Recession will be in USA during this year? Sell USD and buy ... JPY???

[vlad76]

Preliminary 2 q. GBP growth rates will be published soon. So I decide to publish some considerations and perhaps to learned considerations other people taking an active interest in macroeconomics.
Now signs of substantial economic growth slowing down at the minimum or deep recession at the maximum become more evident during current year. Seasonally adjusted at annual rates data prove substantial slowing down gross private domestic investment and GDP from the end of 2006. Moreover seasonally adjusted gross private domestic investment decreased in 1q 2007. Real seasonally adjusted gross private domestic investment decreased during 3 quarters (look on pic001). You can see on this picture that gross private domestic investment growth rates is often leading indicator of GDP growth rates in USA economy. Consumption growth is only support GDP growth now. But consumption growth is negatively affected by row materials price growth, real estate market weakness, slowing labour market growth rates and (???) possible stock market collapse. Indeed stock market collapse is only important detail which is still absent for affirmative answer on the title question. Very likely we get it within current or next month.
My prime interest is two questions. First – why has stock market still not slowing? Second - How possible recession will affect dollar to other majors?
My answer to first question – 1. Expectations of interest rate cuts by FED 2. (more important on my opinion) pure speculative game aimed at short position liquidation. Consequently we can expect the sharp turn of the stock market trend (like 2000).
My answer to second question – original reaction (beginning we can see now) will be sharp dollar downtrend during 3-4 months because of substantial foreign (mainly asian) capital outflow. Accordingly dollar drop may be more considerable against asian currencies. But then…
Recession may be the only way to reduce consumption, import and current account deficit. This was way of Mexico 1995, ASIAN 1997, Russia and Brasil 1998-99, and now – USA. Certainly USA almost exclusively prints world reserve money but now FED doesn’t have any “space for cabal”. Bank of Korea was in such situation in 1997 (closer example – won was floated and already devalued to 1997). I suppose FED policemakers understand current macroeconomic situation not worse then Greenspan who said “R” in february. But what they can do? Cut interest rate and cause alarm? In this case they may get unpredictable consequences for dollar (its world reserve money status may be in danger), for raw materials markets (which may rocket in the sky together with inflation expectations) and as a result for inflation rate. It’s FED policemakers who will be obliged to resolve these problems very soon. But much more rate increase will be required (maybe more then in beginning of 1980s), more sharp recession, banking crisis and world debt crisis may happen. So FED policemakers have to put a good face on things and to be in “semi-position”. It’s because of FED can’t risk full-fledged to save dollar and to squeeze raw materials markets and inflation under high recession probability. Volker was able to do it in the beginning 1980s because he was just appointed. FED has narrow track to make decisions. My subjective opinion – dollar rescue and inflation squeezing is more important goals strategically. This is especially true if FED can’t prevent recession any way – under current circumstances it can’t go same way as in 2001. This “semi-position” is most likely choice of FED. It will begin cutting process after recession became the fact, but this process will be more moderate then in 2001. This policy mean that FED has already humbled with recession and new dollar drop. They give up everything to market forces. It is market that have to reduce GDP and consumption, to drop dollar even deeper, correct (at least temporary) row materials prices, liquidate current account deficit, and thus to make conditions for dollar stability and economic growth. Let’s see if FED policemakers expectation realize.
If my estimates are correct we will see new dollar lows (1.44 and lower), sharp trend change on stocks and carry decline. Asian currencies will be best performers.

[Morpheus]

how low can the USD go? What if USD hits 60 ? What will happen ?

[vlad76]

USD is devalued aganst european currencies, but USA have large trade deficit with asian. Either USD have to devalued to JPY or hardest recession will need to reduce USA trade deficit. Chinese government have to understand that their policy is dead end for the all. Japanese will be intervene to protect JPY/Yuan from growth.

[vlad76]

Well, game is going to most interesting period – stocks crash and global economy recession. Bush court circle in position of FED helped their Wall Street Sponsors to sell in Dow14000. Rates cuts against the background 4% y/y growth and 100 oil price are unexampled in Post Brettonwood history. This is foolish in respect to USA economy help. Import oil expenses and inflation expectations exceed rate cuts effect considerably. Now inflation rates peak is in advance and FED will be forced to raise rates next year. It will make me laugh to see rates rise before president elections. I’m not surprised by such corruption level in Russia but Bush clan made USA the same corruption country. The only Bush interest is strong oil market. All the oil oligarchs around the world applaud to Bush. In Russia Putins rating is fantastic because propaganda arrogate to him economic miracle. But I propose to elect Bush as a Russian and USA president simultaneously. He made for Russian oligarchs more than all the Russian presidents together.
Evidently GBP/USD and maybe EUR/USD growth is over. The best strategy is to sell stocks and GBP/JPY.

