Perspective of the value of dollar and global challenges in 2008
After it was declared that decrease in employment level within the successive three month, most markets agreed that the economy of the United States is experiencing recession.
Although the gross domestic product of the first six month of the year 2008 indicated a slow economic growth, we believe that this figure will approach to negative border in the second six month of the same year, and one of its main reasons is the decrease in domestic demand.
|A careful scrutiny of the condition governs the economy of the United States shows that by the continuation of decrease in the value of dollar, it is possible that the global demands can remedy the decrease in domestic demands, and gradually this can improve the existing situation. At the present time, the economy of the United States is threatened by the recession and stagnation; however, some of the experts believe that the reduction of interest rate and enhancement of payments level of America can make some changes in the economic circle in the second six month of the year 2008.|
In September 2008, when the authorities of the central bank of America understood the seriousness of the economic situation and financial crisis, they took some measures to reduce the interest rate, and declined interest rate by 3.25 units. Now, monetary policymakers are expecting to see the results after six month. (Based upon the forecast of the financial managers of Portfolio Investment Co.Ltd, we reduced our monthly profits to improve the financial conditions of the company).
Probability of decrease in the gross domestic product of the Unites States in the second six month of 2008
We believe that as the economic data show clearly, the current economic situation is very complicated. Housing crisis and its penetration into the other economic sectors caused the first recession in the past seven years. Decrease in sales indices, decrease in stock value, and financial crisis in economic enterprises confirm totally a critical situation and economic recession. Meanwhile, the increase in gross domestic product brought the analysts a contradiction between economic recession and production growth, and created this question "is United States really suffering from economic recession".
To answer this question, it should be explained that the significant all-embracing economic recession is to be occurred in all economic activities, and usually the examination and evaluation of four sectors of employment, industrial indices, actual income and actual sales (considering inflation) can be determinant in recession and gross domestic product is not a good criterion for the examination of overall economic conditions, since in some circumstances such as the present situation, it is possible that the decrease in the value of national currency (dollar) may enhance exportation and stabilize the trade balance of a country on one hand, and the personal consumption and domestic investments reduces because of the decrease in economic growth and lowering of consumer reliability level on the other hand.
Accordingly, it is possible that the increase in exportation and improvement of trade balance may be a factor of increase in gross domestic product.
In the several months ago, most economic reports indicate that the most parts of the economic sectors are suffering from recession. Especially, the data obtained from housing sector confirms the fact that we have a long way to reach the prosperity again. Based on this analysis, it is forecasted that the gross domestic product will face a great decrease in the second six month of the same year. However, some believe that the gross domestic product of the United States will be increased significantly in the second six month of 2008 because of increase in exportation and reduction of importation and improvement of trade balance. The Study of the data relating to investment in business shows a great shrinkage. Moreover, because of the drop in the earnings of households the public income decreased also by the reduction of taxes.
Consumption expenditures and employment reveals the economic recession of United States of America
Consumption expenditures play a main and an effective role in the economy of the United States, so that about 65 percent of the gross domestic product is assigned to consumption sector. The published data regarding consumption expenditures show that this sector is in its worst situation. Meanwhile in April, the index of consumer reliability declined to its lowest degree during the 26 years ago. This index declared by the University of Michigan was declined from 69.5 in March to 63.2 in April, which is the lowest degree from March 1982. The economy of the United States has lost 232 jobs from the beginning of 2008, and yet faces more critical problems including increase in food prices, and energy items, and decline in economic growth, and the growth of consumption expenditures has declined to its lowest degree in the past 17 years. The employment statistics of the United States is shocking, and shows that employers have adjusted around 80.000 jobs, and this is the third successive month and the highest degree within 5.5 yeas ago that the employment sector of the United States faces decrease in employment. Many economists believe that the economy of the United States does not grow in the first six month of 2008. We also believe that if the economy of the United States has not been caught in recession, but this will happen in the near future. In the meantime, the inflationary expectations has exceeded from 4.3 in the past month to 4.8 at the present time, which main reason was the importation inflation especially in energy sector which is due to the decline of the value of dollar. Price index has a 2.8 percent increase in March, while this index had a 0.2 percent growth in the past month. Other expenses but fuel price had a 0.9 percent increase, which is the highest increase from 2001 up to now.
The authorities of the central bank of the United States forecasted in April that the economy would catch in recession in the first six month of the year, and were concerned for its continuation. They expressed that the economic stagnation has is proved by many dealers and market players. In the meantime, the central bank reduced the rate of interest by 3.25 percent from September up to now to prevent economic stagnation.
Some economic data indicate that it is possible the decrease in interest rate to be ceased.
The manufacturer price index in the United States has recently increased more than expected. Its main reason was 1.1 percent increase in the index of food and fuel. The increase in inflation in the manufacturer level besides increase in the production index of New York (from – 22.2 to 0.6 in April) declined the possibility of decrease in interest rate. The production index of New York confirms the fact that the increase in exportation resulting from the reduction of the value of dollar prevents any more recession of economy and any increase in manufacturer price index indicates the inflationary pressure, so that based on the future market rate, the possibility of any decrease of interest rate from 42 percent to 28 percent has been reduced. Moreover, the increase in bonds returns indicates the increase of inflationary pressures and increase in the index of P 500 & S confirms the improvement of financial markets.
