The headwinds in the stock market are rising. Government accommodation in major parts of the world is being dialed back. China is raising interest rates to cool growing inflation and a runaway economy. The Euro bloc is raising interest rates to combat inflation, in spite of a slow growing economy. Brazil is growing, but will have to battle serious inflation. Oil prices keep rising; $4 a gallon gas is a reality in most of the U.S., even if statistical averages haven't quite gotten there.
Black swans fill the air. Arab unrest has a whack-a-mole quality to it. No matter what is done to calm things down, eruptions get bigger and more widespread. Libya has stalemated, putting pressure on Western nations to join the ground war. Japan just elevated its nuclear crisis to Chernobyl status. And that's just the part the Japanese government has told us about. Considering that it hasn't been a paragon of transparency, one can only wonder what we don't know. Japan keeps having aftershocks that would qualify as big earthquakes anywhere else. Things aren't settling down there.
Portugal has just gone to the EU, hat in hand, to ask for a loan in the range of 80 billion Euros plus, following the path paved by Greece and Ireland. The Euro crisis is sliding downhill more or less as predicted. (Watercooler gossip has it that Spain will be next in line for a bailout.) As France takes the lead to spend Germany's money bailing out weaker EU nations, the markets snooze in the belief that creditors will be paid 100 cents on the Euro. Some day that won't be true. If you look at the Euro bloc as a whole, it's awash in debt. We have the lesson from the U.S. and other real estate markets that too much mortgage debt leads to bad things. That will also be true for sovereign debt.
The U.S. Federal Reserve is keeping its monetary printing press going 24/7. A majority of governors say they don't see any inflation, but would welcome it if it happened. That way, they can keep paying the print shop staff overtime no matter what. Meanwhile, back at the ranch, the poor consumer, whose wages aren't rising now or any time soon, is cutting back on driving while trying really hard to believe that beans and franks make a fine meal. Walmart just announced a return to every day low prices. That, as much as anything, tells you the consumer is under pressure. Since the U.S. economy is two-thirds consumption, the economy will soon be under pressure, too.
Stocks have more than doubled since their 2009 lows. Just about the only thing that can keep the bull running would be glowing corporate earnings. Alcoa was at the top of the order today, and whiffed. It reported greater earnings but disappointing revenues. Its stock is off about 3% in afterhours trading. Not a good beginning to the earnings season. If other companies follow Alcoa's lead, well . . . just tell yourself that beans and franks make a fine meal.
Showing posts with label arab uprising. Show all posts
Showing posts with label arab uprising. Show all posts
Monday, April 11, 2011
Tuesday, March 8, 2011
Will the Arab Revolution Topple the Dollar?
As unrest in the Arab world has grown over the past few weeks, the dollar has fallen in value. That would seem anomalous, since the dollar has served for decades as a safe haven in times of crisis. But investors apparently have noticed that the U.S. is unbalanced: too much in the way of imports, not enough in the way of exports, and a growing federal deficit that is likely to punish holders of U.S. Treasury securities if it isn't brought under control.
Exacerbating things is the rising price of oil. Since oil is traded in dollars, the lower the value of the dollar, the cheaper oil becomes to holders of other currencies. One player to watch in particular is China, a large consumer of oil with a growing appetite. The Chinese have already been gradually diversifying their foreign currency investments away from the dollar. Rising oil prices may, more than all the political pressure that can be exerted by the U.S. and other Western governments, convince the Chinese government to truly de-link the yuan from the dollar. As the yuan rises, oil becomes cheaper for the Chinese. If China can turn its economy toward domestic consumption--a goal the Chinese government acknowledges--look for the yuan to rise markedly against the dollar.
