If only that pesky dollar would confirm the pessimism expressed in the US stock market and about the...
If only that pesky dollar would confirm the pessimism expressed in the US stock market and about the US economy, why, the bears would feel a lot better about their state of being.
"The recent performance of the dollar against the euro is, to put it mildly, puzzling," opines the Financial Times, never a big fan of US economic success. "The US economy is flirting with recession and US interest rates are down 1.5%. So why has the dollar been so strong?"'
One obvious answer is that the alternatives are so lousy. Europe, whose relatively closed economy was supposed to allow it to survive the US slowdown with barely a scratch, has a spreading case of eczema. Confidence and sales are slumping, and companies are starting to warn about lower profits as a result of slower US sales.
Japan, in case anyone missed it, has finally decided to put some oomph and bank reserves into its zero interest rate policy. In late March the Bank of Japan (BoJ) came clean (at least for that bank) and admitted the economic recovery had "come to a pause" a curious euphemism since it had never gotten going.
The BoJ announced that it would dispense with interest-rate targeting and adopt a reserves target. Specifically, it will increase bank reserves by ´1 trillion to ´5 trillion and continue to print money until the consumer price index stops falling.
The bet against the yen looks pretty good, given that the BoJ has committed to increase the supply of yen until it arrests deflation. The treasuries bet is a sure thing until the stock market stops going down. At that point, it's advisable to step to the side to avoid being trampled.
The dollar's demise has been eagerly anticipated for years. First, it was the current account deficit that was 'unsustainable'. Then it was the US stock market that was supposed to be the master of the dollar's fate. When stocks turned, the dollar's days were numbered.
The dollar index is up another 10% in the past year. Remember six months ago when the US economy was the envy of the world?
Because of its highly productive labour force and environment of deregulation, the US was capable of 4% non-inflationary growth. Unemployment hit a 30-year low of 3.9%. US companies were models of efficiency, with their slash-and-burn style of capitalism both revered and feared by foreigners.
Did any of that change? The pessimism is becoming so rampant that stock selling is begetting more selling. It's called a self-fulfilling prophesy.
It's what Federal Reserve chairman Alan Greenspan means when he talks about a breach in consumer confidence, at which point a slowdown becomes something else.
There is good news in bearish sentiment, however. One of the more intuitive indicators of sentiment is magazine covers. Paul McCrae Montgomery, a money manager and market analyst at LeggMason Wood Walker in Newport News, Virginia, got a recent 'buy' signal from magazine covers.
"There's a bear on the cover of Time, Newsweek and US News & World Report," Montgomery says. "There are bearish headlines in BusinessWeek and Newsweek."
In fact, there is no good news anywhere, which is generally a sign that the bear is aging. In his study of magazine covers going back 80 years, Montgomery has found a high correlation (85%) between extremes in media sentiment, as expressed in magazine covers, and inflection points in the market, a trend, a company, a CEO and the like.
The intuition behind it is that a particular phenomenon, be it a bear market, raging inflation, endless recession, has to persist for weeks, even months, before it enters the mainstream media and graces the covers of the weekly news magazines. By that time, the phenomenon is over.
Tim Hays, global equity strategist at Ned Davis Research in Venice, Florida, is encouraged by the wide recognition of the bear.
"The average bear market lasts 363 days and sees prices drop 25%," Hays says. "We've been in it longer than that. The bear is widely recognised. We're in late-state pessimism."
Reasons to be bullish may be beyond the point. Once psychology takes over, it's hard to counteract it with reason.
Instead, one day there are no more sellers. The market doesn't go down on bad news. That's when the bears take notice.
Caroline Baum in the Bloomberg New York newsroom
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