The Stock/Investment Thread

[wiggin]

The main thing that impacts short-term prices is that US-listed companies with significant international business report their earnings in US dollars. And they park those earnings outside of the US.

So when a company like GE grows its international business, parks the money in Ireland and and the dollar loses value relative to the Euro, the dollar-denominated earnings increase.

I understand that, Dread, but oddly enough increasing the fed funds rate does not necessarily the trade-weighted value of the dollar will rise. I know that's counter to traditional economics theory and I don't doubt that the long-run effect is to make the dollar more valuable. But in the short term, an increasing rate might do the exact opposite. For one, tighter monetary policy might signal a perceived improvement in the global economy, which might cause people to dump dollars to reverse the previous 'flight to safety'. For another, it might be perceived as a warning sign on inflation, which could also cause people to dump dollars. (Alternatively, markets might welcome the news as a sign of a proactive fed and downwardly revise inflation expectations.) Then there's the effect of dollar-buying strategies by exporting countries being unwound as the spread between their interest rates and the fed funds rate starts to shrink, taking pressure off their exporters.

The point is that the dollar's role as a reserve currency makes its exchange rate far more complex than a simple 'looser monetary policy increases the money supply' and vice versa.

Not tightening also hurts the economy, (since incomes barely go up with a loose monetary policy and high unemployment) by increasing the dollar price of oil. It is based a lot on perception, and everyone atm perceives the dollar to be a sinking ship. The Fed needs to promote stability if it wants US economic growth, which means stopping wild currency swings.... not a good record there though...

Are you serious? You think a loose monetary policy hurts the economy compared to a tight monetary policy? Obviously high oil prices are bad for an economy, but premature tightening is a far worse idea.

I think you exaggerate how much people are worried the dollar is a 'sinking ship'. Inflation expectations are rock-solid, and while it's likely the trade-weighted value of the dollar is likely to drop quite a bit, that's because of a long-overdue rebalancing in global trade flows and not some runaway devaluing of the currency.

[Dreadnaught]

I understand that, Dread, but oddly enough increasing the fed funds rate does not necessarily the trade-weighted value of the dollar will rise. I know that's counter to traditional economics theory and I don't doubt that the long-run effect is to make the dollar more valuable. But in the short term, an increasing rate might do the exact opposite. For one, tighter monetary policy might signal a perceived improvement in the global economy, which might cause people to dump dollars to reverse the previous 'flight to safety'. For another, it might be perceived as a warning sign on inflation, which could also cause people to dump dollars. (Alternatively, markets might welcome the news as a sign of a proactive fed and downwardly revise inflation expectations.) Then there's the effect of dollar-buying strategies by exporting countries being unwound as the spread between their interest rates and the fed funds rate starts to shrink, taking pressure off their exporters.

The point is that the dollar's role as a reserve currency makes its exchange rate far more complex than a simple 'looser monetary policy increases the money supply' and vice versa.

Yes, but that's a whole separate subject from what I posted about, which was how dollar fluctuations impact US companies.

[wiggin]

Yes, but that's a whole separate subject from what I posted about, which was how dollar fluctuations impact US companies.

As I understood it, you were actually commenting on ag's question about how stocks would be affected by monetary tightening by the Fed, with the assumption it would lead to a stronger dollar. All I'm saying is that it's not so clear.

Obviously a stronger dollar generally translates into problems for exporters.

[agamemnus]

I think you exaggerate how much people are worried the dollar is a 'sinking ship'. Inflation expectations are rock-solid, and while it's likely the trade-weighted value of the dollar is likely to drop quite a bit, that's because of a long-overdue rebalancing in global trade flows and not some runaway devaluing of the currency.

Same effect, really. Prices go up, except wages, of course...

[wiggin]

Same effect, really. Prices go up, except wages, of course...

First of all, it's not. A gradual appreciation of currencies of trade surplus countries is a good thing, while runaway inflation of the dollar is not.

