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Worst Economic Impact Still To Come, Fed's Fischer Warns As Dollar Soars To 12-Year Highs
The Trade-Weighted US Dollar has risen almost 19% over the past 18 months - the fastest pace of increase on record - and is now at its highest level since 2003. As we noted previously, this is not unequivocally good for American corporate profits... and if you believe The Fed's Stan Fischer - the worst effects of this soaring exchange rate are yet to come... Most of the impact of exchange rate moves come after that first year. So we’re only just getting into the business end of the impact of the dollar’s strength on the US economy. And the Fed are about to hike?
As BlondeMoney's Helen Thomas noted recently, take the recent speech from Stan Fischer on ‘The Transmission of Exchange Rate Changes to Output and Inflation‘.
For a 10% appreciation in the US dollar:
‘The staff’s model indicates that the direct effects on GDP through net exports are large, with GDP falling over 1-1/2 percent below baseline after three years. Moreover, the effects materialize quite gradually, with over half of the adverse effects on GDP occurring at a horizon of more than a year.’
Here’s the impact on net exports:
Doesn’t look good, does it? Most of the impact comes after that first year. So we’re only just getting into the business end of the impact of the dollar’s strength on the US economy. And the Fed are about to hike?
Check out his conclusion:
“To wrap up, while the dollar’s appreciation and foreign weakness have been a sizable shock, the U.S. economy appears to be weathering them reasonably well, notwithstanding their large effects on certain sectors of the economy heavily exposed to international trade. Monetary policy has played a key role in achieving these outcomes through deferring liftoff relative to what was expected a little over a year ago”
So his argument now is that they’ve been dovish enough because they have already postponed their first hike, even as now it’s just around the corner. This is insane monetary policy. They’ll tell you about the easing after it’s happened!!
* * *
So who gets hurt the most?
As Deutsche Bank details,
A stronger dollar, the reset in oil prices to significantly lower levels and slower global growth and investment spending vs. last cycle will challenge many of the S&P’s commodity and industrial capital goods producers for a long time. We’ve been under-weight Energy, Materials and Industrials since last year on these reasons and expect these sectors to underperform in 2015, 2016 and perhaps longer. Unless lower stock prices offer a more attractive entry point.
We remain concerned about the risk to EPS growth at many S&P industries with high foreign profits owing to FX translation from a stronger dollar. This includes most Technology, Industrials, Consumer Staples, and many Health Care and Consumer Discretionary stocks. Until we can observe how the dollar reacts to initial Fed hikes this remains a difficult risk to dismiss or quantify. At current FX rates, FX drags should stop in 2Q16. We see Industrials with most FX risk given its high foreign profits and then disadvantages vs. trade partners.
But CEOs are not ignoring this reality, as we noted previously, "It's not the economy... it's the dollar" - That would appear to be the message from the companies of the S&P 500 who have reported in Q3. As FactSet reports, 18 of the 23 companies reporting so far have cited "the strong dollar" as having a negative impact on earnings. Not record domestic inventories (liquidation beginning), the plunge in world trade, not the economic collapse in take your pick of Brazil (depression), China (credit endgame), India (exports/imports crash), and so on...
What is being missed here is that "The Dollar" is the symptom, not the cause of the problems. Capital is flowing for a reason to drive the USD stronger (or printed for a reason)... because the underlying economies are collapsing (yes and interest rate arb hopes).
So if ever there was a reason for The Fed to NOT raise rates, the pressure from Corporate CEOs (through their various lobbying or newsletter-writing alumni) must be immense...
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It appears, for now, financial engineering (buybacks) has kept the dream alive relative to the soaring USD vs Asian/EM countries (US growth opps); and "hopeful" projections have kept Forward estimates of earnings alive - even as The USD soars against the American companies' most favored growth nations...
But at some point it's inevitable - unless there is a seismic shift in Fed Policy (QE4?) - that the USD's strength vs Asian/EM nations will crush earnings... and estimates will be unable to rise with even the biggest hockey-stick forecast.
* * *
Remember. crises often start slowly... then erupt suddenly; and equity markets are always (without exception) the last to figure it out.
The credit cycle has well and truly rolled over...
Charts: Bloomberg
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Gooooolllly! Y'all mean the J curve effect is just about gonna start kicking in and the real pain has yet to surface?
Oh, the Humanity of It All
Now on a more serious note, since we don't export anything (except arms) that'll be all OK and everything from China will cost more which comprises of every non-food item that we consume .... just try to cut back on imports as the prices go up!!!!!
Long's they keep fillin' my EBT I be happy ....
Obvious is job for Curve-Bender-in-Chief to fix. Central Planner is issue edict, it is follow. How are you challenge edict of he who is so smarter?
You mean like when G William Miller, a lawyer of whom nobody had ever heard, was appointed Chairman of the BOG of the FRB? We called him G William the Who and figured he'd simply repeal the Law of Supply and Demand.
