US smiling as US Dollar depreciates. Why? Read on.

US Dollar depreciation is helping US and therefore we are not seeing any substantial action by US authorities to stop the depreication

We all are talking about the US Dollar depreciation. There are lot of talks going around about will Dollar be a world currency anymore? Is it worth to buy Dollar Assets as it is getting more volatile then ever?

These questions are valid if we look at the macro level and without any clear introspection into the depth of the issue. However if we look into depth, and ask one simple question :- Who is benefitting from this depreciating USD? Very obvious answer is:- United States of America.

US have a current account balance of USD -731 billion (2007 CIA estimates). This means it is importing more (goods, services and investment income), then exporting (goods, services and investment income). Only exports-imports = $821 billion. The difference in US current account and trade balance means, it is importing return on its foreign investments or it is selling part of its foreign investments or taking debt. Now in any case, if Dollar depreciates, it helps US in following ways:-

· Its exports become more viable. US exports consist of 27% capital goods and 49 % consumer goods, 76% combined. Its imports consist of 30.4% capital goods and 31.8% consumer goods, 62% combined. Now these 4 are amazing set of numbers. If dollar depreciates say by 10%, it directly tilts the balance in favour of exports and only these 2 segments can immensely improve the export-import trade balance in US’s favour. Assuming everything else constant, 10% depreciation can result in reduced imports and reduced imports bills.

· Trade imbalance improves. Let us take the example of USA’s largest trading partner, Canada. US exports 20.1% of its total exports to Canada and imports 15.7% of its total imports from Canada. In 2002, CAD index/ USD index was 0.55, it peaked at 1.40 in early 2008, dropped after that to 0.90 and now is back at 1.30. What does this say? Canada will struggle to maintain its trade surplus which stood at $78 billion in 2008. If CAD keeps on appreciating (it being more and more dependent on Commodities) and USD keeps depreciating, US will become better off of the 2 in coming years. One known casualty of this is Canadian Lumber industry.

· US external debt stands at whopping $13 trillion. Now depreciating dollar increases this debt numbers in US Dollar terms. But does that really matter until you are going to repay it. As of now US is going to borrow more. As per Goldman Sachs, it is going to borrow $1.7 trillion in final half of 2009, $1.4 trillion in 2010 and $1 trillion in 2011. Depreciating currency reduces these borrowing in foreign currency denominations. Depreciating Dollar automatically helps the cause as in near future US is net borrower and not lender.

Now let us see the US Dollar index performance:-

This is the index of USD pegged against 6 currencies (Euro: 57.6%, Yen 13.6%, Pound: 11.9%, CAD: 9.1%, Krona: 4.2% and CHF: 3.6%).

US dollar is very close to its historic lows of 72. If the trend continues and index created new lows, the worry is for countries exporting to US, holding USD reserves and not USA. Take the case of China, if Dollar depreciates, it makes its exports to US unviable. China being one of the largest investor in US Treasury (it holds $797.1 billion in Treasury), puts it in fix. If it sells dollars, Dollar depreciates further and Chinese Dollar assets declines, exports are hurt. Therefore China cannot liquidate its Dollar assets so easily.

To conclude, depreciating USD, is helping the current cause of United States, as it can help improve its deficits, monetarily on papers and in real terms by improving the export-import trade balance. It further helps to take more debt in short term (which it badly needs). Figures further support the fact. Foreign investors hold $3.45 trillion (in August) as compared to $3.08 trillion (in last December) according to Treasury department. Is world liquidity Dollar Assets? Actually not, they are buying more and helping the short term and long term US cause.

Therefore, whatever the furore is, USA is not doing anything substantial to appreciate its currency and is smiling happily as of now at the expense of others. Monetary and financial world being a tricky and thin line, of which policy will work for and which works against, makes this a very interesting time in history. Coming decade will be very interesting as it will give the answer to question:- Who smiled the last? Right now it is USA.

Disclaimer:- Facts, figures and views mentioned above are personal and does not indicate or reflect anyone else's view point or policy. It is only for the purpose of discussion and should not be considered right or wrong.

In response to Linkedin Question :- Weather Economy is decided by Crude Oil or Money?

Oil is just a commodity, yes a large one but after all a commodity. It is a resource required to drive the demand of various activities in the economic growth and set up of Economies. In 2008 almost $2.7 trillion of Crude Oil was traded, big enough right. But when you compare it to World GDP it is less than 5% of almost $60 trillion (World GDP). Yes there is lot of value added at various stages and that increases the influence on Crude Oil in deciding the final GDP numbers. But certainly it is not the Economy decider.

2nd factor which can explain you about why it is not the only driver is CPI. Energy including oil are 17% of Inflation basket (in US). There are 83% other things that is part of inflation basket, so does it explains the World GDP or economies certainly not.

Gulf Countries, they are always profitable even if Oil trades at 30$, if they have excess cash, they create Soverign Wealth Funds and invest in other countries, so higher prices doesnt mean more local investments.

Now coming to money.

Money supply drives prices, no matter whatever the reason be. Price of any thing, stock, commodity, food will increase if more money is chasing it, but does that mean money drives economy certainly not, it is just the means to buy something once economy has given you enough power to buy something.

So what drives economies:-

1. People:- Countries need to be young to grow, where you have more earning population and less dependent population. In other words the earning population earns enough to take care of dependent population.

2. Economic development, which is dependent on government policies, open and investor friendly the country more wealth (in any form) will enter the economy thus making it grow.

3. Literacy. Can you name a developed world economy that is not literate, certainly not. More literate the people are, more connected they will be, more intellectual they will be and more options they will have to drive the economic activity.

