There are a zillion stories these days about the alleged newly forming US dollar carry trade. They look to come from the same sources that claim a grandiose weakness in the greenback. I use the term “alleged” because me, I don't buy it. That is, not the story. The dollar, though, I might.
During the March to September rally we have just witnessed, the dollar has lost quite a bit of value. That makes me think that those who proclaim that same dollar is set to fall further, must also think that the stock markets will keep rising.
But this rally coincided with the most g-d-awful data in housing and employment. Or, to put it differently, it moved in the opposite direction from the real economy. Obviously, there were profits to be made from people losing their jobs and their homes. There's no denying that, and no reason to do so either.
Still, this would indicate that a deteriorating ground level economy can support rising stock markets for a prolonged period of time. Which, and I would think this is behemoth-sized evident, requires stretches of the imagination that no flexible material presently known to man could sustain.
Hence, if you would share my sincere and severe doubts about the rally continuing to go upward as we move forward, you would also have to question the idea of the US dollar continuing to slide. If the stock markets are going to go down, the money presently invested in them will have to move elsewhere. And despite all the pretty talk about increasing appetite for risk, investors getting out of stocks will be looking for less risk, not more. That is what we call a flight to safety, and the US dollar, it just so happens to happen, is the safest bet available.
What bets are there? Oil? Not in a declining economy where demand plunges. Gold? Too much manipulation. Euro? Too many unknowns, Eastern Europe first and most of all. Renminbi? There’s not nearly enough place in China for the amount of money looking for a haven, and what place there may be has plenty Chinese callers.
Now, if you can agree with me that the market rally just can't last on a foundation of rapidly rising numbers of foreclosures and workers thrown by the wayside, simply because Main Street's real economy losses will at some point overwhelm everything else, where would you see the dollar going?
There is still a huge amount of investment capital left, even as much of not most of it is as walking dead as the experts and analysts you can see every day on the beaming dead finance tubes discussing what the moment will be when we hit the real bottom. And start ascending to yet another heaven.
As long as government policies worldwide are geared towards hiding losses on festering toxicity, the remaining investment capital has the ability to push up or down whatever it chooses. And if that capital chooses to move away from a place where it feels itself getting itchy and nervous, it will look for calmer waters. Right now, that is the US dollar. It's not perfect by any means, but it is the least terribly ghastly of all options.
So, you still want to talk about that USD carry trade? It's a dud. There are stories about a UK pound carry trade as well. Not entirely the same tale, but that's not going to happen either, albeit for different reasons.
Japan's yen carry trade took place during a huge credit bubble in just about every country but Japan. Today, the only bubble left is China's, and that's about to blow up in 1.3 billion faces. A carry trade sounds nice, but the first requirement for such a trade is someone wanting to carry something. Such a situation doesn’t exist today. There's people with brazzillions of dollars and euro's etc. wanting to carry all sorts of stuff alright, but there's no stuff to be carried.
A carry trade is viable only in periods of growth, even if that growth is temporary, as well as fake and built on low interest rates, Corleone-style accounting standards and other fairy tale ingredients. But no carry trade can possibly ever take hold in a shrinking economy, not beyond a very short time. Carry trades are by definition international, and international trade is going to the dogs. Export numbers for Japan, China, the big exporters, are down, what is it, anywhere between 20% and 40%. Nothing there to trade, and certainly nothing to carry. Or, yes, there’s always something, of course, but it's not exactly a growth industry, is it now?
The whole carry trade topic did remind me of an old song, and listening to the lyrics it's impossible to escape the eerily striking similarity between the song's lyrics and the US economy. Or, for that matter, the entire American society.
Here's Shel Silverstein's Carry me Carrie, performed by Dr. Hook and the Medicine Show.
Second Street and Broadway
Sitting in a door way
Head held in his hands
Looked to all the world like he was praying
Foot wrapped in an old rag
Bottle in a brown bag
I saw him try to stand
Then I heard the words that he was saying
He said come on Carrie, carry me a little farther
Come on Carrie, carry me one more mile
I don't know where it's leading to
But I know I can make it if I lean on you
So come on Carrie, carry me a little
I carried you, now carry me a little
Come on Carrie, carry me a little while
Well he struggled to his feet
And staggered down the street
To the window of the five-and-dime
He stood and laughed a while at his reflection
And then I heard him shoutin'
Something about a mountain
He could surely climb, if she was only there to point the right direction
But she ain't no, no ain't no
He said come on Carrie, carry me a little farther
Come on Carrie, carry me one more mile
I don't know where it's leading to
But I know I can make it if I lean on you
So come on Carrie, carry me a little
I carried you, now carry me a little
Come on Carrie, carry me a little while......
There are a zillion stories these days about the alleged newly forming US dollar carry trade. They look to come from the same sources that claim a grandiose weakness in the greenback. I use the term “alleged” because me, I don't buy it. That is, not the story. The dollar, though, I might.