[vlad76]

It’s utterly stupid to accept PPI as a real inflation measure. FED trick focusing market attention just on PPI. What about it is 2 y/y? The divergence between PPI and CPI reach largest level just in stagflation periods, namely the second takes the lead over the first. USA import inflation through dollar drop and growth of prices on imported metals, oil products, food and so on. And then these costs lead to growth of wages and American producers prices. The large divergence between import prices (raw materials prices) and PPI is just sign of USA producers profitability problem. And FED makes this problem even bigger and bigger by creating more and more prerequisites for dollar collapse. That is self-evident, that is axiomatic. I repeat another time – FED under Bush is not independent institute and can’t make it’s job properly. Focus on PPI is another trick to “justify” unjustified rate cut. Real inflation is much more then Bernenk want to illustrate.
But most interesting events occur in EUR/USD and oil markets. I surmise that both is object of interventions, I think namely ECB interventions. It is grateful to consider that there are sensible forces in the financial markets still. The battle for 1.5 and 100 go on. I wish interventionists victory but it’s hardest moments is ahead….

[scalper]

I do not think there will be recession this year. The media blew the housing crisis out of all proportions. Sure, there are serious problems, but residential construction accounts for less than 4.5% of GDP. Commercial construction on the roll and makes up for the housing weakness. The credit and liquidity remain plentiful, the US corporate bond defaults are at the record lows.

Over 98% of the mortgages are current. The housing price bubble was bound to burst sooner or later. What did you expect when in some places on the west and east coast the house prices kept doubling every year? Some hot real estate apreciated 150%-300% over the past 5-6 years. What's the big deal that these overpriced properties lost 30%-50% of its 150%-300% gains?!

And last but not least. This is the election year. The only time a recession happaned during the election year was in the 1950s. Historically, recession and presidential election do not mix.

[scalper]

"Recession will be in USA during this year? Sell USD and buy ... JPY???" These are not mutually inclusive events. Simply bettng on the yen if the dollar tumbles is not wise. The first thing to consider is high oil prices. If the dollar falls even more, the oil will go up even higher. Remeber that Japan imports close to 98% of the oil it consumes. So if the dollar falls, the yen may drop too because the higher oil prices will choke off Japanese economy. Another important factor to think about is unexpected BOJ interventions in the currency market. These intervention can significantly mess up any correlation between greenbuck and the yen.

[bigbull]

Betting on a dollar fall already in a recession is not the best way to hedge any sort of positoion or make money for that matter.

The dollar is usually a reliable indicator as to what the economy will do. This is metric is of course drawn with other parallels(variables), where one can juxtapose fair future economic data.

Given that we are already in a recession, the dollar has bottomed and it is forming a base because we are already in a recession. This doesnt mean that dollar will not have its downsiwngs from time to time but the general trend to the downside has ceased, especially when the FED is ready to raise rates late this year.

[techno791]

Originally Posted by scalper

I do not think there will be recession this year. The media blew the housing crisis out of all proportions. Sure, there are serious problems, but residential construction accounts for less than 4.5% of GDP. Commercial construction on the roll and makes up for the housing weakness. The credit and liquidity remain plentiful, the US corporate bond defaults are at the record lows.

Over 98% of the mortgages are current. The housing price bubble was bound to burst sooner or later. What did you expect when in some places on the west and east coast the house prices kept doubling every year? Some hot real estate apreciated 150%-300% over the past 5-6 years. What's the big deal that these overpriced properties lost 30%-50% of its 150%-300% gains?!

And last but not least. This is the election year. The only time a recession happaned during the election year was in the 1950s. Historically, recession and presidential election do not mix.

fer real.

This thread was made during the height of the carry-trade when everyone shorted the Yen and longed the Oceania currencies just like they do oil now.

[scalper]

Originally Posted by techno791

fer real.

This thread was made during the height of the carry-trade when everyone shorted the Yen and longed the Oceania currencies just like they do oil now.

You are right, every time there is a serious unwinding of carry positions, the doom and gloom articles start popping up everywhere like mushrooms after rain.

P.S. I've been doing carry trading for almost two years now. GBPJPY went as low as 193. Who would have thought it could do that when it was at 259? Well, it is back to 211-213 area now because interest positive currency always wins. Great Britan still fights to contain inflation and Japan still struggles with high oil prices. So carry trading is still sound investment strategy.