Bernanke And The Buck

Tuesday, November 17, 2009

Following on from yesterday's post, Macro Man received confirmation this morning that Britain is, in fact, going to the dogs. He rolled up to the station this morning to find that his usual 6.33 service has been cancelled until further notice because of striking train drivers. (Apparently the reports of high unemployment are a fiction.) Fortunately, he was still able to make it to work on time.....because the previous train ran 20 minutes late and he was able to catch it!

Anyhow, there were a couple of interesting developments in the US yesterday. Headline retail sales surprised on the topside (though given revisions, the report was actually pretty much in line), led by, of all things, auto sales. Macro Man had expected auto sales after cash-for-clunkers to remain pretty weak for some time. And while the auto sales index did remain well below its C-4-C high, there was nevertheless a pretty solid bounce from the September low.
If this is emblematic of how the consumer will behave, there are a few itneresting implications. First, Macro Man's core view that the savings rate will push towards 10% will prove to be incorrect. US household saving should rise, and 'twill be a pity if it fails to do so. In any event, if Christmas sales prove to be unexpectedly robust, the chances of a late-year melt-up in risk assets will increase sharply.

A final implication would almost certainly prove to be an unexpectedly sharp widening in the US trade deficit, of which we received a hint on Friday. Given that the accumulated current account deficit of the US is the foundation of the DGDF thesis, an early re-widening could prove to be rather bearish for the dollar...particularly if the Fed refuses to compensate foreign investors for financing it. (Foreign owners of printing presses would, not doubt, continue to do so courtesy of their unwillgness to implement their own monetary policies.)

We saw a similar instance in 2003 and 2004, a period in which the USD weakened sharply against those currencies with market-determined exchange rates. Given the imprecations which are already flying towards Washington from Beijing, Frankfurt, and elsewhere, one can imagine how unhappy foreigners would be with a further sharp weakening of the dollar. (Judge for yourself how they might feel about a re-widening of the US trade deficit courtesy of sustained consumer demand.)

In any event, this backdrop provides an interesting prism through which to read Big Ben's speech to the New York Economic Club last night. After spending most of the speech bemoaning the prospects for commercial real etstae, bank lending, and unemployment (while also sounding rather confident that inflation won't be a problem for some time), BB addressed the issue of the dollar in an unusually stark manner:

The foreign exchange value of the dollar has moved over a wide range during the past year or so. When financial stresses were most pronounced, a flight to the deepest and most liquid capital markets resulted in a marked increase in the dollar. More recently, as financial market functioning has improved and global economic activity has stabilized, these safe haven flows have abated, and the dollar has accordingly retraced its gains. The Federal Reserve will continue to monitor these developments closely. We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability.

That the Chairman of the Fed would mention the dollar so explicitly was news, as indeed was the cherry-picked headline "Fed Policy Will Help Ensure Dollar Is Strong" that flashed across the Bloomberg newswire. Now, anyone reading the previous 28 paragraphs could only reach one conclusion- addressing both sides of their dual mandate, the Fed ain't hiking rates any time soon. Now perhaps this means that the dollar should indeed be "strong"...but Macro Man suspects that most observers might reach the opposite conclusion.

This, in turn, raises the question of the provenance of the paragraph on the dollar. To Macro Man's eye, it looks like it was placed there for the benefit to the Chinese and Europeans (and maybe just a smidge for the gold-buying Joe Sixpack.) 28 paragraphs on why there's no reason to hike, one paragraph on how the dollar has retraced its crisis rally but why the dual mandate means the dollar should be strong. This looks like classic CYA stuff....

So, with the prospect of a late-year risk melt-up, a widening trade deficit, and a complacent central bank, the dollar must be toast, right? Perhaps...but perhaps not. For one, Macro Man isn't really prepared to concede the "rebuilding savings" argument just yet, nor that all financial sector skeletons have been premanently confined to the closets in which they reside.

Moreover, the euro in particular trades very poorly, like it's almost as crowded as the morning train that Macro Man will henceforth be required to catch. The price action of the last six weeks or so can be viewed as either a "teacup" formation, which is bullish....or a double top, which is not. At the risk of descending in chart-reading tautologies, the outcome will likely depend on whether 1.5064 or 1.4628 breaks first.

