is Headed for Hard Times
[Ed. Note: Given the importance of U.S. dollar strength to the price of gold, we asked Chuck Butler, author of the Daily Pfennig, a daily commentary on global currency markets… and the head of EverBank World Markets, the innovative bank that offers FDIC-insured foreign currency CDs and deposit accounts to share with readers his top five reasons the U.S. dollar will weaken.]
- Deficits Do Matter- Never in the history of the world has one country owed so much to other countries without experiencing a currency crisis.
With that in mind, here are the latest deficit numbers posted on the U.S. ledger: Trade Deficit for September… $66.1 billion. Yes, that’s billion with a “B” as Ronald Reagan used to say. At this rate, the trade deficit will exceed $700 billion for 2005, topping 2004’s record $617.6 billion deficit by some 13%. Meanwhile, the budget deficit for October rang in at $47.2 billion.
The markets, economists and dollar bulls keep telling us this is a new paradigm… the globalization of economies, and that old-time fundamentals toward deficits no longer matter. To which I reply, isn’t this the same bad fruit they sold us back in 2000 when they told us it was a “new economy” and that stocks “could” continue to trade at 300 times over earnings? I say yes, it is…
One day, in the not too distant future, investors and traders alike will wake up to the reality that their dream of a new paradigm for deficits was just that… a dream. At that point, we’ll see a return to fundamentals, which strongly point to a weakening U.S. dollar.
- An administration that wants a weaker dollar – We’ve all heard government officials, including U.S. Treasury Secretary John Snow and President Bush, claim that a “strong dollar is in the best interests of the U.S.” The problem is that they turn around and tell the Chinese they want them to adapt a flexible currency, knowing all the time that most observers believe that the Chinese renminbi is undervalued by somewhere between 25% to 40% vs. the dollar.
Actions speak louder than words… if the Administration truly wanted a “strong dollar” they would leave China and their currency alone.
- Global imbalances need correcting- At the present time, the U.S. requires the trade surpluses of 10 countries to finance her deficit, which is equal to 70% of the world’s surplus capital. Put another way, the U.S. contributes 70% of the world’s deficits. This is an unbalanced system that needs rebalancing, which most likely would come in the form of a dollar correction.
The 10 countries with the largest surpluses that finance the U.S. deficit are: Germany, Japan, Russia, China, Saudi Arabia, Norway, Switzerland, Canada, Singapore, and the Netherlands.
The disparity between the world’s current account surpluses and deficits continues to widen, likely to hit a record of nearly 5% of world GDP in 2006. America’s massive external deficit of 6.4% of GDP in the first half of 2005 seems set to go from bad to worse over the next year, as the U.S. savings shortfall is put to a test by energy-related pressures on households and Katrina-related pressures on the federal government.
- A Return of The Asian Tigers- Even with the dollar’s correction in 2005, it remains 30% lower than it was in February 2002 when compared against an identical basket of currencies. The majority of the dollar’s weakness came versus the European and South Pacific currencies of Australia and New Zealand. The Asian currencies, by contrast, have not participated in dollar weakness… yet.
Where do the majority of the IOU’s that the U.S. issues daily end up being held? In Asia… which is why we haven’t seen any correction in the current account deficit in the past 3 years of dollar weakness. The deficits are being financed by the Asians, and their currencies haven’t gained vs. the dollar.
It’s about time, eh? Well, yes! And I’ll tell you why… All of the Asian countries have economic growth going on at the same time. China’s long awaited slowdown has never materialized, nor will it in the foreseeable future. Japan has finally put her decade-plus ordeal with deflation in the rear view mirror. Japanese corporations are beginning to make capital investments, and Japanese consumers finally have a yen to spend their yen!
Foreign investment into the Asian stock markets continues to be strong, as witnessed by year-to-date returns such as Japan’s NIKKEI +22.87% and South Korea +40.37%.
The next big surprise for the U.S. dollar will come from Asia. You heard about it here first.
- Commodities will continue to rally- Inflation in the U.S. is running much higher than the government wants to tell us each month. This rise in inflation has given commodity prices another round of wind in their sails.
Over the past 200 years, commodities have had five secular bull markets between the following periods:
1st boom – 1823-1838 (15 years)
2nd boom – 1848-1865 (17 years)
3rd boom – 1878-1918 (40 years)
4th boom – 1929-1950 (21 years)
5th boom – 1963-1980 (17 years)
The shortest bull market lasted 15 years while the biggest commodity boom went on for a monstrous 40 years! The current bull market is only 4-5 years old. So, if history holds true, the commodity bull market has a long way to go!
This time around, we have the added fuel being provided by China and their 9%+ year-over-year growth in GDP… manna from heaven for commodities, and for countries that produce those commodities.
We are early into an era of tangibles… and late in the day for dollars created out of thin air by the helicopter load.
Chuck Butler oversees the trading desk and operations for over 12,000 individual and corporate clients, both in the United States and abroad, who look to EverBank for FDIC-insured World Currency Deposit Accounts, and Single Currency and Index CDs .
Chuck is a frequently quoted and respected analyst of the currency market; appearing on, was featured or quoted in, or referenced by: the Wall Street Journal, US News and World Report, CBS Market Watch, USA Today, CNNfn, the Chicago Tribune and many other publications.
For more on EverBank’s unique line of FDIC Insured currency deposit accounts and Certificates of Deposit, or about its new Gold CD… a certificate of deposit linked to the price of gold, click here.