Some in the U.S. government would contend all this is good. A cheaper dollar enhances America's exporting competitiveness. But the price of a cheaper dollar is likely to be higher inflation--in gasoline prices and also the price of our numerous imports. The Fed's ultra-easy money policies would have to end and interest rates would rise. That would throw a wrench into the economy in many ways, from slowing the still feeble real estate market to discouraging business expansion to wrecking Wall Street profitability (which rests on a zero cost of funds) to knocking down stock prices.
The Arab revolution is almost entirely out of the control of Western governments, especially the mess in Libya. And even if things in the Arab world settle down in a few months, growing demand from Asia will continue to support and maybe push up oil prices. It's in the interest of the rest of the world to weaken the dollar in order to make oil cheaper. Even serial exporters like China and Japan have to weigh the increased cost of oil against their export revenues in deciding whether or not to keep their currencies weak against the dollar. Also, it seems to be a goal of the Federal Reserve's relentless easy credit policy to weaken the dollar. As the dollar drops, OPEC and other sellers of oil may begin to demand payment in other currencies. The dollar would drop further in such a scenario. Even though America would get an exporting boost from a falling dollar, rising interest rates here would slow the economy at the same time. How this mix of countervailing forces would play out is anyone's guess.
In the financial markets, something unexpected usually causes market breaks, crashes and other singularities. After all, expected events are quickly incorporated into asset prices. The dollar market is too big for an abrupt crash. But the Arab revolution has unexpectedly highlighted the dollar's weaknesses. That won't be good for the greenback.
Exacerbating things is the rising price of oil. Since oil is traded in dollars, the lower the value of the dollar, the cheaper oil becomes to holders of other currencies. One player to watch in particular is China, a large consumer of oil with a growing appetite. The Chinese have already been gradually diversifying their foreign currency investments away from the dollar. Rising oil prices may, more than all the political pressure that can be exerted by the U.S. and other Western governments, convince the Chinese government to truly de-link the yuan from the dollar. As the yuan rises, oil becomes cheaper for the Chinese. If China can turn its economy toward domestic consumption--a goal the Chinese government acknowledges--look for the yuan to rise markedly against the dollar.
Some in the U.S. government would contend all this is good. A cheaper dollar enhances America's exporting competitiveness. But the price of a cheaper dollar is likely to be higher inflation--in gasoline prices and also the price of our numerous imports. The Fed's ultra-easy money policies would have to end and interest rates would rise. That would throw a wrench into the economy in many ways, from slowing the still feeble real estate market to discouraging business expansion to wrecking Wall Street profitability (which rests on a zero cost of funds) to knocking down stock prices.
The Arab revolution is almost entirely out of the control of Western governments, especially the mess in Libya. And even if things in the Arab world settle down in a few months, growing demand from Asia will continue to support and maybe push up oil prices. It's in the interest of the rest of the world to weaken the dollar in order to make oil cheaper. Even serial exporters like China and Japan have to weigh the increased cost of oil against their export revenues in deciding whether or not to keep their currencies weak against the dollar. Also, it seems to be a goal of the Federal Reserve's relentless easy credit policy to weaken the dollar. As the dollar drops, OPEC and other sellers of oil may begin to demand payment in other currencies. The dollar would drop further in such a scenario. Even though America would get an exporting boost from a falling dollar, rising interest rates here would slow the economy at the same time. How this mix of countervailing forces would play out is anyone's guess.
In the financial markets, something unexpected usually causes market breaks, crashes and other singularities. After all, expected events are quickly incorporated into asset prices. The dollar market is too big for an abrupt crash. But the Arab revolution has unexpectedly highlighted the dollar's weaknesses. That won't be good for the greenback.
Wednesday, February 23, 2011
The Easy Stock Market
The Dow Jones Industrial Average has dropped almost 300 points in the last two days, and oil prices have popped up to $100 a barrel. Gas will reach $3.40 to $3.50 a gallon in a week or two. This, all because unrest in the Arab world has upended the government of Libya, a major oil producer. Libya's erstwhile leader, Muammar Khaddafi, is holed up with several thousand loyal troops. Much of Libya is now in rebel hands, and some military units have abandoned Khaddafi. His survival looks increasingly unlikely. But if his forces are well-provisioned, the fighting could continue for who knows how long.
