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The dollar has been losing ground big time to the euro the last two days; I can't say that I'm surprised. In a year chock-full of "first time since dinosaurs walked the earth" stories, surely one of the most astounding was that investors bought three-month Treasury bills three days ago with such enthusiasm that the yield on the bills temporarily went negative. That is, people were actually lining up to lose money buying T-bills. It's hard to get your head around a strategy like that.
Why this twice-in-a-lifetime occurrence? Because notwithstanding the gigantic monetary stimulus being thrown on credit markets around the globe, and in spite of the government guaranteeing nearly everything under the sun -- except the weather, come to think of it -- investors are in high panic mode. They are desperately seeking security, or what passes for security, and have decided that the dollar and the U.S. government are as good as it gets.
I have been literally holding my breath that those same investors would not stop and take a look at the numbers. After all, don't we all take pride in those rare periods when the dollar is outperforming other currencies? Don't we love to see our mountainous overseas-held debt devalued? Don't we love to swan around Europe's hot-shot hotels -- in general, doesn't it make us feel good?
Well, not entirely. With the buildup in pride comes growing barriers to exports for companies like Caterpillar (NYSE: CAT ) , Deere (NYSE: DE ) , and even automakers like Ford (NYSE: F ) and General Motors (NYSE: GM ) . Still, overall, a stronger dollar lowers the price of imported goods and makes us relatively well off.
The November budget report out Wednesday unfortunately raised investors' anxiety level. The deficit for one month totaled an all-time high of $164.4 billion, with the monthly total representing a 67% hike over the year-earlier $98.2 billion. For the first two months of this budget year (which started in October), the deficit climbed to $401.6 billion; analysts are now projecting the full-year deficit to top $1 trillion. At that rate, the gap between revenues and spending could surpass the postwar record of 6% of GDP set in 1983.
No sooner did investors scan these figures than the dollar began to sink. Most stories tied the growing deficit to the financial rescue plans under way, and most concluded that such measures are necessary to kick-start the economy. But, a closer reading of the figures makes me a little nervous.
Notable among the details of the November report were a 7% drop in outlays for Social Security, a 9% drop in Pentagon spending, and a 30% fall in spending by the Department of Health and Human Services -- the outfit dispensing Medicare and Medicaid.
Does anyone else note the red flags? Do we really think that Medicaid, Social Security, and defense spending are headed down? Isn't this like the fellow who's trying to rein in his credit card purchases for a few months to boost his credit rating so he can apply for a mortgage?
In October the Treasury said that debt sales would likely triple in the current quarter; decent budget figures will certainly help sell all that paper. So far, so good; the most recent sales went brilliantly. The notes were apparently oversubscribed. As the budget numbers worsen, as they undoubtedly will, will sales hold up? In other words, to be blunt, is the Treasury cooking the books to get its paper sold?
For some investors, looking through the figures may lead to an urge to diversify -- hence, the upward movement in the euro. The only good news for the dollar is that rising budget deficits and economic woes are not limited to the United States. The pound has weakened compared to the dollar over the past several months, as the U.K. has lowered rates and shoved credit out to the banking sector. And really, who can figure out what the Eurozone economy overall looks like? Some countries -- especially Spain -- look to be in trouble, while the largest, Germany, is fiscally quite sound.
Overall, misgivings about the European economic model -- the overarching role of government and consequent socialist inefficiencies -- may spread to the U.S. as the government's role expands ever further into the financial and auto industries. Down the road, investors may not see much of a difference.
So, investors who appear to have jumped with both feet into the dollar over the past few months may rethink, and buy yen, euros, and even pounds sterling to diversify their risk. It's quite possible that next month the Treasury's budget summary could look a lot worse.