Examining the manufacturer price index shows that although its 6.9 percent increase in comparison with the last year was mostly because of increase in the price of foods and fuel, the enhancement of its main index i.e. foods and energy is not considered which had a 2.7 percent increase and that was unprecedented within the last three years.
Foreign investment has increased due to the improvement of the conditions of stock exchange and increase in their returns, and in March around 72.5 billion dollars of capital was injected into market in addition to 57 billion dollars in February.
Inflation has attracted attentions in the second six month of 2008
The policymakers of the central bank of America paid more attentions to the probability of economic recession and did not focused on inflation seriously. Most of the market players declared the increase in possibility of economic stagnation, in the first sic month of 2008. Although the central bank of America has reduced the rate of interest up to 3.25 percent to prevent this problem, but their delay in taking steps to settle this problem, could not provide a serious solution in this regard. The recent declaration of the central bank of the United States shows lack of trust in the future of inflation, but a stronger trust in the adjustment of interest rate in the second six month of the current year caused this forecast be rejected and falsified, and the indices published recently confirm this fact. Yet, inflation has attracted attentions of market and attentions was paid to the stop of interest rate circle has been for a short time. Whereas the data regarding inflation increased for a short time, the returns of bonds were improved in April and May.
The declaration of the International Monetary Fund in relation with the current situation tells us of the worst economic condition from the great depression occurred in 1930. The International Monetary Fund stated in its annual declaration on the global economic situation that the loss and damages resulting from recent financial crisis has exceeded the boundary one trillion dollars. This declaration indicates that the loss and damages to the housing mortgages was about 626 billion dollars which would be about 950 billion dollars if the mortgages of the commercial estates were added. This report forecasts that we may face worse situation, because banks and financial institutions has forecasted a loss around 230 billion dollars due to decrease in profits and decline of the value of assets.
Economic policymakers, who are more concerned that this situation becomes worse due to the publication the reports regarding the sustained losses, push companies to increase their capitals. The last year report of the International Monetary Fund forecasting the losses restrictively was criticized by many of its members. But the declaration of this year has predicated the losses significantly more than the reports of the other financial organizations (about 600 billion dollars).
Recent Market Movements
Statistics indicate that the global economy trust in current situation has increased for the first time during the past 5 months and the main reason was due to the reduction of interest rate by the central bank of America. Although this delayed measure could not prevent the economic stagnation of America, and recession of the world economy, at least it was able to return peace to markets after several months. Trust increased in the United States, Asia, and East Europe and decreased only in the West Europe. One of the other reasons of increase in trust was that china declared a 10 percent economic growth, and this was the greatest current drive for the world economic growth within the ninth successive season. Increase in the international trust is also due to the increase in optimism towards the economic growth of the United States of America in the second six month of 2008; since as we believe, the economic recession circle of the United States is close to its end from the middle of the second six month of 2008, and we expect a better conditions in 2009. In our opinion, the new status of Europe is in its first stages and it is possible this region experience worse conditions.
Decrease in the trust of investors in Europe indicates another situation.
Central bank of Europe which focused on and is concerned about inflation, used a deflationary financial policy instead of the policy of increasing the rate of interest, to prevent the critical situations and increase in inflationary pressures, and tried to keep the rate of interest as previous on 4 percent (the highest rate within the past 6 years). The contradictory representations of the authorities of the central bank of Europe indicate that they cannot reach an agreement regarding focusing on inflation or economic growth.
According to some authorities, although the index of foods and fuel prices is around 3.5 percent (the highest percentage within the past 16 years), the main reason of that is the increase in the price of foods and fuel; therefore there is no reason to be worry about inflation. While, we believe that the main task of the central bank is to control inflation not to be concerned about economic growth. The newly received orders from East Europe and Asia cause the authorities of the central bank feel more relaxed and they believe that although the 3-percent decrease in the exportation of the United States is worrisome, the 12 percent increase in exportation to china can be deemed a proper substitution. Meanwhile, the International Monetary Fund forecasted the economic growth of Euro region would reduce from 1.6 percent to 1.4 percent. Economic indices show a mild economic growth for the Euro region. House building in the Euro region has not declined. However, we believe that the penetration of financial problems of America into Europe and worsening the economic situation of that region make finally the central bank to reduce the rate of interest.
England is firmly expected to reduce the basic rate of interest
The central bank of England reduced the rate of interest by 75 percent and it is likely to reduce more than this percentage. This fact distinguishes the clear difference between the two systems of policymaking of central bank of Europe and England, since the central bank of Europe decides based on the consensus and reacts to the changes in economic situations slowly, but the system of decision-making of the central bank of England is based on the vote of majority and reacts a little faster. On the other hands, the System used in the central bank of England is more preventive and the economic dependence of England to America causes the predated notices would be received by the central bank of this country. Whereas the value of a building in England has gradually and continuously increases within the past 12 years and the English citizens borrowed a significant volume of loans for buying house, any recession in building sector can cause a serious stagnation in the economy of England, and this factor made the central bank of England to reduce the rate of interest to prevent the economic stagnation. Based on the return rate of 10-year bonds in England, we can conclude that the market does not believe any more in the reduction of interest rate for a short time. Despite this fact, the study of bonds return curve shows that the market players are expecting the rate of interest increases just as before within three to six month later.
