Thursday, March 15, 2007
Time for a game. Which of the following is not like the others?
* Hansel and Gretel
* The Princess and the Pea
* The boy king who survived a coup attempt and then ruled for 72 years
* Global decoupling: if the US slows significantly, it won’t matter to the rest of the world
The answer? They are all fairly tales except for the one about the boy king, who was in fact Le Roi du Soleil.
What started out as a generalized risk aversion event seems to have morphed into something peculiar to the USA. US stocks are trading the worst, the dollar is getting hit, and carry trades of every description are being re-established. The view that a US slowdown need not affect the rest of the world is quickly evolving into market gospel.
In Macro Man’s view, this is utter rubbish. He is cognizant that Chinese domestic demand remains robust, thus providing a crutch to the global economy that wasn’t there in the 1990’s. But the notion that domestic demand in Europe and Japan is sufficiently strong to pick up the slack appears to be flat-out wrong.
Now, an essay tackling this subject can either be very long or very short. And if Macro Man were a professional researcher with no other responsibilities, he would write the long-from version of the argument. However, he isn’t, so he won’t.
The short form version of the argument is as follows. The “strong”, “self-sustaining” domestic demand growth in Europe and Japan recently has still been well below the level of US domestic demand growth, despite the acute impact of the housing crunch in the second half of last year.
For the time being, the market appears to want to sell dollars against most other currencies, both risky and “risk-free.” Macro Man is content to step aside and let the market have its way. However, he suspects that this situation will ultimately morph into a buying opportunity for the dollar, probably against the euro. Either US activity will recover, as Macro Man expects...or growth in the rest of the world will slow, which the market apparently does not expect. The time is not ripe yet to go short...but eventually, it will be.