Equities But Not Dollar Benefiting from a Lack of Alternatives

February 20, 2014

Former British Prime Minister Thatcher popularized the acronym T.I.N.A. — there is no alternative — to justify painful fiscal austerity and deregulation in the early 1980s.  The logic is analogous to a quote from Sherlock Holmes:  “Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.”  The principle seemingly explains the relentless levitation of equities, which in the DOW’s case has risen 147% or 20% per year over nearly five years, during a period that saw U.S. nominal GDP climb less than 4% per annum.  Investors are desperate to earn a return that cash and fixed income assets simply do not offer.  Equities have delivered a return, but there is also a trade-off of accepting a significant downward correction which looms larger with each passing month that the upward streak continues.  The solution is to follow the herd into equities and hope that you have the foresight to get out in time.

The dollar ought to be appreciating, too, given the greater baggage carried by other currencies. 

  • Euroland doesn’t have an exit strategy that retains the euro’s full integrity and restores competitiveness to its troubled members and sustainably low current account imbalances.  After a monster recession and a significant aftershock just since 2008, the region is experiencing a soft recovery that looks very precarious.  Potential deflation is in the blind spot of the ECB, whose Governing Council has responded weakly to substantial sub-target inflation.
  • In Japan, Abenomics shows signs of hitting diminishing returns.  A main objective of the government stimulus has been a turnaround in the trade balance from its current deficit back to the more familiar ground of surplus, but export volumes fell by 0.2% over the past year.
  • Emerging markets are blowing up under the risks of slower Chinese growth, Fed tapering, and political instability.
  • Compared to previous expectations, few economies could match Britain’s for surpassing them, yet sterling is mostly shadowing the dollar as we’ll see shortly.
  • The destructive power of nature is looking more widespread and enduring with each passing month.  The eastern two-thirds of the United States has lately been battered by one snowstorm after another, while California is in the drought of the century.  Southern England is flooded, and Tokyo is also snowbound.  Bad weather keeps shoppers out of stores.  Construction work to repair roofs and fill in potholes in the U.S. northeast will boost GDP in coming months, but that’s the kind of activity that merely restores what pre-existed.  Still the United States will continue to enjoy comparatively strong economic growth.  The February Economist poll of forecasters found a projected consensus for 2014 of 2.9% in the United States versus 1.0% in the euro area and 1.6% in Japan.  The U.S. has better demographics than other economies and holds a get-out-of-malaise card, namely the burgeoning development of shale oil that promises much more than energy independence.

The dollar has strengthened sharply against a slew of emerging market currencies, but such appreciation is pretty irrelevant to the U.S. economic outlook or to what draws the greatest attention of financial market commentators. 

Against the euro, yen, and sterling, moreover, the dollar’s performance has been underwhelming especially from a T.I.N.A. respect.  The table below compares present dollar values against these three rivals to average levels so far this year (YTD), 2013 averages, and the mean levels during 2008-12 and 1999-2007.  The dollar is weaker now against the euro.  It’s been somewhat flat lately against the yen and remains considerably weaker than levels before the Great Recession.  Cable has been the steadiest relationship of these three pairs over all periods shown.

Averages Feb 20, ’13 YTD 2013 2008-12 1999-2007
EUR/USD 1.3718 1.3622 1.3284 1.3741 1.1200
USD/JPY 102.31 103.12 97.65 89.31 115.16
GBP/USD 1.6638 1.6481 1.5646 1.6306 1.6701


T.I.N.A. perhaps doesn’t explain movement in the dollar as well as the DOW because the dollar’s allure ought to be tied closely to sentiment toward the United States, but corporate health is much more loosely linked.  Firms are citizens of the world, drawing earnings from everywhere and not solely dependent upon the U.S. economy for either revenue or earnings trends.  Plus, the U.S. has formidable baggage such as the extensive offshore holdings of U.S. currency that make it an object of diversification.  There also is concern about widening income inequality in America and the damage that does to public sector governance.  Another worry concerns Federal Reserve policy.  A new Chairman inherits a gargantuan and unprecedented balance sheet.  Investors aren’t convinced that heavy reliance on forward guidance is a good thing.  America trails other nations in the quality of its health care system, elementary and secondary school education, and all sorts of physical infrastructure like road and bridge upkeep and rail transportation.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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