[hipmatt]

go buy a house then

[hipmatt]

http://www.abs-cbnnews.com/storypage.aspx?StoryId=93050

Almighty US dollar turns into ‘American peso’

Since 2001 the dollar has lost more than half its value against the euro. It now costs nearly $1.40 to buy one euro. And it isn’t just the euro that seems to be growing stronger against the US dollar. It has declined against many other major world currencies, and even including minor ones like our peso, reflecting the dollar’s loss of purchasing power.

The Philippine Star

There is this joke circulating in financial circles that the once “almighty US dollar,” is fast turning into the “new American peso.” Since 2001 the dollar has lost more than half its value against the euro. It now costs nearly $1.40 to buy one euro. And it isn’t just the euro that seems to be growing stronger against the US dollar. It has declined against many other major world currencies, and even including minor ones like our peso, reflecting the dollar’s loss of purchasing power.

As the Los Angeles Times reported, “in much of the world — from Brazil to Poland to Thailand — one dollar buys less than it did a year ago, and far less than it did four years ago. On Friday, the US currency hit a 30-year low against its Canadian peer.”

There isn’t a single explanation for why currencies rise and fall, the LA Times explains, but many experts believe that the sliding dollar is largely a function of the nation’s borrowing binge of the last two decades. That has left the US with a yawning trade deficit and the fact that it is deep in debt to foreigners.

Alan Greenspan, the former chairman of the US Federal Reserve, blames President George W. Bush for America’s current economic problems. Greenspan says Bush pays too little attention to financial discipline. In a book to be published this week, In The Age of Turbulence: Adventures in a New World, Mr. Greenspan says Mr. Bush ignored his advice to veto “out-of-control” bills that sent the US deeper into deficit.

In theory, a currency is supposed to reflect to some extent, the underlying health of the economy that stands behind it. “The basic thing is, we have been living beyond our means,” Ted Truman, a senior fellow at the Peterson Institute for International Economics in Washington told the LA Times.

A dwindling dollar is, in effect, the market’s attempt to slow those trends, Truman said. The flip side of a weak dollar is that it makes US goods less expensive for foreign buyers. America shipped a record $137.7 billion worth of goods and services abroad in July, 15 percent more than in July 2006, government data show. That’s good news for American exporters.

But even then, Americans still bought more from the rest of the world — including foreign oil — than they sold or exported. Imports reached $196.9 billion in July, up five percent from a year earlier.

The gap between imports and exports is the trade deficit. The broadest measure of a nation’s trade picture is the so-called current account, which includes investment flows. The deficit in the current account for the US reached a record $811 billion last year, more than twice what it was as recently as 2001.

The LA Times reports that “this year the deficit has been shrinking modestly, helped by the surge in exports. But the gap remains massive — another reason, many economists say, that the dollar is likely to keep falling in value… Some believe, however, that the trend could speed up.”

That’s bad for the world economy too. “If the dollar loses value too quickly, it could wreak havoc on the economy and financial markets — driving up interest rates and inflation and slashing Americans’ purchasing power, said Peter Schiff, who heads money management firm Euro Pacific Capital.”

The danger, the LA Times warns, is that a Fed rate cut could spark a much faster downward spiral in the currency. “That could occur if lower interest rates on dollar-denominated bonds caused foreign investors to balk at buying more, or encouraged them to sell US securities and invest their money elsewhere in the world. Worse, wholesale flight of foreign money from US bonds could drive up long-term interest rates if the Treasury and other debtors have to pay more to attract investors to their securities.”

No wonder John Gokongwei, the chairman emeritus of JG Summit told us over dinner in Shanghai last week, he is worried about rough times ahead. He is worried about the view expressed by US Treasury Secretary Hank Paulson that the ongoing subprime mortgage crisis is going to be worse than three of the worst things that ever happened to the global financial system — the Asian crisis of 1997, the $50-billion Mexican meltdown of 1994-95 and the $40-billion Russian default of 1998.

A US recession, Mr. John said, could nip in the bud the boom in the Philippine real estate market. We could end up with a lot of unfinished superstructures of skyscraping condos. Pinoy expats who are fueling all those grand condominium projects will be adversely affected by the US credit crunch. Mr. John said that under US laws, they have the right to ask for the return of deposits they made on local condo units sold to them in America.

Mr. John’s advice: stay liquid and borrow long term.

Mea culpa

I made a terrible mistake in my column last Monday. In the sentence that partly reads “Cebu Pacific’s daily flight to Taiwan will open the floodgates of travel between China’s business capital and the Philippines…” Taiwan should have been Shanghai. I don’t know what possessed me to put Taiwan when the whole column was about Shanghai and we all know China’s business capital is Shanghai. Worse, I missed that mistake when I edited my column.