He fixed it too. In fact left the template for Fix it Again Timmah who did such a Great Job over at Treasury after Bazooka Hank.
Cheap jet fuel, a strong dollar, and war with Syria means...
There has never been a better time
for hard-working Americans
to take an affordable vacation
to exciting Paris!
I am glad ISIS does not charge by the pound!
Both ppl in the pic need a good fitting brazeer.
he needs a bro!
https://www.youtube.com/watch?v=wfONNfAjyrc
While we lived over there, we (US, "seasoned" ex-pats) were ever so pitifully embarassed by the YankeeDog Ugly American Touristas
LMAO.. hike? Bs....even if they do it'll be less than .005%
Don't Fuck the Fed, they are already fucked
USSA is used to export high quality ink on paper financial instrument, but is now only export 1 and 0.
That's disturbing, Boris.
True, but upon a moment's deep reflection, disturbing.
Boris -
1 is good.
0 is good too.
Ink on paper instrument is good too.
All are phoney baloney, subject to change with no warning.
Much better than original USA currency, the gold and silver coins.
Those had to be real.
Many holes in pockets, many boats sinking, many wheelbarrows damaged from weight carrying physical wealth around from place to place.
Much easier to carry 1 and 0 around, even easier for the Fed to make it go POOF !
All gone, bye bye, disappeared all of your wealth, too bad so sad.
More like casino.
Is no fun to play when there are no rules, though.
Maybe time for small guy to look at the boat and wheelbarrow style financial instrument again ?
Derivatives are USD based...As the oil and others are settled it creates a synthetic demand...That is driving the purchase of USDs - to settle derivatives...It is all as phony as everything else.
It won't end well either. There will be a chronic shortage of USD when this shift occurs and the selling begins. Warren Pollock covers this quite well with Greg Hunter.
https://www.youtube.com/watch?v=Zg-_fXDqUak
I honestly don't believe what we are seeing here with USD. I don't see anywAy it can continue. But since I (and ZeroHedge) haven't been right in 3 years. What the fuck do we know. May as well let them get USD $150 and Gold $300. Who cares any more. I know I don't.
King Dollar always in the cards as Federal Reserve pursued moronic "inflationary"* policies.
*QE/ZIRP/NIRP are disinflationary .... deflationary when asset bubbles burst (we're at onset)
Count me in the "I don't fucking care" camp too.
When someone dies of cancer it really isn't what kills them. The system gets so riddled with it that the immune system collapses. People in the last stage of cancer have died from sneezing.
Ah-ah-ah-ah-chooooooooo!
If I could ever buy $300 physical, I'd buy with every fiat I had and could borrow. It would either be there mother of all BTFD opportunities or the sign that the end had arrived.
It's not the dollar, it's the casino your betting in......
Global depression and global war will have to wait. We have a white privilage globull warming about to destroy us all
King Dollar putting a hurting on just about any S&P firms.
Walmart out with Q3 today:
"This includes ongoing headwinds from currency, which we now expect will impact earnings per share by $0.16, compared to $0.15 from last quarter's guidance. We continue to expect relatively flat total sales growth for the year. Without the currency impact, our full-year total net sales growth would be around 3 percent."
http://s2.q4cdn.com/056532643/files/doc_financials/2016/Q3/Press-Release...
So if the dollar is strong it is is bad for most of the largest companies in the USA, but those are the companies that have risen the most and remain above their 200 dma. And are rising today with the dollar gaining??? I need a drink.
Hold tight. Gartman is long the market, so it should tank by the end of the day.
What is the point when Dollar strength becomes SPX weakness? Not yesterday, Not today, not the past year
and, right out of the mouth of israels' Central Bank', adjacent to Rothschilds Blvd. !
The euro needs to go to parity with the $usd, so all the new European sharecroppers can farm the entitlements.
The stronger dollar only impacts US companies that report their profits overseas a la Walmart. Almost everything else about their operations will benefit except for any local workers' salaries and those rare products that are actually manufactured in the US.
You need to rethink your position.
Feel free to prove me wrong by finding one - only ONE - S&P firm that benefits (overall) from King Dollar.
Apple? Most of their employees are overseas and their products and materials they source are made overseas. What hurts them is the cash they keep overseas and the taxes that they pay in USD. USD has been rising for a whle now while their profits keep growing.
Strong dollar only helps Apple's in an asset sense. Not in a profit/revenue sense.
Let me break it down for you:
1. 3M makes about 80% of the polymers in an Apple phone. 3M might make these polymers overseas in Chinca. To do business in China you need a Chinese sister company. This sister company will give you your profits in dollar converted from Yuan (not the other way around).
2. Lets say 50% of 3M's overhead is in the US. That just got a lot more expensive due to the rise in dollar. Now their margins are getting squeezed.
3. Corporate says "Hey Apple, we need to maintain our margin of 10%, and our overhead just got a lot worse (main driver). We are going to have to increase the cost of polymers A, B, and C to X"
That would be a typical scenario. Also, remember that Apple's overhead is also getting a lot more expensive, their foriegn sales are also going way down in terms of the dollar, and they cant squeeze anything more out of China, since they just devalued their currency.
