The last two months have seen an astonishing turnaround in sentiment towards the US dollar. It is now the season’s must-have fashion item for the best dressed portfolio. They must have dollars and lots of them. In just two months the greenback has regained all of the ground lost in the previous ten and is back to where it was a year ago. What are people doing with these dollars? They are not buying shares on Wall Street. The Dow has done very little since mid-year. The recent small declines in US yields do indicate that a bit of cash has gone into the bond market -- but this could not be considered to be a smart decision. As is the case here on the southern tip, the rate of inflation is larger that the yield, and after a while disappointment is bound to result. Property prices do not appear to have bottomed out in the US yet either so there’s probably also negligible money flowing that way.
My guess is that much of the money is being used to repair some extraordinarily unhealthy balance sheets, by repaying debt. And good old fashioned cash is the only thing that can be used to do that. Hence the demand for the currency of the world’s most indebted nation.
The US government showed the way last weekend when it generously stepped in and rescued the two hopelessly insolvent mortgage giants Fannie Mae and Freddie Mac. The debt there is so huge that they are unable to count it until the chaps from the Zimbabwe Central Bank arrive to show them what comes after 999 trillion. Also receiving scant publicity in that mess is the fact that it will take several generations of US taxpayers actually to foot that bill.
They and obviously many other people have been down in the cellar looking for stuff to sell to raise dollars and as a result commodity prices have taken a pasting these last few weeks as well. Emerging market shares have also been well offered and the Chinese and Indian stock markets especially, have experienced a very nasty case of bear infestation. The resources boards of the JSE have been savaged.
Maybe we are seeing the end of an age of exploration and adventure where investors (particularly in the US) forsook the solid boring domestic stuff and instead sent borrowed money off to seek its fortune in exotic climes. That money is now required back home. The mood has changed and perhaps we are in for a spell of domestic simplicity and evenings of hot chocolate and Scrabble by the fireside instead of personalised single malts and internet conversations with distant brokers eager to offload another bucket of toxic waste disguised as acronyms.
The good news about this possibility is that it would suggest that we are getting much closer to the time when securities and markets are declared dangerous and the talking heads demand that something should be done to protect the public. Major financial publications will declare the end of the share market and then you and I will know that it is time to buy!
Now does anyone know who is top of the Curry Cup log? There’s a tremendous fuss going on down here at the moment.
James Greener
12th September 2008.
