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What's Ahead For The US Economy? Ride The Low Dollar To New Stock Market Records

If you have an appreciation for historic irony, you'll love this: Gazprom, our favorite Russian energy monopoly and cornerstone of our strategic portfolio, just announce a major shift in strategy concerning its cooperation with the Germans. Gazprom, which up until recently was planning to take over entire municipal power grids and even buy into German energy giant RWE to get at the coveted German retail consumer, has put all future investments in Germany on ice.

The reason given by the proponents of the Red state monopoly: The Russians are afraid the "conservative," market-oriented German government would end up confiscating Gazprom's investments. Germany is debating "unbundling" the existing structure of the energy industry, aiming at improvement of competition and prices.
The German head of Gazprom Germania went so far as declaring that "the obsession to regulate is leading to an increased planned economy."

Who says we Germans don't have a sense of humor? That's like Ted Kennedy complaining that U.S. Inheritance taxes are driving the mega-rich to establish offshore trusts in Fiji!

Life's little ironies.

But you don't have to look for ironies in the power politics of the European energy industry. Open up your newspaper or read your e-letter subscriptions and you'll see what I mean:

As the talking bears are telling you to sell your U.S. Equities and head for the hills while the dollar declines against the euro and U.S. Real estate supposedly crashes around your ears, the U.S. Economy is in surprisingly good shape. Even as the homebuilding industry is stagnating and entire property portfolios are sold off without having the required hundred houses made of ticky-tacky grafted on every half acre, U.S. Unemployment is now lower than it was in the late 1990s.

And just as the U.S. Economy is healthier than some would have you believe, so, marvel of marvels, is the global economy. The International Monetary Fund (IMF) estimates that the world economy will grow by 4.9% in 2007. And there is a crucial difference between this year and previous years: The current rate of global economic expansion does not rely on Joe Sixpack to take out his credit card and spend his European and Asian colleagues out of recession.

Of course, with the greenbacks at new lows against the euro, the perma-bears and monetary policy purists do have a point: If you're planning to go to Europe this summer, it's going to cost you. Against the euro, the dollar is hovering near record low at around $1.36 per euro. In Britain, two bucks now buy you a pounds' worth of fish'n'chips and lukewarm beer.

That currency thing.

Analysts don't tire of calling for "all-time records" as the euro is now at its highest point since January 2005 and near its December 2004 record of almost $1.37.

Of course, you could take those "all-time highs" with a grain of salt, considering that the euro in its current role as Europe's single currency really only has a proper history of five years and four months. If you wanted any longer-term perspective, you'd have to backtrack the conversion histories of the French franc and the Deutsche mark. That takes a bit of work and research, but if you're really interested in proper placement of long-term data, you'd find out that the dollar has done worse against major European currencies. Much worse, indeed. In the mid-'90s, to be specific. You remember, the Golden Age of Clinton.

But while the talking heads and perma-bears are slavering at the prospects of having to pay more dollars for their bottle of Beaujolais on their vacations in Paris, there's another group completely absent from the outcry: American manufacturers.

Which is even more surprising considering how vocal these folks were in early 2002, when the dollar was riding high both against the yen and the euro. In fact, back then they were lobbying hard to get the Bush administration to pursue a soft-dollar course.

The reasoning is quite clear: If the dollar rides as low as the pants of a suburban teenager against other currencies, it makes American-made products look cheap by comparison. In a global market, where the order goes to the lowest bidder, that's a competitive advantage against European and Asian companies.

Global competition.

Being competitive means that companies can continue making money. Making money means creating jobs — or, even better, keeping additional jobs from being outsourced to China, Mexico and India. (Have you noticed that no celebrity Democrat has publicly come out about their dollars buying fewer euros? My forecast: You never will!)

And guess what? Ever since the dollar began to slip, two things have happened: The U.S. Economy has grown and unemployment has fallen. Plunged. Plummeted to levels that have European politicians green with envy. They're just too busy to notice, what with fighting the windmills of 1923's hyperinflation as a matter of policy.

It's not like this is a Yankee thing, either. You may notice that Japan is doing what it can to keep the yen as low as possible against the euro and the dollar without cheesing of the G8. So far, its latest efforts have resulted in the strongest economic growth in a decade and a half.

China has built almost its entire economic boom on latching onto the low dollar, and is only reluctantly allowing the yuan to appreciate… Biting into its competitive cost advantage. And while the perma bears are anticipating that China will start to allow the yuan to freely float on the currency markets any day now, I have my doubts as to how ready Beijing is to allow this to happen. The weak currency is central to China's entire growth strategy.

After all, exports accounted for about 40% of China's economy in 2007, creating growth, jobs and stability. When China allowed even a minuscule rise in the value of its currency against the greenback in 2005, Chinese companies saw their profits squeezed.

Points of contention.

China scrapped its fixed exchange rate in July 2005. The yuan has gained 7.2% against the dollar since then and is estimated to rise another 4% in 2007. Any additional move would actually threaten the livelihoods of millions of workers and the economic viability of many of the mega-cities and industrial centers China has created out of thin air in the past 20 years.

Margins are slim in China. A revaluation of 20-30% would wreak havoc on a lot of export manufacturers. (Experts estimate that China's textile industry alone loses 8.2 billion yuan ($1.1 billion) of annual profit for each percentage point rise in the currency against the dollar.)

But U.S. Manufacturers riding the low dollar in other markets contend that even at present levels, the undervalued yuan gives an unfair advantage to Chinese competitors. And with the Bush administration's domestic political viability in smithereens, U.S. Treasury Secretary Henry Paulson may not be able to continue holding off moves in Congress to punish China — via trade sanctions against China that are now all but inevitable.

Matters of balance.

Expensive imports and cheap exports typically have a predictable effect on a country's trading balance.
The U.S. Trade deficit is indeed shrinking. For February, it narrowed to a four-month low, when it fell 0.7% to $58.4 billion as the balance of trade with China improved and the cost of oil imports fell. The deficit with China in particular dropped 13.3% to $18.4 billion, a nine-month low. Exports to China rose by 6.1% with imports contracting by 10%. The trade deficit with the European Union fell 2.2%; the imbalance with Canada by a whopping 29%.

Of course, contrary to perma-bear mantra, dropping trade deficits are not necessarily a good thing. The reduction of the trade imbalance with Canada, the United States' largest trading partner, reflects a drop in demand for lumber — and is a direct consequence of U.S. Homebuilder troubles.

In Mexico, too, the sudden slack in demand for building supplies (especially cement) and illegal labor, is having first effects: Cemex SA, the world's third-largest cement producer, estimates that profits fell for the first time in three quarters as U.S. Housing starts fell 31% over last year. Cement sales probably dropped 19%, with ready-mix concrete sales estimated to come in 26% below last year — and that merely because of a drop in demand from Florida and California.

Dropping demand for U.S. Housing will translate into lower prices for homes, cement, lumber, copper and consumer goods in this calendar year, creating an efficient counterweight against the inflationary pressure of rising energy prices. Add in steady immigration and idled illegal workers in the United States (as deflationary factors on the cost of labor) and the pressure on China to make do with tighter margins as the yuan needs to rise, and we are looking at a stable inflationary picture well into 2007.

Which should open up the path for U.S. Equities markets to post new records before the year is over.

Which I'm sure will provide reason enough for the bears to talk down the greenback a few cents lower.

J. Christoph Amberger is president of an independent financial publisher of financial and investment information directed at individual investors.For his daily newscast, check out []

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Updated: 8. März 2020 — 05:23