A Weaker Dollar in 2006

2005 has been a surprisingly good year for the US dollar, overall the dollar has strengthened against other major currencies during 2005, but I believe the dollar faces some serious head winds going into 2006.

The prime concern (as always) about the dollar is the trade deficit. We just got new numbers this morning, and they reaffirm a gloomy outlook for 2006.

According the the WSJ: " U.S. trade deficit broke yet another record in October, widening beyond expectations by 4.4% to $68.89 billion, as rising purchases of foreign oil, natural gas and other goods from overseas offset increased exports. That compares with September's revised $66 billion deficit, and the consensus expectation of economists for a $63 billion deficit."

For 2005 the current account deficit is rapidly approaching $800 billion.

The other side of the coin is the capital account, which along with the change in forex reserves, must balance the trade deficit. Once again this year the US has attracted a lot of foreign capital. Unfortunately, the US is now the third most popular destination for foreign direct investment. The US has trailed China for the past couple of years, now it is estimated that the US also trails India.

Noureil Roubini also points out that the capital account received an unexpected boost in 2005.

"Third, the effects of the Homeland Investment Act (HIA) that has led to the return to the US of almost $200b of US profits that were kept abroad for tax reasons.... The dollar boosting effects of the HIA will disappear as this profit-capital returning factor will be phased out by the expiration of this tax incentive."

A $200 billion reduction in the capital account plus a growing current account deficit seems to set the stage for a weaker dollar one year from now.

A weaker dollar means your dollars can buy less due to higher prices for things priced in dollars, like oil, gold, steel, Toyotas, Hondas.

Timothy Burger
timothyb(at)timothyburger.com

Vicious Price Competition in the Water Market

Winning the award for business writing gone mad this week is BusinessWeek. Dean Foust's generally decent article about Coke's recent troubles contains this gem:

"But ultimately, the advertising is only as good as the product, and on that front, Coke's new offerings look to have just as many misses as hits. Coke will unveil a premium-priced version of its Dasani water, with flavors and bubbles, and it will probably be a hit. That's good, because given the vicious price competition in the water category, Coke needs to keep innovating on this front.""

Yeah, Coke needs to innovate on the water front.

Not to be outdone, Coke will actually introduce:

"In addition to Coke Blak and Coke Zero, in January you'll also see Diet Black Cherry Vanilla Coke and Black Cherry Vanilla Coke. "

What that will taste like, I can't tell you.

Timothy Burger
timothyb(at)timothyburger.com

Weakening Consumer Spending in 2006

Bill Bonner produces a daily newsletter caled the Daily Reconing. Bill also has a new book out called Empire of Debt. Today Bill comments on consumer's "plastic savings net"

"Wage rates are getting globalized - good and hard. This makes some
businesses more profitable; they have been able to take advantage of lower
earnings in Asia. But it leaves homegrown labor struggling to make ends
meet. The only way they've been able to put the two ends of the budget
together has been with debt. It is a "plastic safety net" for America's
middle and lower classes, say economists. When they reach in their pockets
and find no coin or paper, they pull out plastic. Average credit card debt
has grown to $8,650 per family, say recent surveys.

Four things have enabled this growth in consumer debt: Asian lenders, the
Fed's low rates, imaginative debt mongers, and the housing bubble. None of
these things are guaranteed by the Constitution. But they allowed
consumers to pull $160 billion out of their houses this year alone,
according to Merrill Lynch. Without that easy lucre, the ready credit, the
I.O. and Neg Am mortgages, many people would be in bigger trouble than
they are now.

"Although the economy has been better than expected," write James Welsh,
"the stage is set for a consumer letdown in the first half of 2006.
Consumers are facing increases in adjustable-rate mortgage payments,
higher minimum credit-card payments, elevated costs to heat their homes
especially in the Northeast, less home-equity extraction, and lower rates
of home appreciation."

In other words, it is about to hurt. That is the problem with the plastic
safety net. It only works if you bounce back quickly. The more you jump on
it, the less elastic it becomes, the deeper you sink, and the harder it is
to climb out, because each time, you carry a heavier burden on your back."

Timothy Burger
timothyb(at)timothyburger.com