The only boon for Apple is that their $600 billion in cash is now worth more but only overseas. And seeing as they are already pretty enabled in China and Taiwan, I dont think they care to invest more outside the US. So the cash on hand essentially stays the same.
My main point is that, though you may think that a strong dollar would help Apple, because they 'buy' product from China, you have to realize that the main driver in manufacturing is overhead, which in this case is in dollars because they are a US company. And since the overhead is increasing across the board, its very likely that other companies will push to maintain their margins, especially if those margins are already razor thin (which they are). Not to say Apple couldnt strongarm 3M and FoxCon, but its highly unlikely that Apple really likes the stronger dollar, because it also means its harder for foreign investors to invest in Apple (which is the end all be all for these companies).
EDIT: You can also think about it in a macro sense. Oil price fixed in dollar, dollar more expensive, oil more expensive, manufacturing more expensive, overhead more expensive, profit margins decrease, overall profit decreases. The caveat here being that oil is at all time lows, but that's more due to a drop in demand, which once again, would hurt Apple overall (shipping more expensive in relation to part sold).
Thanks for the detailed response inhibi. My point about US companies complaining about the strength of the USD is that they are being disingenuous. They aren't actual US companies because they report their overseas profits offshore in Ireland where they pay 2% taxes. The money they store overseas is losing value because of the strong dollar and it's forcing them to buy USTs to hedge. If they repatriated the money they would have to pay ten times their current tax rate but they have no intention of ever doing that.
The stronger dollar is also hurting their chinese manufacturing because the yuan is pegged to the USD which in turn makes their profits lower in europe. Essentially their arguments against a strong dollar boil down to the fact that they don't like free markets.
Looks good, looks like we are getting 1000usd/oz this week :D some small bar will make nice christmas present. And it is not even christmas yet!
No Problemo. Uncle Sam's ONLY EXPORT is DEMOCRACY
... and Freedom ... don't forget the freedom too ....
Gold and silver getting hammerd to shit because the terrorists lost.
Oh. I thought they were winning. Is it mission accomplished already ??
Ask Gartman, hedge accordingly.
No rate hikes will happen for some time. Only when the dollar gets to about 73 will they rise rates.
breaking news on cnbc:: mr yellen, says:" no audit of the fed, it would hurt the ave american and cause fall of dollar...."
she makes these direct threats to congress..i am sure ZH will have a thread up soon.
big balls, yellin again... as a cock crows
" Change you can beleive in! "
Euro new low, SPX at th high of the day
And gold is getting buttforked! Dec contract at 1067-1068. But its all good. The mother-of-all-rallies will just begin much lower
allowing for greater gain potential. I guess the only question is: when? 2017 or 2027?
What are the chances of a single 15-20% devaluation of the USD against the SDR?
The rest of the world must be scratching its head. The US has shown that they can print as much money as they can and the value of that money will rise, defying logic as we have never seen.
When does that end? For it cannot last.
I am amazed that anybody gives these morons credence for their writings. deutche bank is worried? they should have been out of business long ago. Of Course they are worried.Wall Streets free ride is ending. How about reading the graph of foreign earnings like this> S&P sales abroad, 30% = 70% from home sales. S&P profits from abroad 40% = 60% from US sales. So let me get this. Fuck the homefront which benefits from lower prices, which makes the average earnings that has been stagnate for decades stretch farther and worry about the Crooks that have been robbing us now for 8 years and the Bankers and CEOs that fabricate earnings based on more cheap debt so that they can reap windfall profits and bonuses, while retirees and savers get bung holed? Fuck those guys. Its time the Fed let the market trade on its fundemantals, worry about consumers that have been aviscerated by their policies and go back to their cave where they belong.
Had to downvote you for that one.
The people that produce these writings are not the same ones whom make the decision about how the company, or the larger economy, operates.
The are simply economists whom have taken the role of producing reports.
So ya think someone will start making shit here?
Nobody in their right mind would start a new business in the USSA today.
And sure enough, for the first time ever, more businesses are closing their doors than new businesses are opening doors.
Also, almost everyone falls for the central-bankster and mainstream media lie that "low currency price is good for economy". While that may be true for regions that produce and export more than they import... the opposite is true for regions that import and consume more than they export. Which means, on balance, the USSA benefits more from high dollar than the suffer. You won't hear that from mainstream media though, because they only parrot lies from the predators-that-be.
Quite right. The big multinational corporations that have a large part of their earnings in local currencies are making their voices heard in the discussion about the strength of the dollar. Drowned out are the voices of importers who are able to take advantage of cheap import prices to widen their margins. The increase in inventories over all has been evidence of this. The economies of countries that export to the US have been benefitted as well by the stronger dollar. But, underneath it all is the worsening trade balance of the US.