Through most of the last decade, I answered an interminable number of investor questions about whether the weak dollar would destroy the very foundation of our world. (I exaggerate, if only slightly). Now that the dollar is showing some ballast, we get this: P&G to Apple Hurt by Strong Dollar Keep S&P 500 Profits in Check.
Look, I don’t care which way you fall but someone needs to cry foul when we perceive both a strong and weak dollar to be bad. In reality, we’ve had plenty of bull and bear markets in both strong and weak dollar environments, and in my view dollar direction doesn’t generally tell you much about what stocks are likely to do.
Currencies matter. A lot. But don’t get too far lost in this quagmire when it comes to judging the stock market.
For some years now this blog has argued the inclination to hold the pan European unity project together would be stronger than most believed. Despite ad infinitum and ad nauseum calls for increased nationalization, the Eurozone refuses to buckle just yet. If it will one day die, and it certainly could, it’ll die hard.
Now that it’s Q1 2013, this ought to be stunning to many pundits. Just as global equity markets’ resilience and lack of European meltdown has astounded many investors, too.
Graphic from the Wall Street Journal.
“Anna Schwartz was one of the greatest economists of the twentieth century… Anna had done path-breaking research since the 1930s in assembling the monetary statistics that were at the heart of her three monumental books written with Milton Friedman — “A Monetary History of the United States” ( 1963), “Monetary Statistics of the United States” ( 1970) and “Monetary Trends of the United States and United Kingdom“( 1982). I had the good fortune of collaborating with her on papers ever since; we just finished writing ( with Owen Humpage of the Cleveland Fed) “ U.S. Exchange Market Operations in the Twentieth Century.”
– Anna Schwartz, Pioneering Monetarist – Michael Bordo
Indeed. Her work will have a lasting impact for a long time to come.
So. The Bank of England is offering new liquidity to British banks. My sense is much of the market will interpret this as “this just shows how weak and fragile the system is right now.” But in my view this is an example of why the likelihood of a repeated Lehman-style panic is getting more remote. Ostensibly, the BOE’s plan is to help with things like household lending and consumption in the UK , but in reality this is probably about creating a ballast in case everything goes haywire on the continent and the euro breaks up.
One of the governing principles of this blog is: markets are pretty darn effective discounters of the widely known, believed, and feared. This isn’t just about pricing stocks into the future; it’s also how capital markets work. This event, rather than showing weakness, is instead another example of capital markets moving ahead of potential problems, ballasting them before they happen. This was not the case for Bear/Lehman/AIG, etc.—markets were not expecting those events and hadn’t braced for them. But they are bracing now. This is the nuts and bolts of the process of markets anticipating widely expected outcomes and therefore something else happening, in my view.
Note: equity markets rallied last week, with leadership in Europe.
A great rule of investing thumb is to look where others aren’t looking—what’s widely focused on is already largely contemplated and priced into capital markets. A similar lesson is also often applicable when thinking through public policy and geopolitics.
With everyone talking a potential Greek exit from the euro…
A Greek Euro Exit Could Be Worse Than Expected – Michael Sivy, TIME
…look the other direction: how might the European Union move toward greater federalization?
What Exactly Is a ‘Eurobond’ Anyway? – Catherine Boyle, CNBC
I don’t have any clear view on how all this plays out either way, but don’t get caught focusing on all the same things everyone else is—in politics and in markets, the path to many outcomes is seldom explicit, and often counterintuitive. It should not surprise in the least that a potential outcome of Eurozone break-up talk is the opposite—greater federalization and less direct democracy.
This blog has maintained Europe will be weak for the foreseeable future, but won’t catalyze a new global recession or bear market in stocks. (Though, in my view, it’s best to tread ballet-toe-lightly with sovereign bonds).
But there’s a big difference between saying Europe won’t cause a global meltdown and saying Europe will soon fix its ills. The very notion—treaty or otherwise—Eurozone countries will soon resolve all their deficit problems is laughable.
Italy puts back balanced budget goal by a year – Giuseppe Fonte, Reuters
Interest payments will cost the government 3.1 percent of gross domestic product this year, according to Office of Management and Budget and International Monetary Fund data compiled by Bloomberg. That’s down from 4.8 percent in 1991, the highest in the past 50 years, during George H.W. Bush’s presidency. Since 1980, the only incumbent with a lower ratio than Barack Obama was George W. Bush in 2004.
I’m as for fiscal restraint as anyone, but as this blog has maintained for awhile, the notion the US is headed for imminent ruin tied to the deficit/debt simply isn’t true. With interest payments heading down, and near lows, insolvency isn’t on the table—heck, it’s not even the campaign issue it once was.