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Tuesday, December 04, 2007

The US Dollar and Global Recoupling

I am still in two minds as to what happens next on the dollar front. It is hard to see the downward march of the dollar going too much farther at the moment, but, OTOH, it is hard to envisage a major correction back towards $1:30 - 1:35 to the euro. This piece in FXDaily yesterday was interesting for this part:

"This week the moment of truth may be upon us. The US calendar is chuck full of important data including ISM Manufacturing and ISM Non-Manufacturing surveys, both of which are expected to be softer than last month, though still above the 50 boom/bust line. Dollar's destiny however, is quite likely to be determined by Friday's NFP data. The bears argument has been predicated on the assumption of an imminent recession in the US, but until and unless the jobs data shows clear deterioration there is little evidence that the US economy is in serious trouble. Last Thursday's weekly jobless claims which jumped by 10% certainly provide little cheer for dollar bulls, but the ultimate decision on the direction of the pair will be governed by next Friday's data. If the NFPs can expand by 100K or more the talk of doom and gloom may be overdone."

Especially the last sentence struck me. The gloom and doom very definitely is being overdone regardless of whether or not Friday's jobs numbers come in at over 100K (and regardless, for that matter of whether or not the US goes into recession in 2008).

If you want to see some justification for why I think the US is likely to prove much more robust than many imagine, take a quick look at the US population pyramids I present at the end of the post, it is hard to see a society with such a solid looking set of pyramids going forward (built like a brick s**t-house my old Ma would have said) having that many problems, baby boom or no baby boom.

I don't think you will find another set of pyramids like this anywhere, and undoubtedly they are a legacy of the US's unique demographic history (American exceptionalism yet one more time) driven as it has been by so much immigration.

Now demography isn't everything, as we well know, but given that the US has such solid and stable demography, just what else is it they are supposed to be doing wrong, I wish someone would please tell me? They have deep capital markets, lots of innovative ideas, patents etc, a well functioning job market, a machine to generate new companies on demand etc etc, and a proven ability to correct when they get into difficulty (which they have done, and which they are now correcting). Who are they supposed to learn from, Italy, or Japan perhaps?

Oh, I know, I know, they have the sub-prime mortgages issue, but so do a lot of other people (and Japan) so I don't see what is so special about the US issue here, except perhaps that the US has a proven ability to take the measures necessary (think Bernanke in Aug 2007, we will do what is necessary, or Paulson's mega-conduit).

Now the US of course have a problem in that they have been shouldering with their currency the burden of running Bretton Woods II, and this system is now in the process of unwinding with an ongoing recoupling of the global economy which involves a reduced role and importance for the US one, and continuing diversification out of the dollar. But as Claus Vistesen ably puts it in this post here:

You see, it appears that the old maid is a fitting metaphor for what at the moment seems to be a global game being played about not ending up being stuck with the Dollar.....the game is played and apart from the USD starring it could also seem as if a derivative of the old maid would be who in fact must step up to take the role for the USD as the structure of Bretton Woods II is ground down. Here of course, it will soon (i.e. after my exams) be time to re-visit old arguments but for now I will merely note that I always saw the current structure as very strong and fragile at the same time. It was/is very strong quite simply because de-coupling/re-balancing in the traditional sense where Europe and Japan ascends to take over the throne of the US would be virtually impossible. The fragile nature then comes in as an immediate consequence of this since if Europe and Japan cannot step up to the task who can and indeed will? As I say, fundamentals will tend to drive this and no-doubt the process of global re-coupling whereby the likes of India, Brazil, and Turkey takes over the clout of the US will materialize itself but a lot of glasses might end being shattered in the process.

So this is a delicate moment, that part is clear. The world economy is changing fast, as this chart which shows the shifting relative dollar values of Japan, the USA and the BRICs as % shares of global GDP. As can be seen in the chart the relative decline in the value of US GDP is virtually mirrored by the rising share of the BRICs.

And just this morning we learn that the Committee on Capital Markets Regulation - a group of executives and academics backed by US Treasury Secretary Henry Paulson - have discovered that the U.S. share of global stock-market capitalization has fallen to a 17-year low this year, as faster-growing overseas exchanges lure more and more companies. U.S. exchanges were found to be holding some 35 percent of worldwide equities by value as of September 2007 , down from 52 percent in 2001. The number of U.S.-based companies conducting initial public offerings only on overseas exchanges rose to 15 through September of this year, according to the Committee, while recently as 2001, no U.S. company sold shares exclusively outside the country.

On the other hand markets in India, Brazil and China are booming like never before. According to Bloomberg:

Financial, consumer and industrial companies sold about $48 billion in shares through IPOs this quarter, or 72 percent of all offerings globally. A total 131 companies in developing nations have raised $35.4 billion through IPOs in the same period, versus $32.7 billion raised by 117 companies in developed countries. Emerging-market IPOs also outpaced those from developed nations in the first nine months of the year, with $98.4 billion raised compared with $89.2 billion.

So things are changing, and the moment is a delicate one. But little by little we will get to the other side, and in the longer run this whole process will only be to the benefit of the US, since guess what, the trade deficit will correct, and US exports will once more become mightily competitive. Germany be warned.

Again Claus actually picks up on this point by drawing our attention to this extract from the recent Eurostat trade report:

EU27 trade with most of its major partners grew, with the exception of exports to the USA (-2% in January-August 2007 compared with January-August 2006), and imports from Norway (-9%) and Russia (-5%). The largest increases were for exports to Russia (+29%), India (+22%), Brazil (+17%) and China (+15%), and for imports from China (+22%), Brazil and India (both +17%) and Turkey (+14%).

Of course, there will be downsides to the great transformation in global economic dynamics that is currently taking place before our eyes. US citizens will have to get used to the idea of no longer being participants in the World's Number One Economy for a starter, but what do you do, c'est la vie. Some you win and some you lose, but life, well life like the river it is just moves on.

US Population Pyramids

Short Update

Three pieces of news out today (Wednesday) only add grist to my mill. First off productivity:

Worker productivity in the U.S. accelerated more than forecast in the third quarter, causing labor costs to drop by the most in four years. Productivity, a measure of employee efficiency, rose at an annual rate of 6.3 percent, the most since 2003 and up from a 2.2 percent pace in the second quarter, the Labor Department said today in Washington. Labor expenses dropped at a 2 percent pace, also the most since 2003. Greater efficiency eases pressure for companies to raise prices to counter rising energy costs, diminishing the threat of inflation. Lower labor costs will give Federal Reserve policy makers leeway to reduce interest rates to prevent the economy from slipping into a slowdown that will erode productivity.

Then the ADP employment projection:

Companies in the U.S. added 189,000 jobs in November, more than economists had forecast, a private report based on payroll data showed today.The increase followed a revised estimate of 119,000 new jobs in October, more than previously calculated, ADP Employer Services said.Job and wage growth have so far helped limit declines in consumer spending, which accounts for 70 percent of the economy. Companies filling more orders from overseas may be reluctant to lose workers even as a deepening recession in housing drags down economic grow this quarter.

and finally retail sales:

U.S. retailers' sales rose 2.5 percent last month, starting off what may be the slowest-growing holiday shopping season in five years. Consumers scaled back purchases in the last week of November following Thanksgiving weekend discounts, the International Council of Shopping Centers and UBS Securities LLC said yesterday, reporting preliminary sales figures.

Ok, ok, 2.5% is hardly the sort of retail sales growth they are getting in Romania, but then again, they are still much better than they are in Japan, and in Germany they are actually falling. I rest my case.

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