Ho, Ho-hum! Barely Christmas!
For all of the past bragging the Bush Administration of its economic policies over the last six years, one would think those boasts alone would be a sign of prosperity. And yet, if one bothers to look about, there is no evidence to support their specious claims.
For instance, housing construction is way down, as measured by both construction starts and building permit applications. Even with lower sales prices and interest rates being offered, there remain near-record sales cancellations, exacerbating an already-high unsold housing inventory.
In addition, rising foreclosures are inhibiting any corrections the industry might exercise to limit their exposure to the buffeting economic winds. The worst example of this is Ohio, where one in ten high-risk mortgages are in default, and Cleveland alone has a two-year supply of unsold homes.
This surfeit of American Dream castles in Ohio is attributed to the large number of high-wage manufacturing jobs lost there. Similar conditions exist in the 37 other states reporting housing slumps.
Is it any wonder that retailers are already expressing worries of a poor holiday sales season by slashing prices - and profits?
Some prosperity!
But this poor housing sales situation isn’t merely affecting the profit statements of the housing industry. It is affecting the very value of a dollar:
Housing market to blame for dollar falls
By Nick Booker, Staff Columnist
24 Nov 2006
The weak US housing market is causing problems for the economy at large. The dollar hit a 19-month low against the euro, which briefly cracked the 131-mark for the first time since April 2005. Global Insight, a British economic concern, predicted the euro would hit $140 [per 100 euro] by the end of next year.Sterling hit a near two-year high in frantic morning trading. Dealers said the reason was not one of inherent pound strength but the fact that the dollar was in freefall against many major currencies. Many forecast we may see Sterling hit $2 by the end of the year.
[W]hat happens in the United States has serious consequences for our own economies on the other side of the Atlantic. History tells us that it takes around 18 months for a downturn in the States to hit the UK.
But who is going to wait for history? The effects are much more immediate:
The FTSE 100 fell to its lowest level since early October today as the plummeting U.S. dollar left almost every member company weaker. Close to half of the index’s constituents report in U.S. dollars, while most are heavily exposed to U.S. sales or sales in currencies closely correlated to the beleaguered greenback such as the Chinese Yuan and some central American currencies.
Don’t shed any tears for the Chinese! They appear to have prepared for this:
Yuan against U.S. dollar falls for 5th day 11-20-2006
The yuan fell slightly against the U.S. dollar Friday for the fifth straight day, and dealers said the central bank was suspected of taking advantage of the dollar’s firmness on global markets to slow the yuan’s climb.”Some large-sized dollar bids from the central bank kept the yuan stable, mostly at a lower rate than Thursday. The central bank was suspected of buying dollars late in the session in the previous two days,” said a Shanghai dealer at a European bank. “The central bank appears to aim to keep the yuan steady for a while after a faster pace of appreciation in the past couple of months.”
Dealers said the yuan’s fall over the past five days, a move totaling less than 0.1 percent, was symbolic, reflecting the central bank’s desire that the currency should not appreciate without pause. The yuan gained nearly 1 percent from Sept. 15 to last Monday, rising at an annual rate of 7 percent, its fastest pace of appreciation in any two-month period since the government revalued it by 2.1 percent and freed it from a dollar peg in July 2005.
So of what importance does this have on the dollar and the American economy?
Dollar Falls Sharply Against Euro and Pound
By JEREMY W. PETERS and CARTER DOUGHERTY
November 25, 2006
Economists say the United States is in a vulnerable position compared with its global competitors. China’s central bank holds a large amount of American currency, and speculation has intensified recently that it could begin selling off dollars to avoid being burned if the dollar collapses.
How much does China hold in dollars? Japan and China hold a combined $981 billion out of a total of $2.1 trillion in US Treasuries held by international investors. Just the hint that China might reduce it dollar holdings - despite “dollar assets being hard to diversify” - tend to cause the investors to head for the exits.
“To dismiss this as a technical correction is to overlook the structural reasons why the U.S. dollar is having a very hard time these days,” said Hans Redeker, global head of currency strategy at BNP Paribas in London.
