The Poor Euro

From the introduction of the Euro in 99, here’s a chart showing the S&P500 in Euros.

You’ll notice that there are a few periods. To about early 2003, the two moved more or less in tandem. The S&P goes up or down, so does the Euro S&P. It may be higher or lower, but they’re moving together. From early 2003 to early 2005, the S&P in Euros stays basically flat, no matter what the nominal S&P does. Since then S&P in Euros has risen, but risen much more slowly than the nominal S&P. It’s too early to tell if the recent problems will change that trend-line again however the next chart (done in days, rather than months) suggests it migh be occuring.

At this point the lesson is fairly simple — measured in Euros (you’d get similiar results in pounds, or with other indices like the Russel 3000 or the Dow) the market has never recovered from its crash. Nominal numbers may say otherwise, but really most of what has been happening is that as the dollar went down, stocks went up. From monthly top (August of 00) to monday’s close the S&P is currently up about about 2%.

In terms of the Euro, it’s down about 32%.

Let’s take a look at a Euro chart:

Read that chart and weep. If you had taken $1,000 US in, August of 08, and just bought Euros, today you would have approximately 1,600 dollars. Bottom line. In Euros, the US stock market has never recovered. It’s barely even moved. 3% is nothing. It’s essentially just barely beating the depreciation of the dollar.

Since the bottom in 2003 it has been beating the Euro – a dollar invested at the monthly bottom in the S&P would have made you $1.84, versus $1.48 for just buying Euros – but again, that means that slightly more than half the S&P’s appreciation off its low is just monetary depreciation.

Here are the questions for the future.

1) Will foreigners keep investing the US or will they start pulling their money out? Specifically what will foreign government do, most especially the Saudis and Chinese? Will individual investors start to either edge for the door or to stampede for it? Indications are that the Chinese have decided to “diversify”. They now deny it, but that’s their pattern, deny then do.

2) Will the Fed keep dropping interest rates? Every interest rate drop makes the US dollar much less attractive to investors. General consensus right now seems to be that the Fed should continue to do so (I don’t agree, but that’s another matter).

3) Can inflation be controlled with a dropping dollar, wage inflation occuring in China and oil prices going through the roof. Note here that we’re talking about inflation as the government measures it and the Fed uses it (core inflation), which isn’t inflation as ordinary people exerience it.

4) Will the asset issues that many financial institutions are having spark a panic as people try and get out? If so, the markets will crash (so far they’ve proved remarkably resilient, probably because the Fed and other central banks are pumping out huge amounts of liquidity.)

5) Will the bursting of the housing bubble lead to a crash in consumer spending. Again consumers, bouyed by huge amounts of credit, have proved very resilient. But will the lending, and borrowing, continue even though everyone knows much of the money can never ben paid back. (The anser is not obviously that lending to deadbeats won’t happen, unfortunately. Keeping the game going is the name of the game, because the consequences of market failure are so high.)

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Ian Welsh

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  • “Will the bursting of the housing bubble lead to a crash in consumer spending?”

    I certainly hope so. Something has to. It’s better than WWIII leading to a crash in consumer spending or environmental catastrophe due to runaway climate change leading to a crash in consumer spending.

  • the trade weighted dollar had fallen from about 160 to 100 prior to the crash. So this kind of movement has happened before.

    If the US market crashes, as some think it must, the dollar will likely cease falling and gold will likely back off. Oil will collapse, along with other commodities. The other financial markets will fall right along with it. There is no safe haven in a situation like this.

    So if you’re hoping for it because you like to bash the US, remember what your full hope will bring.

    Our subprime debt pales in comparison to the bad debt of the Chinese banks. In shifting from US assets, its central bank could be presiding over its demise. For a rout here will make a bigger rout there.

  • priced in euros vs yen, you’d have a similar graph. Japan’s debasing of its yen is arguably a huge factor in the currency arrangement today. China’s yuan was pegged to the dollar until recently; the yen was priced still lower to bring the Japanese out of their deflation. In all of this, the euro had merely to sit there in order to rise.

    The European markets are not dynamos; Australia is just a pile of rocks in this equation, as is Canada, so their currencies are higher for their rocks have risen in value. That is because the Chinese are grabbing every resource even to the depths of Africa, all the while holding their currency down.

    Wall Street and the Fed have helped this along, no doubt, but these relationships are fraying now.

  • This not a personal attack. I’m uneasy about the stastical validity of your analysis. It has good shock value, It’s implicity makes it suspect.

    Yes the S&P is more or less flat against the euro.

    So were US house prices against the euro. US homes are not traded in a euro trading one.

    Yes, the dollar has fallen. This could be a deliberate strategy. Locals where I live believe the US is deliberatly trying to face down China on the trade imbalance. Paulson is very silent, so this has some credability.

    How much of the trading by the members of the S&P is in dollars, and how much in euros? If the majority of the trading was in the dollar zone, the US business have performed well (even if he Government is mismamnaging or deliberatly devaluing he dollar).

    Satistically suspect. Probably much more complex than your analysis.

  • Because I have no training in economics I don’t worship economies of scale to the exclusion of all else. Consumer goods aren’t made out of thin air. They are made out of resources that we go to war for. Their production, use and disposal generate greenhouse gases. We here in the US use far more than anyone else. There is no way that the rest of the world can come to use even half the resources that we do.

    There is also the fact that the people who produce consumer goods have finite lifespans. The time they spend producing goods that we would be better off without is an irreplacable portion of their lives wasted. The fact that they may choose to have their lives wasted because they would not be able to eat otherwise does nothing to change this. Their precious time was wasted doing something that was better undone.

    How would you like to be someone who spent the best 30 years of her life making cruise missles who after retirement came to realize that they had nothing to do with defending the country? Cruise missles aren’t consumer goods, of course. But the same principle applies to SUVs.

  • While the analysis is suspect, this quote:

    “Yes, the dollar has fallen. This could be a deliberate strategy. Locals where I live believe the US is deliberatly trying to face down China on the trade imbalance. Paulson is very silent, so this has some credability.”

    is too. The trade imbalance with China is due to the lack of domestic manufacturing of the very things China produces. Of course, the USA is not competitive in textiles and toys but it is obviously not very competitive in high value added goods either — otherwise the trade deficit wouldn’t exist as is. The trade imbalance is thus caused not only by tapping out global credit now to consume now at the expense of the future, but also the fact that the US cannot sell abroad nearly as much as it buys from abroad — a sure sign of competitive weakness. What does the US make that others cannot make better? What is China going to buy from the US that they can’t find a better value elsewhere? The ‘deliberate-weakening-of-the-dollar-to-boost-exports’ argument presumes the US can produce and sell at equalibrium with consumption. Seems a bit out of character for the USA in the last 20 or so years. I suppose there is TRIPS… Those over at the Asia Times seem to have a better analysis — namely, devaluing dollar reduces the real costs of paying back those dollar-denominated debts.

  • is absolutely a deliberate policy. I’m not sure, however, how that makes this analysis suspect though.

    Here’s another chart that would make the point better — track the value of oil in Euros.

    Yeah, the dollar’s fall matters.

  • against currencies which have been deliberately held down the chart would be different and yes, Australia and Canada are resource economies (or as I like to say, the Canadian dollar is now a petro-currency).

  • I rarely buy anything that I don´t ´need´ and to me the bigger picture here is that the human race, or the more affluent part of it, is living and consuming beyond sustainability. We have to change, if we do not then we will end up like hungry dogs fighting over the las scraps. The sooner more people begin to understand this the better, IHMO 🙂


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