FT’S WOLF: “RECOVERY ON VERY SHAKY GROUND”
1 November 2009 by TPC
1 Comment
Nice thoughts here from Martin Wolf of the FT. He think the global economy is still very weak, the dollar is set for a sizable rally, and that the banking bailout is still going on.
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Great points here from Wolf. Agree with what he’s saying:
1. Dollar is not losing value because Faber’s Armageddon hyperinflation scenario is likely anytime soon. It’s losing value because the FED is keeping US interest rates so low. This in turn is creating a dollar carry trade in which dollars are being borrowed short and the borrowed money is being used to speculate in risk assets, primarily commodities, oil, and high beta equities. There is no other way to explain $80+ oil when the world is awash in spare capacity and the supply/demand fundamentals are so weak. Which leads one to the conclusion that the March rally in risk assets will continue indefinitely as long as FED keeps FED funds rate at zero.
2. The dollar will continue to be the world’s reserve currency for the foreseeable future but it will continue to lose market share at the margin to the EURO.
3. The China Reminbi’s peg to the dollar limits how far the dollar can fall, and the dollar’s long term reserve currency status will not be seriously threatened as long as the reminbi/dollar peg is in existence. China can’t end the dollar peg until it has successfully built up a robust consumer-spending driven domestic economy. This will take decades, I think, so those betting on gold and the annhilation of the dollar are probably a little early.