Just how hard a time? Investor interest in European economies is on the rise:
[T]here was no single event yesterday to touch off such a sharp drop in the value of the dollar. Rather, economists said, it was a culmination of recent signs of weakness in the American economy that investors found troubling. Some experts said that could suggest that the dollar’s losses would deepen. On top of that, economic growth in some European countries is gaining momentum, threatening to siphon investment away from the dollar.Against the backdrop of a European Central Bank that seems determined to tighten rates further next year, the appeal of dollar-denominated assets is falling as the prospect of higher returns in Europe rises.
This week, data on German business confidence, French economic growth in the third quarter and a historically reliable gauge of business sentiment in Belgium all pointed toward stronger growth. All these factors are more likely than not to push the European bank to raise interest rates in a bid to head off inflation, a course of action that would damp the appeal of the dollar in relation to the euro, currency specialists said.
“This drop in the dollar has been justified for some time,”
said Chris Turner, head of foreign exchange strategy at ING Baring in London.
In addition to increases in the pound and the euro relative to the dollar, several other currencies improved their value as well: the Swiss franc, the South Korean won and the Brazilian real, for example.
Even holders of the yen, itself hitting a 21-year low versus the euro, are dumping dollars to lock in profits. Traders claim that the Japanese Ministry of Finance advised them to reduce their dollar holdings, but the MoF denies these reports.
The Japanese traders have been playing a risky foreign exchange game:
[T]he low-yielding yen has been borrowed to buy a higher-yielding currency, on expectations that the Bank of Japan will raise interest rates only slowly from the current 0.25 percent. “It remains unclear if and when the Fed will lower rates, but many players now believe there is no upside to interest rates,” said Kaoru Kondo, chief forex analyst at Fisco.Japanese exporters sold the dollar on wariness about its downside risks, such as the slowing U.S. economy and the erosion of the currency’s interest rate advantage. “The dollar is increasingly top-heavy with players gradually lowering the upper end of their trading ranges,” said a trader at a Japanese bank.
What news is spooking them?
The dollar fell to a five-month low versus the euro and tumbled against the yen as a report showing an increase in jobless claims suggested the economy is cooling. Alcoa Inc., the largest aluminum producer, led a gain in the Dow Jones Industrial Average after saying it will cut as many as 6,700 jobs to reduce costs.
“No matter how you look at it this was a bearish report,”
said Jason Schenker,
an economist with Wachovia Corp. in Charlotte, North Carolina.
The consequences of someone failing at this game would exceed those of the Southeast Asian Crash of 1998. In addition to bringing down the US dollar, many currencies closely tied to the dollar - the Australian dollar, the Indian rupee, the Singapore dollar, the Pakistani rupee, and the Venezuelan bolivar - would go down as well.
This would not be a good thing, as many of these nations are in the positions they are relative a weakening dollar due to investing in American debt instruments. A weaker currency means they would be hesitant to bail us out one more time from the consequences of our profligate ways:
U.S. Treasury notes were little changed, with yields near a seven-month low, as the dollar’s fall fueled speculation some foreign investors will balk at buying the nation’s debt.”There is a general pessimism on the dollar right now,” said Samarjit Shankar, director of global strategy for the foreign exchange group in Boston at Mellon Financial Corp. “People are now concerned that the growth outlook heading into next year is on the down side.”
With jobs and housing sales down, what else could go wrong?
[T]he market could not ignore the fact that oil prices have creeped back above $60 a barrel. The fear is that if oil continues to climb, it could deal a blow to the liberal spending that is expected of consumers this holiday season.
It isn’t going to end with the holiday season, either, as this energy industry observer reports:
Oil Prices Should Head Back Up
by Andrew Corn
Nov 22nd, 2006
My dark hypothesis is that oil prices may once again begin to march.Check out the price of oil the first of each week since September. Look at pump prices as we approach Thanksgiving. They are rising. Look again in mid January, just eight weeks away.
All this stew needs to boil is for our government to replenish the strategic oil reserves that were tapped when oil hit its peak earlier this year.
I trust you still remember paying over $3/gal. for gas. You know the foreign investors do, as well as how weak the American economy was becoming. they aren’t going to wait as long to act this next time.
There isn’t any election happening for two years, so the Saudis have no incentive to play nice with the American driver by lowering wholesale oil prices so that we voters would feel more inclined to vote Republican. It didn’t work this time, and it wouldn’t work in two years, either. A lot more damage will have been done to our personal economic positions by then for us to forgive them - and forget.
So enjoy your new Mii toy. It may be the last one you can afford for a very long time.