Topsy turvy world…again

Right, so the dollar gets bought because of dreadful consumer confidence data.  I am used to explaining why sometimes black is white, grey is also white (if you are talking lists) and up is down.  I can explain this one in about 50 words or so, and trot out the ecobable speak about why the bad news is really good for the dollar: slower consumer spending will have an anchor like drag on the economy – without consumer spending (and confidence) you may well have a 200 horsepower motor on the back of the boat but you aren’t going to go anywhere fast with the anchor dragging.

Here goes the 50 words or less…consumer spending in the US is the driving force. Those individuals (and spending) make up 70 percent of the US economy. Without them on board they will hold back any recovery – like the visual analogy – they become the economic anchor weighing down the mighty powerhouse’s recovery.

How many of you counted the words? Sad, sorry. Ok here goes the clever bit: because the consumer is a bit hesitant at remortgaging the house at 125 per cent of its value, drawing equity (or increasing further negative equity), spending on credit or not worrying about having a job by Christmas/Hanukah/Kwanza (bit too PC?), they will end up spending less.  Individual fiscal responsibility will doom the US recovery, how ironic.   The thing that ultimately led to the current financial meltdown is now being held up as the way out: come on spend more, borrow more, kick start the US economic machine by spending.  

The lack of confidence/spending will delay the US recovery. Risk aversion is now the trade. Buy those currencies that are safe haven bets…the US dollar being the largest SHB out there. 

We are seeing some very one-sided trading in the markets. A couple of weeks ago everyone and his dog were short Sterling. Without a George Soros to guts out the selling, guess what, they all ended up buying back those shorts, over shot, and settled back in the middle.  I could have almost scripted that move.  Now we are seeing the euro being overbought and a general oversold dollar scenario. This market favours the brave, buck the trend and definitely don’t go with the flow. The trend is not your friend. I can’t think of anymore one liners, but you get the picture.

What of the correlation between the dollar and the stock markets? When things are normal arbitrage is limited, everything is in line with each other. Swaps, deposits, spreads all trade in narrow ranges and everything is a little dull.  Without having any numbers to back this claim I would hazard a guess that arbitrage is huge. Markets are trading in a vacuum with relatively little correlation to each other.  Bad US numbers should be bad for the stock market and good for the dollar; the stock market seems a little disjointed from reality.  A dollar rally should correspond to a stock market sell off…will wait and see on that one.  However does anyone enjoy the irony of our local airline extending generous baggage limits whilst customs employ rather zealous collection efforts? If this was a Government initiative, hats off to them!

Disclaimer: The views expressed are the opinions of the writer and whilst believed reliable may differ from the views of Butterfield Bank (Cayman) Limited.  The Bank accepts no liability for errors or actions taken on the basis of this information.