Change in direction for the dollar

The trend has changed and the dollar is now in a downward slope compared to the euro. For the first time since the dollars upward move, we now have the euro hitting higher highs and higher lows.

Even though we have this confirmation of a change in the trend, I am still of the opinion that the euro will in the future end up at much lower levels against the dollar. The timing of this outcome however is another matter altogether.

Theoretically speaking commodities and gold should do well, however both are so outrageously overpriced that I dare not even consider the notion.

Assuming that the fed does not overdo it with the printing press, stocks, especially manufacturing stocks (most are priced for scrap), should do just fine and should more than increase in value compared to the loss in the value of the dollar.

Are US consumers changing habits and lifestyles?

You all know that the savings rate in the US is up. What you might not know is that it’s at a 10 year high, as illustrated by the chart below from the BEA via the St. Louise Fed:

TThe funny thing is that Americans are also taking out 15 year mortgaes. The theory is that people will get out of debt faster – NY Times: http://www.nytimes.com/2009/05/24/realestate/24mort.html?_r=2&partner=rss&emc=rss

More recently, there has been increased activity in another loan alternative: a fixed-rate mortgage with a 15-year term.

Brokers and mortgage industry executives say that these loans are becoming especially popular among people who want to shed debt more quickly, and in light of the current economic atmosphere, that goal is perhaps more widely applicable than ever.

The number of 15-year mortgages issued in February jumped to 74,497 from 42,178 in January, according to First American CoreLogic, a real estate consulting company in San Francisco. And according to Bloomberg News, $15.9 billion worth of 15-year mortgages were issued in March, more than twice the $7.5 billion issued in February.

So the American consumer is actually saving more and pay debt down faster! The US consumer is taking it to the bank!
Is this good news for the markets? Probably not. People only save and refuse to spend when they are afraid and worried about the future of economic prospects. However, I do think it’s a negative issue thing for the dollar.
Paying

I am taking bets that by this time next year, economists and market participants will be blaming the US consumer for being frugal and for refusing to take on the excess Chinese and European production.
And if the US consumer refuses to consume like yesteryear, then who will fill the gap? I have no idea, but the logic of many economists is that emerging market consumers will take over.
In any case, the bottom line is that the US consumer is changing habits. He will be more frugal, savings oriented and less debt oriented.

Enjoy the Euro rally while it last

While what you are about to read is widely know for months now, it’s a good idea for market participants to refresh their memory once in awhile, as not to get too carried away.

The issue is the tremendous amount of dollar negativity lately. While there are reasons for the dollar to currently be in a downtrend, one must not forget that in relative terms, the euro is loaded with more negative news looking ahead than one can imagine.

Below is an excerpt from the most recent article of John Mauldin:

Let me quote from the very interesting study the team at Variant Perception did.

As we have repeatedly said, Spain is set for a long, painful deflation that will manifest itself via a spectacularly high unemployment level, a real estate collapse and general banking insolvencies. Consider this: the value of outstanding loans to Spanish developers has gone from just €33.5 billion in 2000 to €318 billion in 2008, a rise of 850% in 8 years. If you add in construction sector debts, the overall value of outstanding loans to developers and construction companies rises to €470 billion. That's almost 50% of Spanish GDP. Most of these loans will go bad.

Spanish banks are now facing a very bleak outlook. Spain's unemployment rate reached over 17% last month; there are now four million unemployed Spaniards and over one million families with not a single person employed in the family. Spain and Ireland had the worst housing bubbles in the world and now Spain has as many unsold homes as the US, even though the US is about six times bigger.

Why are Spanish banks not insolvent? Spanish banks are not marking their real estate loans to market. We've often wondered how it is that our thesis for Spanish real estate and industrial collapse has not created more victims. The answer is simple according to an article in Expansion, the Spanish equivalent of the Financial Times, from the 19th of April titled 'Spanish banks control half of all real estate appraisals.' You can't make this stuff up. We haven't even begun to see the worst in Spain yet."

European banks are in far worse shape than their US counterparts. That is because they utilize far more leverage, on an average about 30 times leverage. How can that be, in what is supposed to be a conservative industry?

European banks were only restricted on the basis of risk-weighted assets, unlike the US where it is the total leverage ratio that matters, so most European banks bought assets that were rated by Moody's and S&P, who couldn't rate their way out of a paper bag, and for anything that wasn't highly rated, they bought credit default swaps or guarantees from AIG and MBIA. Because of that European banks were able to lever up a lot more than their US counterparties. Given the much higher leverage levels and general worsening of collateral values, we think that all the shoes in Europe have not dropped."

European banks have assets of about 330% of their GDP, compared to US banking assets, which are about 50%. They have over $700 billion in loans to Asian businesses (which are watching their exports collapse) and $1.3 trillion in loans to Eastern Europe, which is in a very serious recession, and so many of those loans are simply not going to be worth anything. Simply put, there is going to be a need for massive amounts of money to bail out European banks, or we'll watch their economies simply implode.

Where is the money for the bailouts going to come from? Germany? That will be a tough sell politically in a country that is in a much worse recession than the US. How do you tell your citizens you need to bail out banks in other countries with their tax dollars? Italian and Austrian banks are going to need a lot of capital, more than their governments can pay. It is going to be a very tough problem.

Governments around the world are responding to the global recession by running massive deficits. In addition to the US, the UK, Japan, Russia, Spain, and Ireland are all running deficits of over 10%.

And, as in the case of the US, these are not going to be one-time deficits. The IMF predicts that England will shrink again next year and the recovery in the US will be modest at best. The US economy is expected to grow by 0.2% (far from the optimistic projections of various US government agencies), the 16-nation eurozone will eke out a modest gain of 0.1%, and the Group of Seven (G7) leading industrial economies will, as a whole, only grow by 0.2 percent. They project that Japan's economy will stagnate next year.

Mark my words, sometimes in the next 24 months the ECB will monetize European public and private debt to such an extent, that the Fed in comparison will seem like boy scouts!

Way too much dollar negativity makes me want to buy dollars

With all the money printing by the Fed and with the $300 billion monetization process in play, it’s only natural that the dollar has slid lower against the Euro.

But does anyone realize that the asset purchases needed by the ECB will be more than what we are now witnessing by the FED?

The German banking system is 100% broke, Ireland is near broke, Spain is on the way and not to mention Greece.

I don’t know when, but mark my word, the ECB will be buying (or financing might be a better word) the national debt of Greece and many other countries by this time next year – and these purchases will not be sterilized!

On a purchasing power basis, the dollar is still cheap, although fund flows at the moment (due to FED money printing) are not in favor of the dollar.

Be ready to go long EURUSD when the FED finishes its $300 billion treasury purchases program. The way I see it, the trend will reverse when the ECB starts doing the same thing.

By the way, the announcement by the ECB that it will purchase 60 billion euros in covered bonds is only the down payment of a down payment.