Second of all, inflation without a wage increase is generally a good thing, macroeconomically speaking. Essentially, workers are paid too much right now and due to wage 'stickiness' it's hard for employers to cut wages. Inflation helps erode these wages down to equilibrium values. Now, if we had low unemployment, price increases through inflation would feed into worker demands for higher wages, which could lead to a dangerous wage-price spiral. But since the US has such a large output gap and persistently high unemployment, we don't need to be worried about that right now.

(Parenthetically, I want to emphasize that I realize that our current modest inflation combined with flat wages isn't good for the individual employed worker. But it is good both for our unemployed workers and our broader economic growth. It's also a somewhat disingenuous argument that we should try to support artificially high wages - they were run up to unsustainably high levels before the recession, and this is just a normal correction that gets around wage stickiness.)

[agamemnus]

First of all, it's not. A gradual appreciation of currencies of trade surplus countries is a good thing, while runaway inflation of the dollar is not.

I never said that there's runaway inflation. I don't think what's happening at the moment is gradual. Look at the dollar index that you find on Bloomberg. Down about 15% in a year. Not really gradual.

Second of all, inflation without a wage increase is generally a good thing, macroeconomically speaking. Essentially, workers are paid too much right now and due to wage 'stickiness' it's hard for employers to cut wages. Inflation helps erode these wages down to equilibrium values. Now, if we had low unemployment, price increases through inflation would feed into worker demands for higher wages, which could lead to a dangerous wage-price spiral. But since the US has such a large output gap and persistently high unemployment, we don't need to be worried about that right now.

Sure, it might be good macro-economically speaking, but it's just way too fast. How does it make sense to have a savings account of 1 to 3% interest per year when the dollar is inflating at 15%? Who would keep on buying the debt? It will cause a total meltdown of confidence if the Fed doesn't act in a few months. Seesaws is what the Fed is really good at.

On to the topic of artificially high wages. If you see all the rest of the central banks in the world raise their interest rates, and the US does too, I don't see how that supports artificially high wages. Further, I don't think wages are artificially high in the US... it's more a question of energy (identical to commodity, e=mc^2) prices going up (compared to a world currency mix) in general that are forcing wages to stay low or fall to compensate for the high energy prices.

[wiggin]

I never said that there's runaway inflation. I don't think what's happening at the moment is gradual. Look at the dollar index that you find on Bloomberg. Down about 15% in a year. Not really gradual.

Oh, please, you need to look at larger trends and the trade-weighted exchange rate. There's a lot of volatility in currency prices on short time periods.

Sure, it might be good macro-economically speaking, but it's just way too fast. How does it make sense to have a savings account of 1 to 3% interest per year when the dollar is inflating at 15%? Who would keep on buying the debt? It will cause a total meltdown of confidence if the Fed doesn't act in a few months. Seesaws is what the Fed is really good at.

Trade-weighted exchange rates are NOT the same as inflation! The dollar is not inflating at 15%; it's more like 1-1.5%, which is below normal.

On to the topic of artificially high wages. If you see all the rest of the central banks in the world raise their interest rates, and the US does too, I don't see how that supports artificially high wages. Further, I don't think wages are artificially high in the US... it's more a question of energy (identical to commodity, e=mc^2) prices going up (compared to a world currency mix) in general that are forcing wages to stay low or fall to compensate for the high energy prices.

I honestly don't know what you're trying to say here. Generally higher (core) inflation feeds into higher wages.

[agamemnus]

Trade-weighted exchange rates are NOT the same as inflation! The dollar is not inflating at 15%; it's more like 1-1.5%, which is below normal.

Since the US economy depends on international trade (and the price of energy), the effect is very similar.

I honestly don't know what you're trying to say here. Generally higher (core) inflation feeds into higher wages.

I'm saying that the US doesn't have artificially high wages in my opinionz.


Aaanyways..... let's get back on track... what are company earnings reports to watch in the month of May?