This is what I get for trying to write a column on the run, while in an exciting city like Shanghai and after having had very little sleep. Good thing I am not a diplomat or that would have been a very serious faux pas.

Importing copra

I got this e-mail from a reader, Teddy Navarro.

I am literally teary eyed as I read your column today as you confirm our importation of copra. I know for a fact that it was inevitable because of how the coconut industry was handled by the government since 1986.

Fresh from college I worked for Mr. Danding Cojuangco from the mid 70’s up to his exile in 1986. I was with the special audit team who saw to it that every step of the industrialization of coconut was in place and functioning well.

We visited a state of the art coconut laboratory and research center in Bugsuk Island in Palawan producing hybrid coconut planting materials that were to be used for massive replanting programs to ensure constant supply of copra, copra buying stations all throughout the country even in far flung areas of Basilan and Sulu and Tawi-tawi, coconut oil mills and and the coconut chemical plant in Batangas.

I still remember Mr. Cojuangco saying that all these facilities were put up to produce chemicals out of coconut instead of exporting it in its raw form, maipagmamalaking sariling atin as he would always say.

Since Mr. Cojuangco left in 1986, I have never seen somebody who had the passion and vision for the coconut industry like he had. At the rate the coconut industry was mismanaged and neglected by the government for the past twenty years, I could only say SAYANG for a God-given opportunity.

Shared faith

This one’s from Lal Chatlani.

A priest and a rabbi operated a church and a synagogue across the street from each other. Since their schedules intertwined, they decided to go in together to buy a car.

After the purchase, they drove it home and parked it on the street between them. A few minutes later, the rabbi looked out and saw the priest sprinkling water on their new car!

The rabbi hurried out and asked the priest what he was doing. “I’m blessing it,” the priest replied. The rabbi considered this a moment, then went back inside the synagogue.

He reappeared a moment later with a hacksaw, walked over to the car and cut off two inches of the tailpipe.

[hipmatt]

yes.. fxe, gdx, gld, ..etc

[hipmatt]

I only suppose that the volatility won’t be going away.. we will still see disturbing earnings reports for a while before the rate cut has a chance to make a difference, even if it does at all…

Commodities and metals going to record highs may eventually weigh in on the rate cut parties, as will the record low dollar.

RE still looks ugly, and as we have concluded in another thread, the rate cut will really only affect HELOCS and NEW arms, and it looks like it won’t help the 30 year fixed crowd, it might have made those fixed rates go higher.

We have the largest number of resets coming up in the next six months.. they may only benefit if they refi into another arm loan or similar.. they will have NO benefit if they refi into a fixed loan… we will still have tons of pressure for many to sell, and more foreclosures coming our way.

I will keep my gold, my foreign currencies, and my foreign stocks, but I can’t say whats gonna happen to the US equities.

[hipmatt]

I hear you all, but the new American motto to me is the following

1. Responsible savers will be punished via low interest rates and high inflation.

2. Risky investments, fraudulent loans, and massive debt will get you into a house that only goes up in value… and if the market ever starts to self correct.. the government will write legislation to help bail you out… and the fed reserve will do its best to keep your overly inflated asset at inflated prices.

… summary..

WE ENCOURAGE you to live a fiscally irresponsible life, live above your means, spend recklessly, NEVER save, and then when things go bad, throw a hissy fit like Jim Cramer until you get what you want. We will then punish those with patience and thrift by making them pay for your lifestyle via their taxes and inflation.

.. the only other thing you need to worry about is your celebrity role models, and then obsess about them when they commit a crime, drive drunk, misbehave in public, or just give zero effort in their MTV awards performances.

[hipmatt]

According to bankrate…http://www.bankrate.com/brm/default.asp
most mortgage rates are higher today than last week.. and I tend to agree with HLS that the fed funds rate will mainly impact HELOCs, arms, and credit card debt… I doubt it this rate cut will have much help for the RE industry and the builders, even though their shares are up..

BTW, for those who said a rate cut would HELP the USD.. I guess you were wrong. The us dollar index at 79.17 is the lowest I’ve ever seen it.

I suppose that if you are gonna use an arm loan, and you don’t need food, you don’t buy any goods, and you don’t drive, then the rate cut may have helped you buy a bit more house than before.