Libya has no governmental structure (no constitution, no formal process for succession of leadership). If Khaddafi falls, a hundred claimants to leadership could step forward. That would take a while to sort out.
Oil production in Libya is grinding to a halt, and may stay halted for a long time. Other OPEC nations might be able to increase their production enough to fill the gap. But much of the new production would be sulfur-heavy, expensive to refine crude, not the light, sweet, low-polluting crude that Libya produces. And that assumes OPEC would be willing to increase production instead of cash in on the higher prices.
Gas prices have already drifted up 15% in the past six months. At some point, rising oil and gasoline prices, declining real estate values, continued high unemployment, stagnating (or in the case of many public employees, falling) incomes, and cutbacks in state and federal government spending will combine to chill the economic recovery. Whether we fall into recession again, or just idle in neutral, things won't be good.
It's no surprise the Dow fell so abruptly. Today's stock market is bipolar, either delirious with joy or down in the dumps. The market's recent meteoric rise created the conditions for an abrupt pullback. Whether it's easy come or easy go, we have an easy stock market.
Policy wonks on both the left and right will renew calls for energy independence. The programs they recommend will differ. None will be simple or cheap. However achieved, independence will be expensive.
The economic distress caused by volatile oil prices, the 5,000 plus American dead and hundreds of billions of American dollars spent fighting the Iraq and Afghanistan wars, and the need for expensive continued U.S. presence in an increasingly unstable region haunted by seemingly unstoppable nuclear proliferation make the cost of inaction extremely high. That doesn't mean there will be action. America's divided government is struggling to accomplish anything. Thus far in 2011, it's mostly followed past policies of expanding the federal deficit by cutting taxes and increasing spending. A gargantuan problem such as energy independence may be impossible for the pushmi-pullyu in Washington to handle. Save your nickels. Cash money will command a premium as uncertainty grows.
Libya has no governmental structure (no constitution, no formal process for succession of leadership). If Khaddafi falls, a hundred claimants to leadership could step forward. That would take a while to sort out.
Oil production in Libya is grinding to a halt, and may stay halted for a long time. Other OPEC nations might be able to increase their production enough to fill the gap. But much of the new production would be sulfur-heavy, expensive to refine crude, not the light, sweet, low-polluting crude that Libya produces. And that assumes OPEC would be willing to increase production instead of cash in on the higher prices.
Gas prices have already drifted up 15% in the past six months. At some point, rising oil and gasoline prices, declining real estate values, continued high unemployment, stagnating (or in the case of many public employees, falling) incomes, and cutbacks in state and federal government spending will combine to chill the economic recovery. Whether we fall into recession again, or just idle in neutral, things won't be good.
It's no surprise the Dow fell so abruptly. Today's stock market is bipolar, either delirious with joy or down in the dumps. The market's recent meteoric rise created the conditions for an abrupt pullback. Whether it's easy come or easy go, we have an easy stock market.
Policy wonks on both the left and right will renew calls for energy independence. The programs they recommend will differ. None will be simple or cheap. However achieved, independence will be expensive.
The economic distress caused by volatile oil prices, the 5,000 plus American dead and hundreds of billions of American dollars spent fighting the Iraq and Afghanistan wars, and the need for expensive continued U.S. presence in an increasingly unstable region haunted by seemingly unstoppable nuclear proliferation make the cost of inaction extremely high. That doesn't mean there will be action. America's divided government is struggling to accomplish anything. Thus far in 2011, it's mostly followed past policies of expanding the federal deficit by cutting taxes and increasing spending. A gargantuan problem such as energy independence may be impossible for the pushmi-pullyu in Washington to handle. Save your nickels. Cash money will command a premium as uncertainty grows.
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