by Jack Crooks -
There appears to be no end in sight for the sliding greenback. This
dollar of ours is rapidly falling to depths where no dollar has gone
before. In fact, to say that it's unclear when we can expect a
recovery would be a gross understatement.
I don't know about you, but most Americans still have the bulk of
their savings -- not to mention their walking around money -- in dollar
denominated assets. Whether you're on a fixed income and attempting to
preserve the value of your dollars, or a FOREX trader looking for an
entry point ahead of a dollar-reversal, we need to have a candid, no-
holds-barred discussion about our currency.
So for now, go ahead and take your hand from over your eyes. The week
is mercifully over and the thra****ng has stopped. It won't get any
uglier for the buck; at least not until Monday.
First, let's start by taking a hard look at the factors that sent the
dollar plummeting earlier in the week ...
The Negative Economic Fundamentals
Clobbering the Dollar are Homegrown
Sure, there was some better-than-expected news from Germany and other
parts of Europe that greased the skids, but that is an ancillary
point. This was no international job. It's the homegrown negative
economic fundamentals that are relentlessly pounding the buck. There
are three in particular ...
Negative Economic Fundamental #1: U.S. Retail Sales
Retail sales, a gauge of consumer health, were mostly pathetic in
February -- considerably worse than expectations. That's attributable
to the huge hole in consumers' wallets from the additional cost of
filling up the SUV at the local gas pump.
Negative Economic Fundamental #2: U.S. Consumer Prices
Consumer prices are rising ... again. Another nasty CPI re****t that
was released yesterday showed exactly that. The price increases from
January to February were tame, but the year-over-year numbers are
cause for concern. I'm sure frequent trips to the grocery store have
made it clear to you that price increases aren't easy to swallow.
Negative Economic Fundamental #3: U.S. Consumer Sentiment
The most recent statistics on consumer sentiment are so depressing
that, well, let's not even go there on a perfectly fine weekend.
Suffice it to say the numbers are sitting near 16-year lows and
reflect a dismal economic outlook.
This worsening trend was entirely predictable. After all, it was only
a matter of time before a burnt out housing market, rising food and
energy prices, and a beleaguered stock market left American consumers
in a daze.
Since the beginning of the current U.S. economic downturn, the
ultimate question has become: Can the U.S. consumer hold up?
Unfortunately the evidence is piling up and it's pointing to a big fat
"No."
As the U.S. economy falters, the unemployment rolls continue to grow.
And fewer jobs only add to consumers' frustration. Remember, last week
gave us further insight into the withering state of the job market in
America. The ugly numbers marked the second week in a row that U.S.
payrolls declined. A resilient labor market kept John Q. Consumer
afloat last year, but not anymore.
Weakening U.S. economic fundamentals have clearly bruised and battered
the greenback. But it's even more painful when you realize ...
The Federal Reserve Has NO Intention
Of Doing Anything to Help the Dollar
Did you hear about the Federal Reserve's latest bailout plan? If not,
check out Mike's Money and Markets column from yesterday for a very
good explanation of why this latest Fed effort probably won't amount
to much. I'm in the same camp.
Basically, the Fed's slapdash approach offers up changes to its Term
Securities Lending Facility. And it will amount to $200 billion
dollars of liquidity dumped on the markets through weekly auctions.
Every time the Treasury Department cranks up the printing presses, it
only serves to drive the currency lower.
But even with the Federal Reserve's recent adjustments, the credit
crisis may not subside anytime soon. All banks not Central seem to be
tightening lending standards simply because they're worried about the
availability of capital due to growing losses from their exposure to
this whole mess. And for good reason; witness Bear Stearns' collapse
yesterday.
It's obvious that the Fed and government officials are trying to aid
credit markets and the economy, but have absolutely no intention of
doing anything to help the dollar. For the sake of argument, let's
assume the Feds finally prevail and restore order to the U.S.
economy.
What can we expect from the dollar? After all, restoring order would
just take us back to a point where money was readily available and
risk-taking was fa****onable. Even then traders did everything they
could to avoid the dollar.
Ultimately, the big question on everyone's mind today is ...
Will the U.S. Economy Get Worse Before It Gets Better?
I've racked my brain on many occasions to put together some reasoning
that could legitimize a dollar rally. Unfortunately, everything I've
come up with hasn't been enough. Sure, it may have explained a short
breath of life for the buck here and there, but nothing substantial
just yet.
But really, what must it take for the dollar to finally get itself off
the ground, brush off the dirt and climb the mountain of worry?
There's got to be something, right?
The current dollar bear market started back in 2001. Perhaps stacking
up pieces of the U.S. economy from its good ole days (early 2001) next
to pieces of the U.S. economy from today can shed some light on the
question.
As the chart illustrates, it's not pretty!
Home prices were growing at nearly a 15% year-over-year clip back in
2001. Today, they're falling at nearly a 10% pace.
Unemployment stands at almost 5% today. Back in 2001 it was closer to
4%.
Consumer prices are growing marginally faster today than they were
seven years ago, but these increases likely hurt more considering the
rest of the pile stacked up against the U.S. consumer.
In fact, today's regular unleaded gas price is more than double the
price back in February 2001 -- $3.14 versus $1.41. Ouch! And when you
think about the fact that household debt as a percentage of GDP has
grown to over 100%, from roughly 70% in 2001, the picture looks even
uglier.
As I see it, the dollar's precipitous decline grows scarier by the
day. And the worst part: Rarely do we hear that the dollar is
oversold, undervalued or due for a correction.
Unfortunately, nothing seems set to change that. It becomes a game of
wait-and-see; wait-and-see how long before the U.S. economy improves
and when (or if) the Federal Reserve will alter their course.
Bottom line: When I study all the different elements at play across
the board, I believe we are witnessing a currency under siege. Until
and unless either the U.S. economic fundamentals improve or the Feds
stop their unabated assault on the dollar, upward price action leading
to any kind of sustained rally will probably be blocked.
Stay tuned. For as long as the dollars in our wallets are worth
anything, I'll do my best to keep you on top of the situation.
Best wishes,
Jack
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