Pundits of the double-dip recession theory cite the now globally anticipated fallout of the U.S. dollar as a key source. The fed is printing money like confetti, they say. The U.S. Treasury bill bubble is soon to pop, they add. The newly coined (U.S. dollar-carry trade) (it used to be the yen-carry trade) is driving commodities through the roof, they squeal. The concerns are many. For example, rampant increases in U.S. money supply will eventually drive up U.S. prices, putting further downward pressure on U.S. dollars. And should the Greenback settle at some point, all those dollar carry-trades are going to collapse. Wait a minute, what's a dollar-carry trade again? Allow me: that's when traders borrow dollars at almost zero percent interest and pile into the commodities and equity markets to reap windfall returns. The double-edged part of the dollar-carry trade is also doubly sharp. Any investments that are riding on leverage have leveraged returns and leveraged losses. The tide can turn very quickly. In the dollar-carry trade case, profits can be made as long as the dollar being shorted keeps falling and the higher return investment keeps appreciating. But how high can gold go: $1,300, $1,500, $2,300 per ounce? At some point the see-saw is going to hit the tire and both gold and equity prices are going to fall. In the words of the now famous Nouriel Roubini, or (Dr. Doom), (Everyone will rush to the door at the same time.) Those long equity and commodity positions will have to be sold. And there will be a pullback in the U.S. dollar. But not enough of a pullback to return capital from those foreign central banks, like Russia and China, that have divested U.S. dollars and purchased Loonies or Australian dollars.
Underlying the double dip theory is the notion that the return to life in equities is not due to any renewed corporate performances south of the border. U.S. consumption is not expected to rise anytime soon. The gargantuan U.S. government deficit is crowding out private sector investment. U.S. savings are going the way of the CD (that's compact disc not certificate of deposit). The U.S. real GDP growth of 3.5% in the third quarter of 2009 was not driven by industrial growth, but by the cash for clunkers program and that small portion of the cash stimulus that trickled down from the lofty heights of Wall Street to increase the velocity of money. Rises in both equities and commodities are false starts, fuelled by investor sentiment. No, a global restructuring of financial markets should assure that the U.S. dollar stays low, and we know what that says about the Looney.
And then there is the price of oil. Added upward pressure on the Looney could come from global non-OECD, 2010 oil demand. According to the Energy Information Administration (EIA), 2010 oil consumption is projected to grow by 1.26 million barrels per day. Granted this forecast assumes that real U.S. 2010 GDP grows by 1.9%, it's still primarily driven by sustained demand for crude in China and other Asian countries. That's a 26% increase in the average 2010 price per barrel from the expected 2009 average price per barrel, and 78% of the 2008 average price. In the aftermath of last year's financial crisis, global currencies are repositioning. In the long-run, if our central bank doesn't flood the international currency market with Canadian dollars or peg the Canadian dollar to the U.S. dollar, we may have to get used to the soaring Looney. Some say expect parity by the end of the year and expect it to stay.
Economists, bankers and analysts, nation wide, are concerned that a strong Canadian dollar will hurt our economic recovery into 2010 and 2011. But if this is the case, why has a strong dollar been the mainstay of the American economy for the last decade? Why is Ben Bernanke, Chairman of the U.S. Federal Reserve, rolling out a (strong dollar) policy? If the American's want a strong dollar, why don't we? One answer is that an American recovery depends on sales of U.S. bonds and Treasury bills. The American economy survives off its ability to borrow. A strong dollar means more countries will lend them money. Another answer is that Canada too can prosper off a strong dollar. Here's how. The Canadian economy is a trade economy. According to Stats Canada, in 2008 exports equalled 40% of real GDP, but many economist fail to point out that imports equalled 37% of GDP. Further 63% of imports were American. A strong Canadian dollar means American imports will be cheaper. Cheaper imports mean more money to spend or save. Consumption could go up and the private sector borrowing could be cheaper. Retail and merchandising numbers could improve and unemployment could fall. A strong Canadian dollar could boost real GDP. Also, acquisitions will be cheaper for Canadians. If the double dip theorists are proven right and the bottom falls out of the markets again, Canadians will be able to buy up undervalued American companies at exchange rate driven discounts (tip: purchase U.S. equities with higher foreign subsidy income percentages). The point is a strong Canadian dollar could be good for Canadians, if only we can think like the Americans did for the last 10 years, importing cheap goods and purchasing foreign assets with the proceeds. Given that a strong Looney might make up a consistent part of Canada's economic future, Canadian investors may want to remember: there are two sides to every coin.