[hipmatt]

No, this will not really help out RE.. RE has too much inventory and remember, it is still priced too high. It may help the consumer a bit that has credit card debt, and HELOCs. Won’t do much to the 30 year fixed rates, it may actually cause them to go up. I suppose adjustable rates may come down, but will this save RE? ..NO

[hipmatt]

I agree with bubbles.. I think that there will be drama one way or the other. I expect big swings, in what direction, I don’t know. In the long term I’m bearish, but with all the cry babies on wall street getting their rate cut, I can’t count out a rally. Either way, I am expecting the dollar to fall this week, and gold to rise.

eye-pod… sorry but this post is very relevant to this site.

[hipmatt]

I think the next great bubble will be massive US inflation and a weakening US dollar. Invest abroad. I’d say China could be a bubble, but bubbles burst, and China may not burst for a while.

I do agree with Peter Schiff on this one..
this is what he thinks..

American Consumers are Losing their Crown 9-14-07

With the U.S. Dollar Index breaking decisively below its long-term support level, the sun is finally setting on the golden age of American consumption. As America’s economic dominance fades, so too will the faith in the central thesis that has explained its apparent success and has shaped the majority of recent economic theory.

At issue is the belief that a nation can grow and prosper by borrowing from abroad in order to consume imported goods. To consume at the pace that it has, America exchanges income producing assets, such as companies or property, or interest bearing IOUs, such as Treasury notes or mortgage-backed bonds, for foreign made clothes, toys and electronics. Economists call these transactions “growth”. But rather than discovering a new path to prosperity, America has simply stumbled on a short cut to financial ruin.

For years America has convinced the emerging market countries that their prosperity is a function of our consumption. It is argued that their export oriented economies would falter if not for the insatiable American willingness to consume (a “virtue” that is assumed to be uniquely American). As the dollar falls into the abyss, this myth will be shattered.

My forecast is that over the next two to three years the U.S. Dollar index will fall to 40; half of its current value. As this happens, much of America’s economic power will be transferred abroad. The chart below approximates current per capita U.S. dollar GDP for thirty nations, including the United States, listed in descending order.

Luxembourg 91,926.63
Norway 76,447.78
Ireland 57,163.07
Switzerland 54,466.77
Iceland 53,532.47
United States 46,085.15
Sweden 44,454.36
Netherlands 42,762.96
United Kingdom 41,959.85
Canada 41,347.87
Australia 37,981.52
France 37,416.55
Germany 36,779.14
United Arab Emirates 36,180.87
Japan 36,021.22
Singapore 32,082.02
Spain 31,726.55
New Zealand 24,511.95
Greece 24,030.41
Israel 20,510.55
Portugal 19,287.51
Saudi Arabia 16,612.16
Poland 9,214.27
Chile 8,335.70
Russia 8,183.02
Mexico 7,755.69
Argentina 6,548.80
Venezuela 6,393.99
Brazil 5,518.21
Peru 3,328.55

A 50% decline in the value of the dollar will simultaneously increase interest rates, consumer prices and unemployment in the United States, while causing stock and real estate prices to fall. Consumption, which accounts for better than 70% of U.S. GDP, should collapse as a result, producing a significant recession. My forecast is that U.S. GDP will contract by at least 20%. (The Fed may seek to mitigate the nominal decline with expansive monetary policy, but such moves will only result in an even greater contraction in real GDP.)

Assuming a 50% decline in the value of the dollar and a 20% fall in U.S. GDP, the above chart would look something like this:

Luxembourg 183,853.25
Norway 152,895.56
Ireland 114,326.14
Switzerland 108,933.54
Iceland 107,064.94
Sweden 88,908.73
Netherlands 85,525.93
United Kingdom 83,919.70
Canada 82,695.74
Australia 75,963.04
France 74,833.10
Germany 73,558.27
United Arab Emirates 72,361.73
Japan 72,042.44
Singapore 64,164.05
Spain 63,453.11
New Zealand 49,023.91
Greece 48,060.83
Israel 41,021.10
Portugal 38,575.02
United States 36,868.12
Saudi Arabia 33,224.32
Chile 16,671.40
Russia 16,366.03
Mexico 15,511.38
Argentina 13,097.61
Venezuela 12,787.97
Brazil 11,036.41
Peru 6,657.09

Obviously, these projections are very rough. Not all foreign currencies will rise in step and not all foreign GDPs will remain constant at today’s levels in local currencies. However it is the concept that is important. Notice how America falls from 6th place to 21st. America’s per capita GDP falls from 58% of Luxemburg’s, the top nation on the list, to a mere 20%. America’s per capita GDP falls from 14 times that of Peru, the lowest nation on the list, to only 5.6 times.