Canadian Bank is worried about the penetration of recession into Canada
Although the economic indices of the last year indicate the strong economic growth of Canada and the main part of this economic growth is due to the internal expenditures and investments, the central bank of Canada reduced the rate of interest by 100 units (1 percent) from the December of the current year to prevent penetration of recession into its country. The costs and expenses of exportation faced an 8.5 percent decrease within the last three months of the year due to the crisis of its greatest commercial partner, but the economy of Canada grow with the annual rate of 5.5 percent. Moreover, the growth of investments was a factor to continue the economic prosperity in the first half of the year 2008. Possibly, the central bank of Canada will reduce interest rate once or twice to prevent surely the spread of recession in Canada.
The general price level has increased in Japan
Among the industrialized countries, Japan is, due to the lowest rate of bank interest, less worried about the spreading of problems of mortgage loans market into its country. However, settlement of transferring transactions and increase of the value of Yen on the one hand, and the great economic depression of its economic partner on the other hand influenced deeply its export market, which is considered as the drive engine of the economy of Japan.
Whereas the policies of Mr. Shirakawa as the new governor of the central bank of Japan are significantly similar to that of Fukui the ex-governor of the said bank, therefore this substitution of office does not influence the procedure of Japanese Yen. The huge impact of oil price on the economy of Japan caused the increase in oil price be apparent in the markets of Japan, so that the general consumer price index has a 1.2 percent growth in March, which is its highest growth in the past ten years. The unexpected increase in consumer price index as the most important economic index increased the inflationary expectations and the possibility of the increase in the rate of interest, so that the publication of this report increased the bond returns. At the present time, there are no threats of any decrease in interest rate. The Japanese who encountered price reduction for about eight successive months, faced due to increase of oil and food price, the overall increase of prices from the December of the last year. The economy of Japan had not any increase in prices from 1995, and the increase of main index by 0.1 percent and of general index by 1.2 percent causes concern about the reduction of economic growth, since this increase in prices is due to the increase of raw material prices not the increase of demands. We believe that the authorities of the central bank of Japan are aware of the significance of inflation growth, because they know that the procedure of the global increase in prices is continuous. However, the substantial reduction of wages caused the authorities of the central bank have no fear of the effects of inflation on wages, and although the government of Japan reduced the gasoline tax to slash fuel price and thereby to control inflation, these solutions are temporarily effective and the global increase of inflation will make the central bank of Japan to increase the interest rate.
Study of Fluctuations of dollar vs. Yen from 1990 to 2007
During 1990 to 2007, the rate of dollar vs. Yen fluctuated on the average 1700 units statistically. Considering the recent crisis and estimation of downward trend of dollar, we expect more fluctuations for 2008 in comparison with the past but similar to 1995, as we see that the exchange rate in 2008 has fluctuated between two thousand to three thousand.
Analysis of the money market of America and Japan
In the first six months of 2008, the return gap declined to its lowest level, but in the second half of the same year, dollar return curve changed due to the inflationary expectations and possibility of stop of interest rate reduction circle, and the swap price of dollar increased in inter-bank market. It is forecasted based upon analysis of the future rate that the exchange rate of dollar – Yen is around 97 at the end of second half of the year.
Studying the 10-year bond market of Japan and America reflects an inflationary concern. Reduction of return gap range enhanced dollar, and on the average in consideration of 0.1 unit change in return gap of the ten year bond, dollar fluctuated between 200 to 300 units.
Studying the stock exchange of the United States
After financial crisis of Aug. 2007, Dow Jones stock has continued its upward trend, and after reaching 14000 units, it begins a downward trend. It seems that the economic crisis of the United States is reducing downwards.
It can be estimated in terms of graph, that after completing the current correction by 13000 units, it is not possible any more to ascend to higher levels and if any descend occurs below 12700 units, the index falls to 1000 units. The level of 12700 units is considered as a fluidity rate and expectation change level.
Studying the fluctuations of Dow Jones Index and its comparison with the fluctuations of Dollar-Yen exchange rate and estimation of its future rate
On the average, in consideration of 1000 units of fluctuation in Dow Jones Stock Index dollar has changed equal to 500 units against Yen. It is expected that if Dow Jones Stock falls by 10 thousand units (descend to the extent of 3000 units) dollar will collapse to the extent of 1500 units and reaches to the low level of 90.
I hope, I could provide you with some useful information about the economic situation of the world, especially of the United States of America. I ensure you that Portfolio Investment Co.Ltd and its managers consider all economic fluctuations of the world to perform their business, and do their best to prevent your capital sustain any losses.
With hope to grow more and more Portfolio Investment Co.Ltd.
Manager Of Portfolio Investment Co.Ltd : William Clark