A strong ECONOMY does not EQUAL a STRONG

STOCK MARKET!

Although I am optimistic on the economy for the next six months, that does not necessarily mean the stock market is safe. It’s a question of whether the future growth is already factored into today’s stock prices. Take a look at the prices of many hot stocks today, even in areas which seem secure, such as energy:  many of these companies are selling at big multiples of annual sales, and many don’t have any earnings at all. It’s reminiscent of the tech sector in 1999.

Dr. Greenspan got a lot of media time in his testimony on Capital Hill. Unfortunately, much of the time was again spent on questions regarding Social Security. However, he finally said that spending cuts are much better than tax hikes in trying to reduce the deficit.

Dr. G. told members of Congress that the current federal budget policy is “unsustainable.” Note that he did not say “the budget deficit,” and there is a big difference. He knows the deficit is small in comparison to other countries and our GDP. But it’s the ‘policy’ which must change. The last budget was full of pork for every special interest in the country. It was a pig’s delight, both Republican and Democrat. That’s what’s wrong with a two-party system: they have the party, and we get the bill.

Dr. G. also said that he saw no signs of foreigners wanting to sell the US Treasury securities. The Bank of Korea made a statement that it was diversifying into other currencies. The dollar tumbled and the media was filled with scare stories about a dollar crash. The fact is that the Bank of Korea, and most other central banks, always have diversified. But dollar instruments, mainly US Treasuries, are the major position by far, as they are the safest most liquid instruments on earth. 

But let’s assume that the Bank of Korea would no longer buy one US Treasury. Would it make an impact? Here is a chart of Central Bank holdings of US Treasuries, courtesy of bond guru Jim Bianco (Bianco Research). The line is ALL purchases of Treasuries by central banks. The bar chart is Japanese purchases of US Treasuries. Lo and behold, about 90% of the purchases have been from Japan. Therefore, it really doesn’t matter much whether Korea, or other countries, reduce their purchases.

While almost everyone is negative on the dollar, it probably has one of the best fundamentals right now. The world’s billionaires have listened too much to their economic advisors, who probably drive to work in a Chevy to advise their employers who get there in a Rolls Royce.

The US economy is growing at 3.9% currently, while Germany and France are at the edge of entering new recessions. The important European countries have high taxes and labor laws which are driving companies out. Their birth rates are so low that the entire welfare systems will collapse in the next 20 years. The super-bureaucracy of the EMU in Brussels makes it even more difficult to get out of the mess. Who would want to invest in that area?

The only hope for the EMU is the Eastern European nations who are now in the process of joining the EMU. They are not burdened with all the red tape. Some have already established a simple flat tax system, similar to Russia’s. Others will do so in the future. A simple tax system produces higher tax revenues. Our reps in Washington haven’t learned that yet. Eastern Europe is now receiving with open arms the companies who are fleeing central Europe. They are experiencing a boom.

To counteract, Brussels has been trying to get Ireland, the success story of Europe, to raise it’s taxes, so that the other European countries don’t look so bad. Instead of trying to improve conditions for everyone, they want everyone to be equally miserable.

If all the above doesn’t make it clear that the Euro is not a good substitute for the dollar, we have the interest rate differential. Europe can’t raise interest rates because of renewed double-digit unemployment. Their benchmark rate is 2%. The US is now 2.5% and rising.

 I would not short the dollar at this point.

Bert dohmen 

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