Posts Tagged ‘U.S. dollar’
Since May, when it was near an all-time low, the U.S. dollar has rallied. Compared to other major currencies of the world, the greenback is up five percent since July, as the chart below illustrates.
The question: should investors get into this U.S. dollar rally?
Dear reader, the U.S. dollar is not moving higher because the fundamentals of the U.S. economy are getting better. It’s moving higher because other parts of the global economy are doing worse than the U.S.
The eurozone economy is so weak that the European Central Bank has lowered interest rates again, pushing the value of the euro lower. In the United Kingdom, Scotland is looking for independence. The crisis between Russia and Ukraine continues without resolution. New troubles are brewing in the Middle East. China reported yesterday it would start pumping money into its largest banks.
Chart courtesy of www.StockCharts.com
Right now, with the majority of major world central banks either printing more of their paper money or bringing interest rates even lower, the U.S. is the best of the worst.
But I believe the rally in the U.S. dollar will be short-lived.
Central banks are trying to move away from the U.S. dollar as their reserve currency. At one point, trade in the global economy was dominated by the U.S. dollar. This is changing, slowly but surely.
Consider just one of many recent examples; the Chinese and Argentinian central banks will be doing an $11.0-billion currency swap operation. This will allow Argentina to increase its reserves and pay for Chinese imports in yuan—the deal was signed in July. (Source: Reuters, September 7, 2014.)
Putting … Read More
The numbers are in…
In the second quarter of 2014, world central banks bought 117.8 tonnes of gold bullion compared to 92.1 tonnes a year earlier—a jump of 28%. Central banks have been net purchasers of gold bullion for 14 consecutive quarters!
According to the World Gold Council, “Economic and geopolitical events throughout the world are sources of ongoing instability and uncertainty. Such events reinforce the requirement for appropriate risk management by central banks through holding gold reserves for asset diversification.” (Source: “Gold Demand Trends Q2 2014,” World Gold Council web site, August 14, 2014.)
Hog wash, I say. Central banks are buying gold bullion because they are slowly moving away from U.S. dollars as their reserve currency and replacing them with gold bullion.
In the second quarter, Russia purchased 54 tonnes of gold bullion, Kazakhstan purchased seven tonnes, and Tajikistan bought three tonnes. Combined, just these three central banks made up more than 54% of all the official purchases of gold bullion in the second quarter.
You won’t see the central banks of France or Germany buying gold bullion because they already have enough (that’s if Germany can ever get its gold back from the U.S.).
So if demand for gold bullion is rising, as evidenced by central banks buying more, gold coin sales near record highs, and gold demand in India rising again now that the government is easing tariffs on gold imports, the million-dollar question is why aren’t gold prices rising?
There is plenty of discussion on the Internet about gold manipulation and how prices are purposely being kept down. I can’t comment on that, but I … Read More
The U.S. dollar is still regarded as the reserve currency of the world. The majority of international transactions are settled in U.S. dollars and most central banks around the word hold it in their foreign exchange reserves.
But since the Credit Crisis of 2008, and the multi-trillion-dollar printing program by the Federal Reserve, the supremacy of the U.S. dollar as the “world’s currency” has been challenged.
The BRICS countries (Brazil, Russia, India, China, and South Africa) have agreed on starting a new development bank that will compete with the International Monetary Fund (IMF) and the World Bank. (Source: Washington Times, August 5, 2014.) Both the IMF and World Bank are “U.S. dollar”-based.
Since the year 2000, the U.S. dollar composed about 56% of all reserves at central banks. But after the Credit Crisis, that percentage started to decline. In 2013, the greenback made up only 32.43% of all foreign exchange reserves at foreign central banks. (Source: International Monetary Fund COFER data, last accessed August 11, 2014.)
Yes, the $3.5 trillion in new money the Federal Reserve has created out of thin air has made other central banks nervous about holding U.S. dollars in their vaults. After all, if you were a foreign central bank with U.S. dollars as your reserve currency, how good would you feel to know the U.S. just printed more dollars as it needed them without any backing of gold?
But it’s not just the money printing. It’s the massive debt the U.S. government has accumulated…currently at $17.6 trillion and soon to be $20.0 trillion.
In the short-run, the U.S. dollar is still considered a safe … Read More
My colleague Robert Appel (BA, BBL, LLB) issued a research paper to the subscribers of one of his financial advisories earlier this week. I thought it important that all my readers be aware of and understand the crux of what Robert is saying about our current economic situation and where it will eventually lead.
Here it is:
“The actions of the Federal Reserve (how far they went to ‘stabilize’ the economy) after the Credit Crisis of 2008 is unprecedented in American history. Of course, I’m talking about the Federal Reserve printing nearly $4.0 trillion in new U.S. dollars while keeping interest rates artificially low for almost six years now.