Just about everything that Macro Man sees says that EUR/USD should be going up, and yet it's not. And that, if you're long, might be even more annoying than the minefield of the morning commute.

Posted by Macro Man at 8:32 AM  


I don't totally buy the Dollar is going to crash argument (no pun intended of course) as I don't think the Euro is a deserving candidate for the flows. Needless to to say I don't have a position the other way.

I think the Market has discounted a good part of the weak dollar story.

I hate the dollar, euro, Yen equally.

What's really interesting to me is that just how ungodly gold actually is when all things are considered. Australia's RBA has proved that even a bit of judicious attention to the inflation bogey makes gold look like the idiot cousin at the wedding. Gold has barely budged against the Aussie.

jc said...
9:34 AM  

@jc what is more there is some lovely carry in lending aussie and borrowing gold

Anonymous said...
9:55 AM  

There may be a plethora of reasons why EURUSD should be going up, but it already has...

I can't recall which day, but Rosenberg had an amusing analysis on COT spec net longs and shorts on US commodity exchanges. Net long every risk asset and short treasuries. And the volume of contracts shorted/long were near the peaks.

The risk markets are probably all trading heavy because of such lopsided positioning. EUR looks particularly poor, EURGBP, EURJPY...

Anonymous said...
10:37 AM  

you can have further anecdotal evidence of UK strength if you were commuting to London from the north, using first capital connect. For a few weeks now more than half of the trains have been cancelled due to "not a member of staff available to run the service". Or perhaps it is just a sign of imcompetence/lack of consumer rights!
What do you make of eurusd risk reversals? Apparently current aberration in behaviour comes from equity managers hedging for six months onwards.. implieds are also real expensive relative to realised, which makes all these flows more impressive..

Anonymous said...
10:40 AM  

First Crapital Connect operates my service, too. "Insufficient staff" is newspeak for "they've gone on strike." The flow into euro puts is indeed impressive, and from my perspective provides another reason to doubt a naive DGDF trend....

Macro Man said...
10:44 AM  

"CYA stuff"?

the one thing we know is that Ben's pronouncements ammount to nothing but meaningless jawboning. this speech is of no consequence whatsoever, I think we can all agree on that.

further, i don't think it's right not to hate the USD just because you don't love the EUR. what about (gulp) BRL, (shiver) RUB, etc? or indeed AUD?

Anonymous said...
11:21 AM  

Anon 11:21


Anonymous said...
11:45 AM  

ahh thanks

Anonymous said...
11:49 AM  

ahh thanks

Anonymous said...
11:50 AM  

I still got a small long in EUR/USD, did some in and out trading last week. IMHO the best DGDF trade still is gold+silver, looking to increase my position on pullbacks. But what do you expect a monstrous gold bug to say?

Gregor Samsa said...
11:57 AM  

I have tutto respecto for your opinions, MM, but I never could understand the one about the US savings rate going to 10%. Saving money is not something that happens as an economic choice; it's more of a mentality. If you've been running balls-to-the-wall for twenty years the idea that somehow you're going to start saving money in the bank(and reaping those 1% returns on it) is ludicrous. If you're spending all that you've make, then saving money requires cutting back on things. People might do that for a month or two, but something always comes along, and even if they've been able to put away a couple of grand, they look at it and say--why am I sacrificing for this? In general, Americans won't stop spending until they lose their jobs.

Some Browning, perhaps:

Dust and ashes, dead and done with,
Venice spent what Venice earned.

But What do I Know? said...
12:27 PM  

Where is the evidence for the dollar carry trade?

12:41 PM  

BWDIK?: Increased savings generate return not of 1%, but of 20%, or whatever one can save from payoing down credit cards and other forms o revolving credit.

I had thought that confronted with a once-in-a-lifetime shock to net wealth, employment, and expected asset returns, the Baby Boom generation in particular would consciously adjust their spending patterns, a la their Depressionary forebearers reaped the bitter harvest sown during the roaring 20's. Moreover, the capacity to consume is also driven by the ability to borrow, which I have viewed as almost certain to be lower in the future than it was in the past.

