The One-Eyed Man
Treasuries, the U.S. Dollar, and interestingly gold (which is often inversely related to the dollar) are all rockin' again this morning. This is not a good sign for the markets because fear is clearly ruling the day for investors and institutions again. I mentioned last week that I had almost no doubt that the major indices would eventually fall right through the lows that they hit at the end of last year. We may be well on our way to that right now.
Another, seemingly less talked about reason for the strength in the dollar right now is as the old saying goes "In the land of the blind, the one-eyed man is king." The United States is the world's one-eyed man right now. Many analysts, including those like Peter Schiff, correctly called the implosion of housing. What they ignored however when they recommended investing in foreign stocks and getting out of the dollar is that the ROW (rest of the world) is as messed up as, or even worse off than we are.
Here are a few stats from the ROW:
- The Japanese government projects that GDP will drop 12% from last year
- While the U.S. lost an estimated two million jobs over the past quarter, many analysts believe that the number of jobs lost in China is ten times that large.
- The GDP of the European Union fell by 6% in the Q4, including an 8.2% drop in Germany. As hard as it is to believe, many European banks are in much worse shape than U.S. banks. Some of them were reportedly levered an astounding 50-to-1 going into this mess. Some analysts believe that the write-downs at European banks will total $25 trillion dollars before things are all said and done. A number of its member countries, like Italy and Greece, are so messed up that many analysts are questioning whether the Euro will even survive this downturn.
- Don't even get me started about the U.K. Yuck.
Looking at the economic problems that are out there as a domestic problem is too ethnocentric and flat wrong. This is where many analysts, like Schiff missed the boat. The decoupling theory that many, including myself to some extent, bought into was flat wrong. We're all in this mess together. The ROW is just as messed up as we are. That's what is driving people to the U.S. dollar. Long-term I still am fairly bearish on the dollar, but the question is in relation to what? It could be a while before we see any weakness in it versus other currencies given the fact that the dollar seems to be the only game in town as far as currencies go in this risk-averse world.
The theory that borrowing costs for the U.S. will ultimately rise still makes sense to me. Even if other countries want to buy our Treasuries they won't have nearly as much money to do so as they have in the past. I remain very unconvinced that foreign countries like the UK, China, and Japan are going to be willing to print the vast sums of money that it would take to buy Treasuries at the same level that they have in the past, let alone at the new accelerated rate that the U.S. government is issuing them to fund our rapidly rising budget deficit.