Goldman’s O’Neill says don’t bet against the dollar

Guess I should have mentioned this earlier: I’ve been on the road since Thursday, which is why I haven’t been posting much. The regular Curious Capitalist commenter known as “Dad” has a big birthday this month (85!), plus the newest of his grandchildren (who has yet to comment on this blog) is turning 1, so we had a big family hoedown. I made the salad. It was really good.

Anyway, I’m flying back to New York later today, but am currently sitting in a cozy room with my laptop and an excellent wifi connection. So I’ve been catching up on the news, and this particular headline from the Frankfurter Allgemeine (which is one of the first places I look when I can’t find much interesting in the WSJ or FT) caught my attention: Chief economist of Goldman Sachs: “I wouldn’t bet against the dollar”. (Actually, it reads, “Chefökonom von Goldman Sachs: Ich würde nicht gegen den Dollar wetten”, but I don’t think German language competence should be a requirement for readers of this blog.)

The chief economist of Goldman Sachs is Jim O’Neill, a Mancunian who in the late 1990s and early 2000s, when he was Goldman’s chief currency strategist, kept proclaiming to anyone who would listen that the dollar’s high valuation against the euro at the time was ridiculous and unsustainable. So he’s not some kind of dollar cheerleader.

But now he thinks the European governments are so worried about the euro’s continued rise that the European Central Bank might intervene in currency markets to try to halt it. If this met with support from the U.S., markets would be surprised and the dollar would retrace some of its recent decline.

O’Neill also puts the odds of a U.S. recession lower than the 40% to 50% that I’ve been increasingly hearing from Wall Street economists (translation mine):

In my opinion the probability of a recession has not increased, it’s still at about one-third. Exports will compensate for the weakness in the domestic market.

So there you have it. Nobody, including Jim O’Neill, actually knows where the dollar is headed next, of course. But lately, many people have taken to talking as if continued decline is a foregone conclusion. It’s not.

Apple CEO Cook Gives Up $75M in Stock Dividends

NEW YORK — Apple CEO Tim Cook is giving up $75 million in dividends on restricted stock that the company is awarding to all of its employees.

In a filing with the Securities and Exchange Commission on Thursday, Apple Inc. said that Cook requested that his restricted stock units not receive dividends. The dividends that Apple workers are getting amount to $2.65 per quarter for each restricted stock unit held. The shares are not normally eligible to receive dividends, so Apple’s decision is a perk for its employees.

Dad

Not only was your salad good, Justin, the whole affair was excellent! And we didn’t talk once about the value of the dollar.
kert

i know that one of the elements to your tasty salads happens to be the malden salt….also, i plan on spending a little moolah sometime soon to help keep the dollar alive….just doing my part
p_lukasiak

The chief economist of Goldman Sachs is Jim O’Neill, a Mancunian who in the late 1990s and early 2000s, when he was Goldman’s chief currency strategist, kept proclaiming to anyone who would listen that the dollar’s high valuation against the euro at the time was ridiculous and unsustainable. So he’s not some kind of dollar cheerleader.

Did he have a crystal ball in the late 1990′s that told him that we’d abandon fiscal responsibility and pursue an insane foreign policy under George W. Bush? Because IMHO, had the US maintained its fiscally responsible course, the dollar would still be highly valued (with us paying off the national debt, US securities would practically become a collectors item) and we wouldn’t be confronting ridiculously high oil prices because of the “risk premium” we’re paying thanks to Bush (and that risk premium is one of the reasons the dollar is losing value.)
http://www.fundmasteryblog.com Kurt Brouwer

Mr. O’Neill was correct back in 2001 when it took only 84 cents to buy a Euro. That was just before the Federal Reserve began dropping interest rates to deal with the combined effect of the recession, the terror attacks of 9-11 and the stock market’s big decline (the worst since World War II).

Now, he is correct that the dollar is undervalued. It take $1.46 to buy a Euro. The undervaluation is due to interest rates. The Fed began cutting interest rates again this year in order to stimulate the economy and ease the credit crunch from the subprime lending mess. The dollar has fallen commensurately with interest rate reductions.

The good news is that the weak dollar is stimulating exports and leading to a substantial improvement in the trade deficit.
http://www.dollarsmakesense.com Yadgyu

“Because IMHO, had the US maintained its fiscally responsible course, the dollar would still be highly valued…”

The value of the dollar is negligible.

If you have enough dollars, the value does not really matter. The U.S. dollar is still the preferred currecny in many parts of the world. The U.S. is incredibly resilient, even with the subprime housing deal, the war in Iraq, a federal deficit, and job losses. This country is strong because it has a good infrastructure, a wonderful educational system, and is relatively peaceful. Those who bet against the dollar today will feel like fools in a few years.
Justin Fox

In response to p_lukasiak, I think the dollar was going to decline in value against the euro no matter what. But I would agree that W’s economic policies have possibly made things worse. Will post more on this in the next couple of days.

As for Kurt Brouwer and Yagdyu, yes, these things are cyclical, the U.S. economy has lots of strengths, and at some point in the next 10-15 years everybody’s likely to be complaining about the too-strong dollar. But between now and then some scary stuff could happen.

Finally, about the salad. Maldon salt was in fact part of the equation, although the booth at the Ferry Plaza Farmer’s Market where you can mix and match about 20 different kinds of greens was the truly crucial element. And every time I buy a box of Maldon salt I am of course putting upward pressure on the pound and downward pressure on the dollar.
http://www.dollarsmakesense.com Yadgyu

“…the U.S. economy has lots of strengths, and at some point in the next 10-15 years everybody’s likely to be complaining about the too-strong dollar. But between now and then some scary stuff could happen.”

Scary is good for the economy.

The spineless jellyfish investors will either lose money or be too scared to invest and not have a chance of making any. Whether there are good times or bad times, there is always money to be made. Just because there is a recession or some other economic crisis does not change the fact that people need money to buy things. The beautiful thing about America is that people will go into debt to buy meaningless things, thereby enriching corporations and helping them to create future jobs.

The bust here in America only means that there is a boom somewhere else!!!