I'm not ready to throw in the towel yet; after all, citizens of most developed (ex UK) countreis have shown an ample capacity for savings.

If I am wrong, however, and the US household sector shows the acumen and intelligence of a magpie (ooh, there's something shiny! let's but it!), then perhaps occasional poster "Gary" will need to revise his views on the non-idiocy of Joe Twelvepack.

Macro Man said...
12:44 PM  

I remember the 70's very well.

In the 70's unemployment was a real problem ,but at one and the same time we had more strikes than at any time since the roaring 20's.
In other words people striking does not actually indicate the economy is better than we think it is .It just indicates than many people are educated to be dumb.

Anonymous said...
1:04 PM  

why would folks save if rates are 0? meanwhile whilst folks discuss deflation, one comes across price info of commodities shooting up (ie US dollar going down).

so no incentive to save (though a lot to sepculate) and less disposable income as taxes and goods rise for basic essentials.

alternatively, a monetarist would say that increasing money supply as bernanke has done would create disensentive to save due to inflation expectations.

or, the US's money printing will just show up as greater Chinese reserves. ie reserve acculumation outside US means negative savings rate within the US. simples. thanks ben.

Anonymous said...
1:13 PM  

Uh...the liability side of the balance sheet matters too! If you can find someone to lend you money with a zero % interest rate, then you shouldn't save (also assuming you get positive utility from consuming another flat screen TV, shitty car, or Big Mac.) If, on the other hand, you are paying double digits on any outstanding loan balance, you have a very real incentive to save and pay down that debt.

Macro Man said...
1:18 PM  

MM, stop thinking like an economist!! :>)

If you're paying 20% interest on your credit cards you're probably in denial about what your "household balance sheet" looks like anyway (most people don't even know what a balance sheet is, or if they do, what theirs looks like.) Asking the Baby Boomers to change their lifestyles and save more is like asking an alcoholic to cut back on his drinking--he might be able to do it for awhile, as a New Year's resolution, for example--but he'll soon relapse into the same behavior as before. Most people do not think rationally about or plan well for the distant future, so theorizing about what they "should" do is a mere academic exercise and best left to the economists. . .

That's a nice analogy to the magpies--there are plenty of shiny bits left to buy, especially when the magpie next door has one already. . .

But What do I Know? said...
1:42 PM

just sayin'

Anonymous said...
1:42 PM  

"going to the dogs"

Going? When I left in '06, I think it had already gone. I suffered on the Cambridge to Liverpool St. line; quite often the first train would be late/wouldn't run simply because the driver slept in/didn't turn up. No strike required!

Anonymous said...
1:42 PM  

The more I think about it, the more I think that this savings rate metric has increasingly important implications. I start with the assumption that American consumption was in excess of what a long term "equilibrium" rate could sustain, and was driven by debt. Basically, costs exceed revenue, and the difference was being made up by consumer debt. See the Sudden Debt blog if anyone wants the details on this.

The saving rate is a measure of the degree to which this trend is reversed. As everyone has already pointed out, nominal interest rates of 0% discourage savings. This is the direct impact, but the indirect impact is to sustain asset prices, artificially, and create the impression that everything is back to "normal", when in fact, the old "normal", was actually abnormal because it was based upon an unsustainable application of credit to drive consumption. Sooner or later reality will catch up with us.

I know that most people here are interested in short term trades, but for longer term money that has to make macro bets (such as Gary), this could be one of the most important factors driving outcomes.

PPM said...
1:52 PM  

It could also be due to a bifurcation of the labor market - less jobs for those with the outstanding balances and more jobs for those who don't. Perhaps a stretch but do we have any people who trade credit card receivables etc who could comment on this?

Nemo Incognito said...
2:40 PM  

Well, what we do know is that consumer credit outstanding has fallen $125 billion from the high, and every month this year since January. Doing a little bit of digging, I see that the 4.9% decline in consumer credit from the peak is more than twice as great as any prior decline since the end of WWII. True, consumer credit declined some 19% from the peak then, but your average household had, shall we say, "other shit going on"...and there was nothing to buy anyway.

