There’s a lot of cash sloshing around in the global economy, and a fair chunk of it’s coming to America. That’s hardly news, of course. Indeed, it’s getting easier to take all the liquidity for granted. And why not? For all we know, the river of cash may keep flowing indefinitely to these United States.
Relying on the kindness of foreigners has been no trivial trend in finance in recent years. But how long will the kindness last? Indeed, self-interest is no stranger to governments and corporations overseeing large pots of money. If that benefits America, so be it. But if not, fair weather friends are the rule.
With that in mind, the trend of late in generating cash comes from oil exporting governments. Oil exports from the ten leading Middle East exporters, for example, will more than double this year to $450 billion from $200 billion in 2003, yesterday wrote Mohsin Khan, director of the Middle East and Central Asia Department at the IMF, in Dar Al-Hayat, a Beirut news site. Next year, the ten exporters will pull in even more, perhaps $500 billion, he added.
That’s a lot of money, even by the global economy’s standards. Indeed, this year’s $450 billion of oil-exporting revenues for the Middle East ten dwarfs $188 billion that the Economist recently reported is expected as the current-account surplus for China and other emerging-market nations in Asia.
Arguably, a lot of the petrodollars are returning to the United States and rolling into Treasuries. “While it is difficult to determine how these funds are invested,” Khan opined, ” we can say that a large share has been likely invested in U.S. dollar financial assets.” Some say such purchases go a long way in explaining why long yields are lower than some they arguably should be. Indeed, the benchmark 10-year Treasury yield of 4.42% has essentially remained unchanged since the Federal Reserve began raising interest rates in June 2004.
So, what’s the problem? Oil exporters seem to be helping keep U.S. interest rates low. Stop complaining, and go borrow some money, right? More than a few consumers have done just that. And optimism is infectious.
Ed Yardeni, chief investment strategist at Oak Associates, this morning wrote in a report to clients that the stock market is coming around to the belief that inflation’s not a problem after all, and so the Fed’s cycle of tightening may soon end. In fact, the rally in the equity market of late (the S&P 500 is up 4.5% this month through yesterday) is, to quote Yardeni, broadening. Yesterday’s jump in stock prices “left almost no industry behind,” he noted.
Indeed, nine out of ten sectors that comprise the S&P 500 show gains so far this month, ranging from a 1.5% climb in consumer staples up to 7% for materials. The only slacker in November has been utilities, a sector that shed 0.8%.
Meanwhile, the bullish aura has spread to the dollar as well. The U.S. Dollar Index has confounded the bears in recent months and climbed 6% since September 2.
What worries some, however, is the fact that the price of gold has been rising too. The precious metal’s up 11% since September 2. Gold and the dollar historically have moved in opposite directions, and so the fact that they’re both moving in tandem has spawned talk about what it means.
David Gitlitz, chief economist at TrendMacrolytics, advised in a note to clients yesterday that the bull market in gold “stands as a stark reminder that any talk of the Fed nearing the terminus of its policy normalization program remains premature.” In other words, interest rates are going higher still because inflation hasn’t yet been quashed as a threat. “We continue to expect Alan Greenspan to leave office on January 31 having put the funds rate at 4.5% [from the current 4.0%], and see Bernanke as more likely than not to push through rate hikes at two of his first three meetings, leaving the rate target at 5% at mid year,” Gitlitz predicts.
Alan Kohler of the Eureka Report worries that the twin dollar/gold rally can’t last, and that the dollar’s headed for a correction. “The US dollar is rising at present — along with gold — because of a short-term arbitrage on cash rates as the Fed continues to push them towards 4.5%,” he wrote today via Australia’s The Age. Simply put, American short rates are among the highest in the world, which is attracting capital, and thereby pushing up the dollar.
But foreigners, including the oil exporters, are buying gold as well, Kohler advised. Therein lie the seeds of a future dollar tumble. “The Arabs are less inclined to finance American consumers than are the Chinese and are more worried, as investors, about the sustainability of the U.S. current account deficit,” Kohler continued. All of which convinces him that “American financial assets will have to be repriced eventually, either directly or through a devaluation of the currency, or both.”
But for the moment, petrodollars are working to America’s advantage. And on the eve of the Thanksgiving holiday in the U.S., investors aren’t about to squawk.