
normally, I don't think the 50 is all the important, because it was frequently breached to the upside in the 2000-2003 down trend. but when it falls right atop the fibonacci level and the strong period of consolidation at the 1405 area, it seems almost certain to be another nail in the coffin.

measured in global purchasing power, I this downtrend could be much worse...

first, unlike in 2001, the US is no longer the dominant economic power. at least 5-15 other major economies have outperformed the US over the last 4 years and will continue to do so.

second, commodities are priced in dollars. the more people globally who want commodities, the more the dollar will decline. another way to understand this is the world now wants hard goods -- and not services. while we do produce grain exports, our country imports so much oil and other merchandise that we still run a significant deficit in goods. this IS narrowing. but at the end of the day, the US still doesn't produce enough goods. as the rest of the world enters the middle class, they will buy the goods as well, reducing the percentage of the demand we control. as that happens, we lose purchasing power and economic relevance.

in other words, there used to be excess productive capacity in everything from eggs to oil. for a while, the green revolution and globally-replicated manufacturing rendered hard goods cheap and common. now as american innovations like corporate capitalism and free trade lift the lives of millions around the world, the demand for these items explodes. before, the US was the market.

third .... I repeat: commodities are priced in dollars... in fact, just about everything in the world IS priced in dollars. that means if things are going to change, it can only go against the dollar. so long the dominant currency, the dollar enjoys many little priviledges like that. no other coin has such global relevance. but, they've already established a market in iran that used rubles. one has to think many other countries will follow. that will trigger an entirely new wave of dollar negativity. throw it all together, and we could be looking at a dollar index worth 10-20 in the next 2-3 years. it sounds crazy now, but once these forces get cut loose, they become completely irrational.

speaking of irrational revaluations is the the fourth and most important point: the world has been making a winning bet against the US for years now. at every turn, we have let people down ... weak job growth, companies hoarding piles of cash without investing in the economy, relatively low interest rates, and -- until recently -- ever widening trade deficits.
like every other trade, this one has to run its course. I don't see any reason to think this one is anywhere near the end.

when a market turns, like the nasdaq in 2000, there are both technical and fundamental red flags. right now, the anti-dollar trade is showing none.

finally, I suspect the dollar has become the new yen. I wonder whether hedge funds are shorting it to finance higher yielding assets outside the US... the new yen -- one more reason to doubt the dollar!!

the loonie has already done it.. even oil's done it... it seems inevitable AUDUSD and USDSGD are next to cross the line.

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