Macro Man said...
2:49 PM  

So where the hell is the cashflow coming from? Honestly, is this just all tax rebates, cash for clunkers etc? Is it just me or do the cashflows not reconcile here for US consumers?

Nemo - confused as he expected the US consumer to pull back while Asia went bananas.

Nemo Incognito said...
2:51 PM  

There is a certain optionality involved with carrying usurious CC balances. Yes, you pay the rate, but if the situation turns from bad to worse you can default.

Besides, as our leaders keep reminding us, the recession is over. Laissez les bons temps rouler!

Crisis Management said...
3:03 PM  

Maybe I'm just an Austrian school credit monkey but a whole lot of stuff does not seem to be balancing out right now. Sigh, less gardening leave more flows models it appears when I go back....

Nemo Incognito said...
3:25 PM  

Some are suggesting that the recent drop in the savings rate is due to cash for clunkers and some of the other transfer payments of the stimulus package. I wonder as well if it's partly due to rising unemployment? Not familiar with the way in which it is measured.

I agree with you, MM, I have to think it will rise, almost by definition. But the impact of it is not totally clear: Japan's savings has collapsed over the years and they're not exactly in party mode.

Steve said...
3:30 PM  

Steve, the important differnce with Japan is the demographics: As Japan slides down the unpleasant side of the population pyramid, we are moving to situation wherre, in a few years, something like 1/3 of households will be living off of retirement savings, with the concomitant negative savings rates.

Macro Man said...
3:37 PM  

Totally agree MM, my idea being that the interpretation is not straightforward. We have a bunch of boomers coming of age too, and if the legions of unemployed are using their savings, reading the tape could get messy.

And our govt is doing its damnedest to get us to spend, which strikes me as somewhat disingenuous. You pay someone to buy a car he would have had to buy anyway, then dispatch his old car off to vehicle heaven? A car that had an economic value?

Steve said...
3:44 PM  

See Naked Capitalism

martin said...
3:57 PM  

On US savings - the savings rate has been depressed by two factors 1) As pointed out by MM, the paying down of cc etc... and 2) The impact of stimulus like C4C pulling forward auto demand.

We know that in 1H09 Consumer cedit declined $195bn ar from the FoF report. Since then Consumer credit has contracted by $37.85bn in 3 months or $151.4bn ar. From MM's chart we can see that roughly $15bn of auto sales were addded by C4C in June-August or $60bn ar. Add this to Septembers $355.6bn ar savings rate and it looks more like $762bn ar - which is a savings rate of more like 7.1% with and upward trend... That fits into the increased US savings rate theory pretty well in my view.

Adjusting for stimulus and credit repayment is tricky/slightly arbitrary though - but i think the point is that absent these factors the rate would be almost double what it is now.

Mugpunter said...
4:07 PM  

How reliable are the retail sales numbers from the census bureau MM? Maybe I am biased but I find it hard to believe that people are spending that way from what I see (but they might not be saving either)
State sales tax revenues have the sharpest decline since 1963.

Nic said...
4:17 PM  

Agree, Mugpunter, that all fits. What you may not see from London MM is that "frugality" is all the rage here, and in NYC at least the number of shuttered mid to high end boutiques is palpable. I suspect the trend is strongly in force, it's just a question of tuning out the noise.

Steve said...
4:21 PM  

Nemo, until the bubble burst, the cash flow came from credit, primarily from securitized consumer assets, which required little to no bank capital, and could therefore be expanded to infinity. Whether consumption can be sustained at prior levels depends upon whether government and CB sponsored money supply expansion is sufficient to replace the securitized credit contraction. This depends on (a) creating enough dollars and (b) having a mechanism to distribute them to the consumers. So far, lots of dollars have been printed, bu the distribution mechanism is lacking, aside from incredibly inefficient direct government to citizen subsidies like the home buyer's credit and C4C etc.

PPM said...
4:30 PM  

So is that the SNB intervening?