4. Innovation:- Innovation does not mean only about winning Nobel Prize, it can also be doing something already being done, but in more efficient manner. Like, producing cheap, micro products etc.

To conclude: Crude is a commodity required to full fill certain tasks of economy. Money is one way of deciding the wealth the economy have and a mode of exchange, it in itself is not a wealth. Economy, is dependent on the activity that takes place within it or associated with it. Thus decided by all (All means all) the action that happens within it.

Follow the Original Discussion on on my linkedin Profile.

Market mood and current scenario! A perfect text book picture of doing exactly they have done before!!!

Around a month ago in one of the discussion I talked about S&P range of 1010 and that is where it got tested!

I love to talk in numbers, however sometimes its better to speak logic and not just the numbers. I would like to share few points which have indirect or may be direct relation to market movement and can help us analyze the current situation where we stand and what should we do???

1. Mean Convergence is something that can never be ignored. S&P in its recent rally had gone far ahead of its mean (which ever you follow, I follow Mean Overshoot beyond moving average). So it needs to cool down and we are seeing the cooling effect.

2. First leg of any positive movement (from times immemorial) start in such kind of extreme panic. First correction is seen as a caution by most people as thoughts of recent meltdown still are fresh in minds of everybody. This factor is also proving true. 3. USD, everybody is speaking against it. (Only 5% people are bullish). So logically it is forming a base and I think may be a long term bottom. We should see strength in USD. 4. Gold, the channel its moving in, if you see the chart is getting narrower and narrower, which indicates that it need to chalk out its new course very soon (may be Oct), and things should work against it if USD rises and thats a possibility.

5. Sugar went into correction much before the rest of the things and whatever reason we say (Excessive rains in Brazil or less rains in India), it is bouncing and bouncing hard. Will other commodities follow, take your call.

6. China, and other Asian tigers once again have proven their metal. They are roaring and roaring hard, not dependent solely on Western Consumption. Now if you add a bit of Western recovery, then expect much better numbers.

7. Baltic Dry Index which was at $700 in December is now close to $3000 and is more or less close to rates where world trade and ship usage start getting normal.
8. Recent good set of numbers by so many companies (yes quality of numbers can be debated), expect numbers closer to these in coming quarter as well and that can contribute to lowering PE multiples, as its always easy to climb from lower base.

9. For the time being inflation argument has been thrown out of the window and central banks need not to worry about raising interest rates just to control inflation, the most common step they take. It seems that inflation will be normal.

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10. After all it is the money flow that will drive the market, scenario right now is, we all (investors, traders etc) are deploying the money to stocks, brought the market to these levels, now all of us want to book some profit, we talk of hitting bottom again, but are we pulling out completely, I think, "no", Actually we are cautiously looking for an opportunity to enter the market as very few people took the benefit of recent rally to an extent they can feel satisfied.

So to conclude, please sit back and take a overall look, I am seeing this a perfect example of "Fear Overplaying+Markets Outplaying+ Smart guys doing exactly what they need to do, be fearless but diversified and watchful".

Is it the economy or the data?

1. How reliable the data and the resources from where it is collected is are?

2. Do we really interpret the data in the way that is right and useful?

These are the sources covering data for years and innovating themselves from time and again. If the instititutions like World Bank, IMF, DOE etc can not be trusted for providing us the correct data then I think the analyst who do the job of analysing this data is in serious trouble. Because there is no other big source of data. I strictly dont think that there is any problem with reporting as it is going on for years. Right or wrong thats not our job and we dont have definitive figures to support our contradictions to this data.

Now moving the next part: Interpretation: Accept the fact that this is what we have and now look into it with open neutral heart. Good analysts never take a biased view and they analyse data and then come up with their view points. Sometimes over interpretation brings in so much variables and confusion that one tends to come up with view point far away from reality.

Examples:-

Some prominent research house (I cant name it for the reason of non-disclosures etc, you all know) came up with few numbers that China is going to be the biggest disappointment. They are inflating their growth numbers, their electricity production is declining which says they are not in good health. Agreed, but a common sense is, a country which is going to spend $600 billion on its infrastructure (approx. 22% of its GDP), can it be such a big disappointment. If some one goes to China, you feel the development on ground levels. Im not saying I favor China's numbers, Im just saying that we need to look at macro level and on both sides of bar.

Example 2:- US dollar is losing its sheen, because its lot more volatile in recent years, there are few other strong world powers emerging who want to end the dollar's monopoly as Currency of trade, so dollar will weaken and its days are over. I heard one very famous investor saying:- I cant invest in US stocks even if there are few very good stocks, just because they are in currency that have only one future: heading south. So is everything right with other currencies, take Euro's example, strong performance over the years but now high growth countries and cheap labour countries in Euro zone are facing the heat. There inflation in higher then more developed Europe and currency does not adjust to it (as it is one) thus on comparative basis they are not growing at the same rate of their GDP growth as the utility of the people is tied to factors that are beyond the control of their country.

Foreclosure data is US:- Are we at the bottom, just because housing sales rose in last month and prices of houses are improving. Huh! Another factor is there are still people who just stopped paying their installments and it will take another year for them to go through the process of foreclosure and equal time to bank to writeoff.

So to conclude, data sources are same and nothing much will change in terms of the resources of data. It is very complex structure and can not be rivaled. Today due to online media being at its strongest in its history, every analysis reaches everybody interested in it within no time. Its we as a user of data who need to set our limits and analyse the data with calm, open eyes and without bias. Rumor mills are also important part of society, because without them intelligent people wont get their due and smart money will not get chance to be parked at the place where it deserves to be.

Regards

Harman