As the dollar turns, all eyes on Asia
Today's Financial News - Posted August 10, 2009
While most investors question the sustainability of the domestic stock run, savvy investors are wondering just what the Asian markets think of the situation.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): If you have been following the situation, you know things are getting interesting, very, very interesting.
As the American economy begins to level off and test the notion of growing once again, the Asian markets have not even bothered to stop and think. For the third day in a row, Japan’s Nikei index closed at its highest levels of the year. The Hang Seng closed 2.7% higher. And The Philippines’ market surged by 2.4% during the first day of the trading week.
The only major Asian market closing in the red today was China’s Shanghai. It was down by 0.3% but only as investors begin to wonder if the recent rally is the start of another dangerous bubble.
While a surge in the global equities market may appear as a positive move for investors, it is not an entirely welcome notion in the minds of the world’s ruling powers, especially the gang in Beijing. An explosive recovery in China could do much more harm than good.
Simply look at a few of the underlying headlines today to start to understand why.
First is the unsurprising news that America’s budget deficit grew to $1.3 trillion in July, setting yet another impressive record. The combination of rapid-succession spending initiatives and a downturn in the nation’s GDP has created the largest spending gap in the nation’s history.
Don’t worry. The record won’t last long. It will be even bigger this month.
Anytime the nation’s deficit is getting bigger, its borrowing must follow. Not to worry. Tim Geithner has the situation under control. With the nation’s pile of IOUs approaching the legal cap of $12.1 trillion, the nation’s Treasury secretary has officially asked for an increase in the nation’s credit limit.
Application denied?
The man whose name appears on every freshly printed “Benjamin” says it is “critically important” for Congress to increase the nation’s official borrowing cap within the next two months, before the current limit is reached.
It must be done, Geithner says, “so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations.”
Washington has always upped the limit when asked (how else would we be in the current situation?), so doubting this spend-happy Cognrgress’ approval is likely a waste of time. But just the mere notion of keeping “confidence” is an important concept for investors to understand.
For China, that is far from good news. The more America spends, the smaller Beijing’s hopes of superiority become.
Word that more and more analysts are looking pessimistically at Uncle Sam’s debt helps to prove the point. According to the increasingly common word from subject experts, America’s bonds are becoming “extremely problematic.”
One analyst told reporters this morning to, “be very, very careful with government bonds.”
If you are China, sitting on some trillion dollars worth of American debt, is that the news you want to hear?
Beijing certainly does not want to hear that Congress is working on a healthcare bill that will add another trillion dollars to the pile over the next decade.
Finally, the good (even if overpaid) folks over at Goldman Sachs (NYSE:GS) are even more optimistic on China’s growth potential. In a report released this morning, the company’s analysts say they now expect China’s economy to grow by 9.4% this year and a whopping 11.9% in 2010.
An expensive loaf of bread
Instead of hinting at what that means, I’ll come right out with it: the dollar will depreciate… BIG TIME.
While Bernanke and his crew fiddle with rates as close to zero as the market will allow, China’s tightly-manipulated financial sector will undoubtedly see borrowing cost go on the rise. No matter how closely the government controls the value of the yuan, investors seeking safety and security will certainly dump money into China’s economy.
Wrap it all up and you have the perfect recipe for a falling dollar.
China has a bit of a problem on its hands. Sure, Beijing wants the country to become an economic powerhouse. But the stronger China gets, the weaker the dollar will get. And with a massive dependency on the value of the greenback (remember all that American debt it bought?) a weaker dollar spells major trouble for the country.
One solution making waves in the forex market these days is the notion that America’s debtholders are going to start asking for their payments in a local currency, or even worse, gold.
The idea does not have a lot of mainstream traction just yet, but the whispers from major debt holders like Japan are growing stronger by the day. Imagine the day when the dollar becomes just like every other currency and losses its deity-like stature. It will be financial chaos.
This should be a cue for American investors. Now is the time to diversify internationally. If you have not already done it, make your moves today.
A perfect way to get started is to read this.
Next Article: Isn’t it nice to be making money?
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