Professional Gringo said...
5:43 PM  

Steve, I hear you, but one man's anecdote can be countered by another's (see but what do i know's view above, presumably also sourced from the US.)

So I am left parsing the data, and to date I have observed less frugality than I'd frankly like to see. C4C was a bit too successful for my taste, encouraging an unneccessary turnover of the vehicle stock in the name of helping out crappy automakers for a bit.

Perhaps I'm biased, though. While I'm sure that my income qualifies me as a "high earner", at least when it comes to tax time, I have never purchased a new car in my life (all four that I've bought have been used.) Not that that makes me any sort of paragon of virtue (I find Buffett's thriftiness to be an irritating affectation), but it does make me lose faith in the self-discipline of some of my fellow citizens...

Macro Man said...
6:04 PM  

Last nigh, Fed Vice Chair Donald Kohn pretty much said there was no bubble compared to levels a few years ago (but what if those levels were manifestation of the financial bubble?)...and even if there were, the Fed cannot do anything about it because the economy is too weak...pretty much giving speculators the greenlight to run amok and take the dollar lower. Here are the excerpts from last night's speech:

"As I've already noted, our abilities to discern the "correct" values of assets is quite limited. At present, however, the prices of assets in U.S. financial markets do not appear to be clearly out of line with the outlook for the economy and business prospects as well as the level of risk-free interest rates. Most bond spreads and equity premiums are still appreciably higher than a few years ago and comparable to their levels in past recessions. Moreover, money and credit have been quite weak, suggesting that asset price movements have not been fueled by increased leverage that would leave financial intermediaries vulnerable to a reversal of recent gains...Still, my current assessments could be wrong--asset prices may in fact be in the process of rising excessively. However, consider the complications of using monetary policy to lean against a presumed bubble at this time. A decision to reduce monetary accommodation now would mean taking immediate steps to raise short-term interest rates or to reduce the support for private credit markets by selling longer-term securities that the Federal Reserve has acquired over the past year. Tightening financial conditions at a time when an economic recovery has just begun, when labor markets are continuing to weaken, when inflation is below its optimal level for the longer run, and when significant strains persist in the financial system would incur a considerable short-run cost in order to achieve possible long-run benefits whose extent is, at best, quite uncertain..."
- CMC313

Anonymous said...
6:16 PM  

Since Monday's gap up open through what I saw as some important levels it seems end of year melt-up is on the cards. Finding it increasingly difficult to suspend disbelief and go with the flow so keeping it tactical / short term seems to be the solution to avoid max frustration.
Copper looks to have finally broken out Nemo...

Anonymous said...
7:45 PM  

In Weekly terms, EURUSD needs to close below 1.4933 to confirm the rejection of bullish rally this Friday.

I still think the morning train is too crowded and risk&reward ratio is much better for selling on rallies around 1.4965-1.5005 with tight SL around 1.5025, and worked so far so good since last Thursday.

I am happy to change the view on Monday if EURUSD closes above 1.4933 tho !

good luck.

Trywalker said...
2:10 AM  

LB is on vacation in Northern California and offers that this market is a lot less annoying from the safe distance of 2500 miles and two glasses of Cabernet. Yet even from this happy vantage point, one feels that LB will yet again wake to discover he has turned into a giant insect. 2009 has been a Kafka market.

leftback said...
4:32 AM  

My view is that the US (and Canadian if anyone cares about our Tokyo-sized country) banks have continued to tighten credit conditions on good customers, making it harder to access funding. Meanwhile the economy remains in the pits, GS hands out mega-bonuses and the average American who has lost/is about to lose his house is so upset he is maxing out his credit cards before throwing in the towel.

I met a guy camping this summer with a gorgeous $250,000 RV; said he lost his house so bought this baby on credit and will keep driving it around the country until they foreclose. By the time they find him to serve the papers, the RV will be worth much less and he will have had his comeuppance.

Strange mentality but would explain the consumer data, part of the melt-up and a coming strong whip in the other direction once the credit rope stops reeling out.

Astigmatic Oracle said...
7:06 AM  

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