2008-09-28

When going gets tough .... the Dollar gets going

What happens when you have a crisis in the middle of presidential election quarter - too many cooks spoil the broth! This is what seems to be happening in US today. Everyone has some axe to grind and some points to score and when you have politicians meddling in free markets you can only expect a very spoiled broth finally.

It was really cheeky of McCain to parachute himself into the negotiations just when all the "hard work" is about to be completed. It was a nice ploy to distract attention and may be score some points about his "country first" credentials. And at the same time I never understand why current US administration has to rule its subjects in such a climate of fear and bullying. Every major holiday period results into "red or orange" alert on all airports, promptly broadcast via all available loudspeakers and flat screen panels. And these days it appears all Bush speeches look similar. "Congress needs to pass this in shortest possible time or else we are doomed" seems to be the theme. First it was weapons of mass destructions and congress needs to commit US to war, then it was "stimulus" package to boost US economy and now it is committing $ 700 bln of tax payers money to bailout some wall street bankers. The only thing common is the siren call of impending doom and a "silly" smirk on the face of Mr. President as if telling the world - "don't think, we don't have time to think, you need to do this or else we are doomed". I am not sure why Americans allow them to be ruled in a manner that any voice of dissent is "unpatriotic" and any one who does not agree with the "Solution" is part of the "Problem".

Anyway, as clear from the rant above that we are in a very uncertain time. The problem facing the world markets is grave. After all merrier the party, messier the hangover (and of course the clean up afterwards under the influence of hangover with every T D and H shouting in your ear - I told you so).

I feel the bailout package will be passed in one form or the other. Most likely with "phased money instead of 700 bln upfront", "with lots of political/bi partisan/congress oversight of the process" and with some other "political agenda thrown in". Whether it will solve the problem or not will be a different question. My view is that it won't. It will avoid the melt down but it will not provide the boost. It can slow down the rate of decline but it will not start the growth. That will take its own time until the poison bleeds out of the system.

There is abundant talk that the bailout will crush the dollar however I do not feel it that way. Of course if the bail out helps start the "growth" once again in the world economy then possibly dollar will be under tremendous pressure. However given the scale of the problem, I do not see suddenly US consumers into buying frenzy once again, flocking to the Las Vegas condos with giant flat screen TVs from Korea and all those "Made in China" stuff. The decoupling theory that developing world can grow without depending upon the developed world is flawed and has been proven wrong already.

That leaves with the question - if Dollar is going down, what will go up?

- Would I rather hold Turkish Lira in these times or US Dollar. So that leaves emerging markets out.
- Commodities are already in bubble and that is bursting soon. We are not likely to see money returning to these sectors soon.
- Oil is under pressure and would remain so as long as world growth is under threat. Only upon turn around in growth would oil start making new highs once again.

So as long as there is no alternative to US Dollar as reserve currency, we will end up with stronger dollar while this mess is being cleaned up.

However I could feel only two assets which "might" be able to beat dollar. One is JPY - the huge unwinding of carry trades and rising inflation in Japan and alignment of growth between Japan and US might favour JPY. Second is GOLD - but only if the fear reins to high. These could provide interesting trade ideas for future.

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-VS