Thursday, May 3, 2018

US Dollar is still attractive compared to other currencies

The US Dollar has its share of believers and non-believers. Gary Shilling brings up some important points on why the US Dollar could be here to stay in the top position for a very long time. Article from Bloomberg follows below.

The most recent data from the International Monetary Fund on the composition of global foreign-exchange reserves paints a dour picture of the dollar. After a brief respite in the wake of the global financial crisis, the greenback’s share of reserves is back on the decline, falling to 62.7 percent as of the end of 2017, the least since 2013. At the peak in 2001, the dollar accounted for 72.7 percent of worldwide reserves. On top of that, the value of America’s currency has been depreciating fairly rapidly, with the Bloomberg Dollar Spot Index tumbling 11.3 percent over the past five quarters.

So, given the outlook for worsening U.S. debt and deficits, is it time to throw in the towel on the dollar? That would be premature. Despite the recent rough patch, the dollar’s preeminent status should remain intact because it continues to meet my six long-run criteria for a dominant international currency, revealed by our study of exchange rates since ancient times.

-Rapid growth in the economy and gross domestic product per capita. The recent U.S. tax cuts as well as enhanced military spending and infrastructure outlays should push annual real GDP to the 3.0 percent to 3.5 percent level versus the 2.2 percent since the recovery began in 2009. On the supply side, labor will likely be ample even without sizable immigration as youths who stayed in college during the Great Recession look for jobs and discouraged workers continue to return. American productivity growth has been slow but should catch up as new technologies grow large enough to move the aggregate needle.

In contrast, Europe is dragged by the lack of a common fiscal policy to complement the common currency. Japan’s two decades of slow growth will persist as its aging and declining population portend slower growth and more resources are devoted to retirees. In the usual development pattern, China’s growth is slowing as it matures while the earlier one child-per-couple policy and continuing low fertility rates will depress new labor force entrants. Also, U.S. President Donald Trump will probably limit the transfer of growth-enhancing American technology to China.

-A large economy, usually the world’s biggest. China’s GDP, the world’s second-biggest, is still just 58 percent of America’s. More important, its GDP per capita is only 15 percent of the U.S., and to close the gap, its GDP would need to grow about 10 percent per year for three decades. In last year’s fourth quarter, growth was 6.8 percent and continues to slow. Some countries such as Switzerland and Singapore are attractive, but are far too small to support global currencies.

-Deep and broad financial markets. International money -- especially with today’s electronic trading --wants to be where the action and liquidity are. The U.S. stock market capitalization as defined by the New York Stock Exchange and the Nasdaq is $27.4 trillion, dwarfing the euro zone’s $8.8 trillion, China’s $7.3 trillion and Japan’s $5 trillion. U.S. sovereign debt stands at $15.3 trillion, and foreigners own half of it. That compares with $7.6 trillion in Japan, where foreigners own just 7 percent, $6.1 trillion in China and $1.6 trillion in Germany.

-Free and open financial markets and economy. Foreign investors are willing to hold a country’s currency if they face few restrictions. The World Bank ranks the U.S. sixth out of 189 countries for business-friendly regulations while the top five are small countries. The U.K. is seventh, Germany is 20th and Japan is 34th. China is a distant 78th with its semi-controlled economy with a mercantilist policy. Furthermore, China’s heavy dependence on exports is reflected in the tightly controlled and at times manipulated yuan. Japan’s zeal for exports also leads to attempts to control the yen. In Europe, Germany and the Netherlands are relatively open economies for foreign investors, but that’s not true for the euro zone as a whole.

-Lack of substitutes. The Chinese want the yuan to be a global currency, but are unwilling to adopt the free and open financial markets that are required. Japan resists the yen becoming a global currency. The euro has been untroubled lately, but the threat of a euro-zone breakup is not completely gone after Greece threatened to leave several years ago. Today, immigrants from Syria and elsewhere are causing major worries in Europe, contributing to Brexit. Some 87.6 percent of global foreign-exchange market turnover involves the dollar. The euro is a distant second with 31.4 percent, while the Chinese yuan is involved in just 4.0 percent. The total adds to 200 percent since two currencies are involved in every transaction.

-Credibility. That is essential for a primary global currency, and there can’t be major concerns about devaluation. As the global premier currency, it’s difficult to see how the greenback could be devalued unilaterally. Against which currencies? Confidence can be fickle, but the dollar’s credibility is likely to improve as the U.S. current-account shrinks. Among other reasons, the postwar babies have been poor savers throughout their adult lives, and need to save robustly as they increasingly face retirement, or work until they die.


Monday, April 9, 2018

Increased Long Treasuries positions

"I think we are in a world of lot of deflationary forces. 
People worry about the Chinese dumping Treasuries. But their on record saying that they are not going to change their policies. Obviously if they started to sell treasuries, they would tank. Who would be the biggest losers ? The Chinese as the rest of their portfolios would be vastly reduced."

Excess Supply world
"We are in an excess supply world. That's why Trump's got the upper hand with the Chinese. In an excess supply world, whose got the upper hand, its the buyer, not the seller."

Listen to the full interview here on Bloomberg Markets AM

Tuesday, March 13, 2018

What could trigger a US recession

"Cumulative, you could have enough effects to touch off a recession. Now that would be for the first time, a death by a thousand cuts."

Monday, February 26, 2018

On Donald Trump - Interview part 2

Gary Shilling talks to ThinkAdvisor on President Donald Trump and his effect on the people and stock market.

What are the chief positives of President Trump’s tax package?

The cuts, kind of, even up the playing field in the corporate area. They don’t really do much net-net in the individual area. They front-loaded them, with the idea of spurring the economy. But it was a political game — we’ve got an election coming up this fall. However, there was serious need in the corporate area for updating in a globalized world. We had a 35% tax rate, and now it’s 21%. Amazon and Microsoft and [other companies] had cash stashed overseas.

Why will the cuts have little effect on individuals?

There’s an effect in the next year or two because they’re front-loaded. But then that’s basically taken away in the succeeding years. So it may spur incomes in the next year or two, but that fades over time.

Will people start spending more?

Higher-end people don’t adjust their spending when their incomes or assets go up and down. But with more money in their hands, middle- and lower-income people tend to spend. So I think that whatever increases they get in income will probably go to rebuilding their savings, particularly baby boomers, who have been notoriously poor savers throughout their entire lifespan.

How much do you credit Trump for the stock market’s record-setting performance?

Some things that Trump has accomplished suggest that he has had a measurable impact on stocks. The most important one is deregulation. That’s his biggest accomplishment. Deregulation isn’t dramatic. [I mean], there’s no Rose Garden signing ceremony for deregulation. It’s a little of this, a little of that. It’s putting different people in charge. It’s either ignoring regulations that they want to avoid or changing them.