The report of my death is exaggerated,” said the American author Mark Twain famously in 1897. He may as well have been a spokesperson for corporate America today, and for the United States dollar.
Is this the beginning of the beginning of the euro? And is the rand, which “tracks” the euro, following in the footsteps of the European single currency?
Not so fast. The market might have the emotional maturity of a two-year-old, but it has the IQ of a genius. Let us examine why the more things change, the more they are likely to stay the same.
The US is apparently doomed by the so-called Twin Deficits. Like two giant bar graphs that sky out of the page, the trade deficit and the budget deficit are favourite targets for anti-US economic prognosticators. Yet, the trade deficit is only 4,3% of gross domestic product (GDP). Economists tell us that a deficit of 6% of GDP is still acceptable.
When your economy represents nearly 55% of world market capitalisation, then a 4,3% trade deficit becomes a lot of money — about $398-billion, to be precise. One would do well to note that the US has been running a trade deficit for more than 30 years — fuelling the greatest economic success story in the history of the world.
The budget deficit (which is really nothing more than an operating overdraft) disappeared almost overnight during the halcyon Clinton years.
Profits were good, taxes were high, and the budget deficit suddenly became a surplus. Today the deficit is $149-billion — a sharp reversal from the $137-billion surplus of only a year ago. But USA Inc. has had a few tough months recently. The airline industry needed a $50-billion lift, untold billions were dished out to the taxpayer at home and the war against terrorism has been a hungry child. New York City also got a $50-billion goodwill gesture. No handouts or “grants” were asked for from the rest of the world — and, of course, none were given (except for a cheque from a benevolent Saudi prince, whose eight-digit gesture was, er, declined).
Today, interest rates are low (to stimulate the stock market by making money cheaper to borrow) and taxes have been cut. So, yes, the pot has gotten lighter. This has created a perception that the Federal Reserve is overspending. The market has frowned on the US, and its currency.
On September 11 the unthinkable happened to the unshakeable. Then the same thing happened in corporate America this year, in another twin disaster: the bluest of blue-chip accounting firms imploded in a cloud of dust, exposing crooked CEOs pulling the strings.
There are two issues here: an accounting problem — the wrong information being given to the accountant — and an accountancy problem — when the accountant himself is party to the shenanigans. When accounting numbers start to move under the market’s feet, it will move swiftly to terra firma. The Dow 30 (the index made up of the 30 biggest companies in the US) has tumbled to a five-year low (into the 8 000s) and the technology-laden Nasdaq (National Association of Securities Dealers’ Automated Quotation) index has fallen into the 1 300s. A three-digit Nasdaq is not beyond organised thought.
Against this backdrop two things have happened to investors: they have lost faith in the US, and they have lost faith in stocks. They have been looking for a new home for their money. Japan, in its third decade of recession, was a non-starter, and the United Kingdom, with almost no growth and an uncertain future for its currency, was no haven either. In the land of the blind, as the saying goes, the one-eyed man is king — and the money has gone to Europe.
We all know that the value of a currency, like any commodity, is determined by supply and demand. In what is really an embarrassment of riches, Euroland has found the value of its currency suddenly level with that of the mighty dollar.
Europeans themselves, still sober after the market knocked its currency from its delusional 1,17 at entry to a paltry 82c (at its lowest), are acutely aware that, fundamentally, their market is not yet a match for the US. Taxes are high and the whole of Euroland seems bound together by red tape. Growth is slow, and slowing. Even Germany’s Chancellor Gerard Schröder acknowledges that the driving forces for the upturn will need to come from the US.
In what is rather an irony, a strong euro is the last thing Europe needs, because it makes its export market, on which it so heavily depends, more expensive to foreign buyers. The other side of this irony is that a weaker dollar is not all bad for the US — it is obviously good for its export market.
The rand is more than a disinterested spectator to these proceedings. Like the euro, it has strengthened against the US dollar and, like the euro, not necessarily because its own fundamentals have improved.
Rather, inflation has climbed to 9,8% — compared to the US’s (more or less constant) 1%. All things being equal, this inflation differential will exactly translate into the amount by which the local currency must weaken against the dollar (to keep pace with a basket of goods whose dollar price has only increased by 1%). Sentiment will also play its role: among other things, South Africa can choose either to ring-fence itself from the African economy or to embrace it. The market will inspect its choice, interpret the data and deliver comment. We shall see.
Will the dollar continue to weaken? Will the world plunge into recession?
The buck, as we know, stops with the US economy. And here we have, fortunately — very fortunately — good news. Gross national product grew by 1,7% in the fourth quarter of 2001 and by 5,6% in the first quarter of this year. All sectors of the economy look solid. The consumer is both spending and sounding optimistic about the future. Inflation is low, and house prices are at an all-time high.
USA Inc. is acutely aware of the damage that the accounting scandals have caused; these are mistakes it can well live without. But the world’s most mature market is highly motivated and able to correct these mistakes. In a country that understands efficiency better than any, both voluntary and government-imposed actions will be implemented, and corporate America will have regained its respectability.
For how long investor sentiment will remain negative, nobody knows. The threat of war looms, as it always has. The world is changing, as it always does. The US might have caught a cold; her currency might be out of sorts. But once confidence returns, as it always will, no other economy or currency is better poised to launch a recovery. On that you can bet your bottom dollar.
Chris Van is an independent offshore investment specialist