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Goldilocks May Be Good for the Dollar
Wednesday, November 15, 2006
Vol. 8 No. 227 |
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In Today's Letter:
Comment: Goldilocks May Work for the Dollar
Offshore: Singapore Guards Privacy
Wealth: Democrats Have Congress - Now What?
Privacy: IRS Wants to Tax Invisible Money
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Goldilocks May Be Good for the Dollar...
Today's comment is by Jack Crooks, our Currency Director and Editor of both The Money Trader and Crooks on Currencies.
Dear A-Letter Reader:
We've heard it again and again that the U.S. consumer will be killed by the fall in the housing market.
Economists tell us that housing has a major "wealth effect" on the consumer. The U.S. consumer used his house as an ATM to extract cash, in the form of home equity loans. Now that prices of houses are falling, he won't have money to spend. We've been told what he does have to spend will go toward his towering debt burden.
Well, realty and economic forecasts are proving once again to be two separate things. But we consumers are confounding the experts-again. Right now we're seeing the U.S. dollar well supported against the other major currencies.
This week we learned two important things that are very good for the consumer and economy: 1) inflation is falling, and 2) the amount of spending on energy is falling. Here's why that's important:
Falling inflation means that your income will purchase more goods i.e. it increases purchasing power. (P.S. we have never had a recession when the growth in real disposable income was growing, as it is now.)
Second, lower energy prices increase consumer discretionary spending ability. This means if we pay less to heat and cool our homes and drive our cars, we have more money available to spend.
Guess who hasn't been worrying about consumer spending? If you said the U.S. stock market you'd be right.
Stocks have been on a tear over the last four months while economists were worrying. The Dow Jones Industrials, which is a 30-stock benchmark of America's mega-cap companies spanning across many industry sectors, is now at an all-time high. Stocks are supported by corporate profits. And corporate profits are being helped by falling materials costs (commodities and energy) and consumer spending. Stocks are telling us the U.S. economy is just fine, no matter what the economists are saying.
I find it interesting that the same economists who expound on the negative "wealth effect" of falling housing prices never seem to comment on the positive "wealth effect" of rising stock prices. Granted, not everyone is being helped by a higher stock market, but higher stock prices support consumer confidence and help to counter the negative impact of lower housing prices.
The point is the U.S. economy looks a lot better beneath the surface once you dig into the meat. And if we consumers are in good shape and inflation is under control, we have to tip our hats to the Fed. They may have hiked rates high enough to counter inflation pressures, yet not quite high enough to kill off the consumer.
That's a Goldilocks scenario that might scare away a lot of dollar bears.
JACK CROOKS, Currency Director
On behalf of The Sovereign Society
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Singapore Defends Financial Secrecy
As we have noted before, Singapore recently has revised its banking and financial laws to the point where it can rightfully lay claim to the title of "Switzerland of Asia." Singapore now has strict banking secrecy much like that of Switzerland.
Now comes confirmation of this financial privacy from Singapore's elder statesman, Lee Kuan Yew. Lee has defended the secrecy of the government's powerful investment agencies (GIC and Temasek) in spite of demands from outsiders that the government reveal their assets and inner workings. Temasek and GIC are estimated to control more than US$200bn (€157bn, £105bn) in assets, making these agencies some of the biggest investors in Asia.
"This system exists on the basis of integrity. Starting from the top right through, there are checks and balances - not from the media, but as part of the system," said Mr. Lee, who, together with his son, Lee Hsien Loong, prime minister, heads the GIC board. Ho Ching, Temasek chief executive, is the prime minister's wife. "We took this country from zero to here, and we're not out to bring it back to zero."
"So I say, please put your mind at ease - Singaporeans do not worry, you need not worry for them." And the same strict privacy rules apply to foreigners who hold bank accounts or do business in Singapore. Small wonder that hundreds of millions of dollars in new investments and bank accounts are flooding into Singapore.
BOB BAUMAN, Editor
LINK: http://www.ft.com/cms/s/fa1fc3f2-6d26-11db-9a4d-0000779e2340.html
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A Democrat Congress - Now What?
Will last week's Congressional elections change the course of my investment strategy?
Historically, a divided Congress or one that's stuck in gridlock has been pretty good for stocks. Investors embrace continuity and that's pretty much the case now. I don't expect much to change. If anything, a government that's influenced more by the Democrats is even better for the markets.
Stocks, contrary to popular wisdom, actually perform better under the Democrats because they have a tendency to spend more than the GOP. But since 2001, the Republicans have spent like mad. In fact, this government has spent more during the last five years than all previous administrations over the last decade.
Government-induced fiscal stimulus is very good for stocks and hard assets, including real estate, because the money-supply expands. That's been the case since 2002 when tax cuts went into place and of course, the S&P 500 Index has surged 80%.
But now, with Democrats bent on cutting back spending, bonds should do well, too. I continue to like Treasury bonds over the next 13 months and view any correction as a strong buying opportunity, especially if bond yields ratchet above 4.9% on the 10-year T-bond. Stocks are not cheap today but with interest rates still very low and coming down over the next six to eight months as the Fed cuts rates, equities look attractive. Combined with inflation, which has already peaked for this cycle, stocks, bonds and commodities look good for 2007.
ERIC ROSEMAN, Investment Director
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The IRS Wants to Tax Money That's Not Really There
Who says Congress doesn't have a sense of humor?
Yes, those fun-loving guys and gals at the "U.S. Joint Economic Committee" are investigating the possibility of taxing "virtual money."
What exactly is "virtual money?" It turns out, that under the very nose of the Joint Economic Committee, there has been an explosive growth in the Internet. Wow! What a revelation! And with it, there's been a dramatic increase in the popularity of online gaming and "virtual economies" where financial transactions take place within an online community.
Now, if you don't spend hours online each week fighting off an Arctic Ogre Lord and hours more wading through the Tax Code, you probably haven't thought much about whether Uncle Sam will someday tax your virtual winnings from Internet gaming.
But, you'll be pleased to know that the U.S. Joint Economic Committee has done just that. And they've come up with the common-sense recommendation that the IRS not impose "premature" taxes on virtual economies.
The IRS doesn't necessarily agree, although to be fair, they're not entirely familiar with the concept. Their thinking goes something like this: "Goods taken in trade or won at play are taxable the moment they fall into somebody's hands, even if they are not sold for money."
We'll see how all this pans out. In the meantime, here's something to ponder: we're all using a form of "virtual money" every day, because U.S. dollars are created out of thin air by borrowing them into existence through the Federal Reserve. They're no longer backed by gold, silver, or anything other than the "American dream." But, unfortunately, the IRS does insist on taxing us when we accumulate them.
MARK NESTMANN, Privacy Expert & President of The Nestmann Group
www.nestmann.com
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Special Note: In yesterday’s A-Letter, we printed Jack Flader works with Zetland Financial Group Ltd. He is no longer with that company. Jack Flader is now the head of Global Consultants & Services Ltd. in Hong Kong. You can reach him via email at jack@gcsl.info.
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