These actions have caused an ‘era of financial insanity’ that penalizes seniors, savers, and prudent investors, while rewarding borrowers, those who leverage, and risk-takers.
It encourages public companies to doctor their own bottom lines by borrowing money (at cheap interest rates) to repurchase their own shares. This reduces the denominator of their earnings numbers—giving only the illusion of prosperity—and also reduces share float, thereby putting upward pressure on stock prices since more money is suddenly chasing fewer shares.
Articles have appeared in several well-known financial publications, with sources, citing central banks around the world have injected $29.0 trillion into equity markets because they themselves simply could not manage a return at the very same rates they were inflicting on others!
The prime beneficiaries of these insane monetary policies are the banks themselves and the government itself. Because low interest rates allow Washington (and other, similar, fiat regimes) to manage debt payments that could not otherwise be managed in a ‘normal’ interest … Read More
According to the U.S. Congressional Budget Office, next year, the government is expected to incur a budget deficit of $469 billion and then another budget deficit of $536 billion in 2016. (Source: Congressional Budget Office web site, last accessed July 21, 2014.) From there, the budget deficit is expected to increase as far as the projections go.
Yes, the government’s own estimates are that our country will run a budget deficit every year for as long as the government’s forecasts go.
That’s quite unbelievable. We live in a country where the government (and politicians) feel it is okay to continue being “negative” every year, indefinitely. It’s like I’ve written many times: if our government were a business, it would have gone bankrupt long ago. But the government, through its non-owned agency, the Federal Reserve, has the luxury of printing paper money to fund its budget deficit and debt. If a business did that—printed money to pay its bills—that would be illegal.
Today, the U.S. national debt stands at $17.6 trillion with about $7.0 trillion of that incurred under the Obama Administration. (Is it any wonder a CNN/ORC International poll said this morning that 35% of Americans say they want President Obama impeached with about two-thirds saying he should be removed from office?)
But what happens to the budget deficit once interest rates start going up? We’ve already heard from the Federal Reserve that interest rates will be sharply higher at the end of 2015 and 2016 than they are now.
Earlier this month, the U.S. Department of the Treasury was able to borrow money (issued long-term bonds) at an interest … Read More
There’s a big problem brewing…one that I started warning about two years ago: food and basic commodities prices are skyrocketing.
In April, the Producer Price Index (PPI), an index that tracks prices paid by producers for commodities, increased by the most in 19 months. The month-over-month change was 0.6%—yes, that is an annualized inflation rate of 7.2%. (Source: Bureau of Labor Statistics web site, last accessed May 20, 2014.)
Generally speaking, the producers (the companies that grow/import the food we eat and make the goods we buy) are “hedged” in the short-term so consumers won’t see a jump in prices right away; consumers will see prices rise in the months ahead.
While some economists are saying food prices are rising because we had a terrible winter and the weather played havoc with harvests around the world, I simply think too much money has been created out of thin air over the past five years, too many dollars are in circulation, the U.S. dollar is falling in value against other world currencies and that is pushing up domestic prices for goods, causing inflation.
This chart illustrates the situation very well. It shows how much currency there is in circulation in the U.S. economy. You can easily see that after 2008, our monetary base exploded.
As the chart shows, there is no denying we are experiencing hyper-monetary inflation in the U.S. There’s simply too much money in circulation. (You can thank the Federal Reserve for that.)
Understand this: when inflation increases, your buying power goes down. Today, your dollar is worth less than it was last year, last month, or even last … Read More
Central banks are still adding gold bullion to their reserves and the smaller countries are getting into the act big-time.
According to the International Monetary Fund (IMF), in the month of March, Iraq’s central bank added 36 tonnes of gold bullion to its reserves—worth about $1.5 billion. This is the first purchase by the central bank since August of 2012, when it bought 23.9 tonnes of gold. (Source: Reuters, March 25, 2014.)
Sure, you could say, “Michael, 36 tonnes of gold bullion is nothing for a central bank.”
I agree. But looking at the bigger picture, it is very significant for a small country like Iraq—a country whose annual gross domestic product (GDP) is smaller than Amazon.com’s sales for 2013—to be getting into gold bullion in a big way. The official announcement from the central bank of Iraq sent the message that it bought the gold bullion to stabilize the country’s currency and add insurance to their reserves.
Since 2009, central banks around the global economy have become net buyers of gold bullion, and I don’t think they will stop anytime soon. The main reason for this is that the central banks see a significant amount of volatility coming to the world of paper currencies—something they hold in their reserves.