China is conspicuously absent from the list. Its current per capita GDP is only about $2,200. However, were China to allow its currency to float freely, my belief is that the yuan would rise far more significantly than other currencies. I have no idea how much more significantly that rise will be, but let us assume that its rise against the dollar would be double the rate of the typical currency in the Dollar Index. That would result in China’s per capita GDP rising to $8,800, just above Peru’s but still below Brazil’s.

Factoring in China’s enormous population means that such a significant rise in its per capita GDP would have a profound impact on global consumption. Consider the following table, in billions of U.S. dollars, of the GDPs of the G-7 nations plus China:

United States 13,928.462
Japan 4,599.358
Germany 3,036.853
China 2,871.019
United Kingdom 2,552.655
France 2,370.843
Italy 1,949.878
Canada 1,357.073

Now consider the table with my assumptions regarding exchange rates and a 20% decline in U.S. GDP.

China 11,484.08
United States 11,142.77
Japan 9,198.72
Germany 6,073.71
United Kingdom 5,105.31
France 4,741.69
Italy 3,899.76
Canada 2,714.15

Under this scenario, China supplants the United States as the world’s largest economy, not in 30 or 40 years as is commonly believed, but perhaps as soon as before the end of this decade. The U.S. retains its lead over Japan for second place, yet the margin declines from over 300% to just 10%. (My prediction is that the yen will rise more significantly than most other currencies meaning that Japan’s GDP will likely surpass U.S. GDP as well.) Further, the GDP of the thirteen nations sharing the euro is currently about 12.8 trillion dollars. After the dollar’s decline it will rise to a staggering 25.6 trillion, more then twice that of the U.S. As a result, considering the EU as a single nation, the U.S. economy would then rank forth among the world’s largest, with its GDP declining from 43% of world GDP to only 21%.

Current ideology holds that a recession in the United States as severe as the one I am forecasting would be catastrophic for the global economy. But this short-sighted view overlooks the effects of such tremendous dollar gains in the GDPs of the rest of the world. Wouldn’t the increased consumption of everyone else offset the effects of the decreased consumption of Americans? It is not as if factories around the world would shut down if Americans stopped spending. All that would change would be the nationality of the buyers.

As American consumer spending declines, foreign spending will rise to take its place. With an explosion in foreign purchasing power, consumers around the world will see the dollar values of their incomes and savings soar. Globally, goods will fall in price and consumers around the world will snap up the bargains. Goods that were formerly out of reach for many foreign consumers will now be affordable. The reverse will occur in America. As production is diverted away from poorer Americans to more affluent foreigners, consumer prices in America will rise sharply. Goods that Americans used to easily “afford” will now be out of reach.

As gold surpasses $700 per ounce, oil tops $80 per barrel, and wheat prices exceed $9 per bushel, Americans are already getting a taste of things to come. Prices for these and other commodities are rising as a direct result of the weakness in the dollar. As this weakness intensifies in the months ahead, commodity price increases will accelerate. However, as their own currencies rise, many foreign buyers will actually experience price decreases. The result will be even greater demand for commodities from abroad just as domestic demand subsides.

Further, as the world stops exporting so much of its savings to America, there will be far more capital available to foreign entrepreneurs to invest productively. Think of the crowding out effect of so much of the world’s savings being lent to American consumers. Now imagine the foreign investment boom that would follow as foreigners reclaim access to their own savings.

The American propensity to consume is not a unique talent. Any nation can emulate it so long as it finds willing lenders and suppliers. Production on the other hand is an entirely different matter. It requires free markets, limited government, the rule of law, savings, capital and hard work. The world economy will not be brought to its knees simply because Americans stop consuming. Rather it is America’s service sector economy that will collapse once the rest of the world stops propping it up.

[hipmatt]

It does help illustrate the beginning of the domino effect. Just as mortgage co. are letting people go, so will lumber, and many others, now that the boom is over.

My guess is that many of these jobless people will not be able to find adequate work. How long can you make mortgage payments with out a decent job? This will only add to the record number of homes for sale.

[hipmatt]

umm.. call the agent in the ad??

[hipmatt]

Some idiot bought a Murrieta Stucco McMansion for 1.1 million… haha what a tool!

[hipmatt]

This is a good thing.. loan officers are scum of the earth IMHO. We don’t need 1/8 of the current amount of lenders, if any.

[hipmatt]

“They demanded, among other things, that if a borrower can’t afford higher payments when a low introductory rate ends, that low rate should be extended to the full term of the mortgage.”

… there you have it.. problem solved, just keep the FBs interest rate at the 1% intro rate, and everything will be fine.

[hipmatt]

70% CDs
30% percent GLD, GDX, and a few other gold related stocks.
UDN.. dollar bearish etf, and a foreign dividend value etf

[Author]

Posts