DONALD COXE February 10 2003


DONALD COXE February 10 2003


Remember the tech mania? There was a greenback mania that went with it.



THE TERM “bear market” has been used about the stock market so much lately that the casual observer might believe that only stocks have bears (and, whenever they reappear, bulls). Not so. Markets in any tradable asset class are labelled by which kind of investment strategy currendy works in them.

In a bear market, speculators make money by selling the asset short, and then buying it back at a reduced price. That is the opposite of a bull market, in which speculators (and investors) make money by buying assets that go up in price.

What many people failed to notice during the technology mania that energized the equity bull market of the 1990s was that the American dollar was also in a remarkable bull market. Foreign investors—Europeans, Asians, Canadians—could make serious profits in their own currencies by owning U.S. stocks and bonds even if those assets didn’t go up much in U.S. terms. A German who bought a U.S. Treasury bond in mid-1995 and held it until January 2002 made roughly 40 per cent in Deutschmark/euro terms on the bond’s face value, and also made annual profits averaging slightly more than five per cent when she cashed interest coupons, which meant she earned double-digit interest on the best-known, most liquid bonds in the world.

Her happiness did not offset the gloom in Brussels and Frankfurt as the currencies of the leading European countries continued to weaken against the dollar—a weakness that turned into a rout when the euro was born. For the Eurocrats who had laboured to get agreement from the member nations on scrapping their own currencies in favour of the new euro, the dollar’s strength was an ongoing insult. The new currency, which was supposed to be the new store of global value, was a global joke.

Meanwhile, the U.S. dollar, which was supposed to crumble under the weight of the fast buildup in U.S. external debt, was a bird in flight. The greenback was better than any other currency—and was most certainly bet-

ter than gold, which was in its own longterm bear market.

Then, on Jan. 31, 2002, the American dollar peaked, rolled over, and began to decline against most of the world’s major currencies. In particular, it weakened against the euro. Most observers said all that was happening was the dollar was in a moderate correction. The euro, which had been as low as US85 cents, would settle at around par—US$1.

Since year-end, those bland forecasts have been blown to smithereens as the euro has soared past US$1.08, and the broad index of the dollar’s value against a basket of leading global currencies has fallen from 104 to 99. (At its peak in mid-2001, that index was at 119, so the dollar is down 17 per cent against a trade-weighted collection that includes such currencies as the euro, the yen, the Swiss franc, the pound, and the Canadian dollar.)

Naturally, gold has risen as the dollar has fallen. Gold was roughly US$270 an ounce when the dollar index was at 119, and it has risen about US$100 since then, or 40 per cent. (Gold’s percentage move should be in the range of twice the rise of a diversified basket of currencies, because gold is the “pure” bet against the U.S. dollar, whereas those other currencies have their own individual characteristics—good and bad.)

That the greenback scaled such peaks at a time when the U.S. was bleeding more than a billion dollars a day on the trade deficit was a sign that the U.S. currency had acquired, like technology stocks, a special kind of cachet that seemed to make it immune to ordinary economic laws. All the

Most observers said all that was happening was a moderate correction. Those forecasts have been blown to smithereens.

handwringing in Brussels, Frankfurt, London and Ottawa about the weakness of their currencies against the dollar was from acute embarrassment. Why should the currencies of thrifty countries, boasting high savings rates and running trade surpluses, plunge compared with the currency of the country with the largest trade deficits in history and the lowest savings rates in the modern world?

The biggest reason for the dollar’s glitter was Nasdaq. People across the world fell for the hype from the Pied Pipers, shills and mountebanks, who proclaimed that U.S. technology companies had found the perpetual prosperity machines that would make Americans rich without the need to save. Foreigners sent their savings to the U.S. to buy these wondrous stocks, and to buy bonds denominated in the currency of the country that produced the magic. The dollar soared in its own form of mania.

Once Nasdaq crashed, it was only a matter of time before the dollar would break down, if not actually crash. By last year, according to Bridgewater Associates, the U.S. was tapping more than 70 per cent of all cross-border savings flows around the world to finance its current account deficit (trade and investment). The situation was clearly unsustainable.

Although world leaders kept tut-tutting about the U.S. current account deficit, telling Washington to get its house in order, they remained avid about selling their country’s products to U.S. consumers, the global buyers of first and last resort.

Now that the dollar is in a full-blown bear market, those same leaders are worried. The soaring euro threatens to slash European exports—which is the strongest component of the eurozone economy. The soaring yen is a disaster for Japan, where the nonexport economy has the dynamism of a Shinto ancestral shrine.

The technology excess was great for global economy activity as long as it lasted. The dollar excess was also great for global economic activity as long as it lasted. Sliding global stock markets and shrinking global economic numbers are telling us both those parties are over. The dollar bear has joined the tech bear to spoil our fun.

Nothing recedes like excess. I?il

Donald Coxe Is chairman of Harris Investment Management in Chicago and of Toronto-based Jones Heward Investments.