Too many major world currencies are in a downtrend. The U.S. dollar has been on a decline since the beginning of 2014. The Canadian dollar is hitting multiyear lows. The Japanese yen has been plummeting.
Where do we go next with gold bullion?
At present, the amount of negativity towards gold bullion is immense. But the fundamentals paint a different … Read More
When news first broke from the Federal Reserve that it would slow down the pace of its quantitative easing program, the consensus was that the U.S. dollar would start to rise in value as the Fed would be printing fewer new dollars and actually eliminating all new paper money printing by the end of 2014.
But the opposite has happened.
Below, I present the chart of the U.S. Dollar Index, an index that compares the value of the dollar to other major world currencies.
As the chart clearly shows, the dollar started on a strong downtrend in July of 2013. When I look at the dollar compared to individual currencies like the euro and British pound, the picture looks even worse.
The common belief since the Credit Crisis of 2008: when there’s uncertainty, investors run towards the safety of the U.S. dollar. But something started to happen in mid-2013. Despite China’s economic slowdown, despite the situation with Russia and Ukraine, and with the Federal Reserve cutting back substantially on its money printing program, one would think the U.S. dollar would rally in value—but the opposite is happening.
Two reasons why the greenback is falling in value so fast:
First, world central banks have been slowly selling the U.S. dollars they keep in their reserves, as the percentage of world central banks that use the dollar as their reserve currency has fallen from more than 70% in the year 2000 to just over 60% today.
Secondly, with the Japanese and Chinese reducing the amount of U.S. Treasuries they buy and with the Federal Reserve reducing the paper … Read More
Understanding the economic slowdown in the Chinese economy is very important because not only does it impact American companies doing business there, but what happens in the Chinese economy—now the second-largest economy in the world—affects the global economy.
While media outlets tell us the Chinese economy will grow by about seven percent this year (30% below the 10% the economy has been growing annually over the past few years), the statistics I see point to much slower growth.
In February, manufacturing activity in the Chinese economy contracted and hit an eight-month low. The final readings on the HSBC Purchasing Managers’ Index (PMI) for February showed manufacturing output and new orders declined for the first time since July of 2013. (Source: Markit, March 3, 2014.)
And there are other troubles. The shadow banking sector in the Chinese economy shows signs of deep stress, but we don’t know how much money is really on the line here. China keeps much of its real economic news to itself, but we do hear how firms that are involved in the sector are defaulting on their payments.
And the Chinese currency, the yuan, keeps declining in value compared to other major world currencies. The Wisdom Tree Chinese Yuan Strategy (NYSEArca/CYB) is an exchange-traded fund (ETF) that tracks the performance of Chinese money market instruments and the yuan compared to the U.S. dollar. Look at the chart below:
Since the beginning of February, the Chinese yuan and Chinese money market instruments have been showing signs of severe stress, largely unnoticed by mainstream media and economists.
There is no doubt in my mind … Read More
Whenever I got stuck solving a problem in elementary school, my teacher would say, “go back and see where you went wrong.” This lesson—“learn from your mistakes”—was taught again in high school, and then throughout my life. It’s very simple: you can’t do the same thing over and over again and expect different results. Albert Einstein called it “insanity.”
When I look at the Japanese economy, I see the most basic lesson you learn in business school being ignored. The Bank of Japan, and the government, in an effort to improve the Japanese economy has resorted to money printing (quantitative easing) over and over, failing each time to spur growth. One might call it an act of insanity.
Through quantitative easing, the central bank of Japan wanted to boost the Japanese economy. It hoped that pushing more exports to the global economy from its manufacturers would change the fate of the country. It wanted inflation as well.
The result: after years of quantitative easing, the government and the central bank have outright failed to revive the Japanese economy. In fact, the opposite of their original plan is happening.
In January, the trade deficit in the Japanese economy grew—the country’s imports were more than its exports. Imports amounted to 7.70 trillion yen and exports were only 5.88 trillion yen. The trade deficit was 3.5% greater compared to the previous month. (Source: Japanese Customers web site, last accessed February 20, 2014.) Mind you, January wasn’t the only month when imports were more than exports in the Japanese economy. This is something that has been happening for some time.
Inflation in the … Read More
If there is an investment theme I would follow in 2014, it would be this:
Preserve your capital, be worried about the economy, and don’t for a second believe that key stock indices are going to provide returns like they did in 2013. This year may just be the year when the floor is taken out from beneath stock prices.
Why am I so bearish on 2014? It’s because I believe a perfect storm is in the making for key stock indices.
The main driver of key stock indices, corporate earnings, is under pressure. Of the 344 companies on the S&P 500 that have reported their corporate earnings for the fourth quarter of 2013, 3.3% of them surprised the market with better-than-expected earnings—43% below the four-year average “surprise” rate of 5.8%. (Source: FactSet, February 7, 2014.) Corporate earnings are far from exceptional.
