Tuesday, April 24, 2007

Falling houses, falling dollars

Fred Cederholm has a rather intriguing article about the strength demonstrated in various markets lately and the concurrent shocks the US dollar has been experiencing. Indeed, it has been a puzzling run, given that there appears to be no "noteworthy triggering event" that would have sparked such market enthusiasm, especially as it comes on the heels of that whopper downturn spurred by the drop in Asian markets a few weeks ago.
last week the US equity markets experienced a buying frenzy. Last Friday, the Dow Industrials closed at 12,961.98 (up 158.35 for the day), the NASDAQ closed at 2,526.39 (up 21.04 for the day), and the Standard and Poor’s 500 closed at 1,484.35 (up 13.62 for the day). Crude oil closed at $63.38 and gold closed at $695.80.
Cederholm wonders who was doing the buying and with what. At this point, one can't help but note the pounding the US dollar has been taking, with the Euro hitting an all time high and the Sterling popping over $2. That spells one thing: one or many dollar holders are buying equity and using dollars to do it. And, as Cederholm also points out, there is fundamental distaste on world markets for how the American economy is being run.
This downward activity by the US buck was fully understandable. The US government and the American public continue to live well beyond their means – underwriting their profligate spending on the largesse of foreigners. The US National Debt topped $ 8.882 TRILLION on Friday. The National Debt has continued to increase an average of $1.56 billion per day since September 29, 2006!
The US dollar is the de facto world trade currency. It has been since 1971, when the US dollar was declared a fiat currency, unbacked by anything other than demand. That demand was secured by an agreement between OPEC (really, Saudi Arabia) and the US government to use US dollars for oil trading. But, as I've pointed out before, that precarious situation is experiencing some perturbations, as all the major dollar holders have indicated that they will be "diversifying" their assets away from the dollar. Cederholm points out that the increased price of oil today
is almost completely explainable by the erosion in value of the dollar relative to the POUND or the EURO. It may be claimed that the Dollar is still the “official” currency of the energy markets, the facts show otherwise.
Furthermore, our ratcheting trade deficit is swamping countries with US dollars, dollars that are falling in value. The trade deficit right now creates an outflow of $2.2 billion per day.
This has been going on for quite a while, so it should come as no shock that there are at least four geo-political entities which have accumulated dollar holding in excess of a TRILLION, EACH! These are the Chinese, the Japanese, the EURO (currency) zone, and the Arab OPEC’s. When you sit on that huge a block of Dollars, do you continue to hold them – watching them erode in value, or do you try to convert them to something else?
All of this buying is completely opaque, so no one really knows who is actually making the markets flush while the dollar tumbles. But it looks pretty obvious. And do not ignore the fact that each of these "geo-political entities" opposes US foreign policy in general and especially as regards Iraq and Iran.

But the continued slide of the greenback is not the only economic woe threatening to derail the American dream as news today indicates that existing home sales dropped 8.4% in the month of March. Furthermore, median home prices dropped 0.3% for the month and have been doing so for eight contiguous months, an unprecedented stretch of decline.

This should alarm almost everyone -- and it is -- and the real reasons for it ought to be admitted. But they aren't. We're still being treated to the insight of "analysts" telling us that, while they don't really "know" what is going on, it must have been bad weather that kept home sales down. But they don't then explain why the previous low month for sales was June of 2004. Too hot, I guess. Americans sure are fickle when it comes to their home-buying weather conditions.

The loss of home equity, most of which now is the hallucinated result of inflationary pressure, is perhaps the only source of "wealth" most Americans actually have. And this loss started about the time the American public began to enjoy a negative savings rate for the time since the Depression. This does not make for a happy future scenario for many people: no savings, a falling dollar, rising oil prices, and now, loss of the hallucinated wealth generated by a housing bubble everyone knew would, if not pop, at least deflate.

The whole melange is starting to have a fairy tale quality, paired as that always is with an expected happy ending. Of course, American life has been marketed that way for decades and only the most cynical among us would chafe at the notion of better living through square footage and mortgage debt. But no matter how much we want to believe it, Disney will not produce the history of the United States. When not completely ignoring the economic tsunami rolling in, we and our estimable political class pretend these ominous signs are not signs at all. It's the weather. Rail against foreigners, foreign lands and pony up for that sweet new Toyota. Everything is grand. Buy stuff, blame the Chinese for selling it to us and keep on truckin'.

Oh, and remember, we invaded Iraq for the democracy.


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