In respect to the future, so far, for their first-quarter corporate earnings forecasts, 57 of the S&P 500 companies have issued negative corporate earnings guidance compared to 14 companies that have issued a positive outlook. (Source: Ibid.) Buying stock when companies in key stock indices are worried about their corporate earnings has never been a wise move.
Then we have the issue of the slow pullback on money printing by the Fed. The Federal Reserve is now printing $65.0 billion a month in new money as opposed to the $85.0 billion a month it printed in 2013. Not a big deal? It has been for the emerging markets, as the U.S. dollar strengthens and emerging market currencies collapse, putting further pressure on U.S. companies that sell abroad.
The … Read More
This choppy trading action in stocks is here to stay for a while, and it could even be more pronounced once fourth-quarter earnings season ends.
The numbers continue to pour in, but the unease in investor sentiment is obvious, and it’s partially due to the fact that stocks didn’t experience a meaningful correction last year. Whatever the reason or catalyst, further retrenchment in share prices is an eventuality that’s easily in the cards this year.
While companies, especially large-cap corporations, are able to manipulate adjusted earnings and fully diluted earnings per share, the numbers are still only mediocre at best. And share prices came up so tremendously in the Fed-induced reflation that today’s earnings results aren’t making the case for buyers.
In the large-cap space, The Clorox Company (CLX) perfectly illustrates the numbers being presented by countless blue chips.
The company beat on revenues but missed on earnings. Fiscal second-quarter sales were flat at $1.33 billion. Net earnings were down to $115 million, or $0.87 per diluted share, as compared to earnings of $123 million, or $0.93 per diluted share last year. Currency translation had a material effect on U.S. dollar sales.
The company delivered one percent in total volume growth in the most recent quarter, which is quite anemic, even for a mature blue chip consumer company.
Fiscal 2014 total sales growth is expected to be between one and two percent. Diluted earnings per share should be between $4.40 and $4.55, but management specifically cited unfavorable currency rates as a red flag.
Nothing is as troublesome in global capital markets than currency movements. The devaluation of emerging market currencies … Read More
“Michael, you don’t know what you are talking about.” That’s pretty much what I was told back in 2005 and 2006 when I was warning extensively that the U.S. housing market would collapse.
When a boom in any form of investment is going on, and millions of people are participating in that boom, it’s hard to convince people the boom is about to bust. At a certain point, we start hearing that old saying “it’s different this time,” which means people simply don’t believe the boom will end. They try to legitimize it.
But like all booms, the bust did happen. The housing market went bust big-time, and we all know what happened after that.
Today, there’s another asset class that is booming, that investors large and small are literally running to. No, I’m not talking about the stock market (it’s already in bust mode). I’m talking about the greenback, the good old U.S. dollar.
In recent days, and despite trillions of dollars in new money created by the Federal Reserve, the U.S. dollar has gained traction as investors search for safety amid the collapsing emerging markets.
Personally, I think investors are wrong to find security in the U.S. dollar. In fact, I see its days as the leading currency of the world being numbered.
But the fundamentals that make the dollar a “safe haven” are damaged. Aside from the fact the Federal Reserve has printed trillions in new money and the government continues to take on never-to-be-repaid debt daily, central banks around the world are reducing the amount of the reserves they keep in U.S. dollars.
Please look … Read More
Some prolonged downside is exactly what this stock market needs—a market that’s been looking for a catalyst to sell for quite some time.
While there has been pressure on long-term interest rates, we still have virtual monetary certainty this year with the Fed funds rate staying where it is. Weakness abroad in China is still a story of overcapacity, but there has been some refreshing economic data out of the eurozone.
What’s clear in Western economies is that positive economic data is sporadic and mostly without trend. The lack of consistency in mature economies has equity investors in a bit of a loop. Ten percent downside across the main stock market indices would be a healthy development for the long-term trend. We never did get a stock market correction last year, only consolidation, as investors were only too happy to keep buying.
Fourth-quarter earnings season has been modest so far, with outperformance (according to Wall Street) mostly coming in at the bottom-line, meaning that genuine sales growth is still a very tough thing to accomplish. Furthermore, a lot of corporations aren’t guiding 2014 above previous outlooks, and this makes it very difficult to be a new buyer.
Global capital markets are gyrating on a reassessment of investment risk and the prospect for real economic growth. Add in currency volatility, and there are the makings of a flight to the U.S. dollar and a sell-off in the stock market.
Still, the most important data now is what corporations actually say about their businesses. Beating the Street is less important than a true assessment of business conditions and expectations for the future. … Read More
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