Falling Dollar = More Exports

This chart shows the value of the dollar in relation to the Euro against outbound TEU's (Twenty-foot Equivalent Unit containers) from the port of Los Angeles / Long Beach.

The Euro has been gaining strength while the dollar has been falling over the past year. When the Euro was first introduced in 2001, it was trading at roughly equal to that of the dollar, you could get a Euro for 94 cents. As of February 2008, it takes $1.48 to buy a Euro, a 57% increase in the price in just seven years.

Not all is doom and gloom; as the dollar declines American exports begin to look like bargains to consumers overseas. Likewise, the amount of American exports from Los Angeles / Long Beach has increased over this time period.

The joke used to be that the greatest American export was outbound empty containers. There was some truth to this argument.

It was easier and cheaper to create new containers in China and ship them to the United States rather than wait for empty containers to make their way back to the mainland.

This is no longer the case, the balance between outbound traffic and inbound traffic is starting to stabilize, due to decreases in inbound traffic and increases in outbound traffic.

Sovereign Wealth Funds - Next Big Thing?

From Marketwatch.com

Sovereign funds eye Japanese REITs - report
By MarketWatch

SAN FRANCISCO (MarketWatch) -- Despite a general decline in large real estate deals due to the ongoing subprime loan crisis, sovereign wealth funds such as Government of Singapore Investment Corp., or GIC, have been stepping up investments in the Japanese market, according to a report in the Friday edition of the Nikkei Business Daily.
Large recent deals include Morgan Stanley's (MS:) sale for 77 billion yen ($750 million) of The Westin Tokyo to GIC, the Nikkei reported. Sovereign funds like GIC are government-controlled, and have stirred some controversy as they've invested in politically sensitive industries abroad. See related story.
But investments by sovereign funds in Japanese real estate have helped prop up real estate transactions in there, as they snap up properties and invest in the real estate investment trust market, the Nikkei reported.
GIC, which has over $200 billion in assets, has also acquired the Hawks Town commercial facilities in Fukuoka, and holds a 5% stake in Japan Prime Realty Investment Corp. (JP:8955: news, chart, profile) , an REIT affiliated with estate developer Tokyo Tatemono Corp (JP:8804: news, chart, profile) , the Nikkei reported.
Other sovereign funds boosting their presence in the Japanese real estate market are based in Dubai and other Middle Eastern countries, the Nikkei reported, citing unnamed sources.
The total market value of Japanese REITs on the Tokyo Exchange fell sharply in the second half of last year, the Nikkei reported, drawing the interest of sovereign funds.
In addition, the Nikkei reported that the Japanese market boasts a large amount of high-quality real estate that is generally under-priced compared to foreign equivalents

My Thoughts: The dollar is at a 13 year low in relation to other currencies. The Federal Reserve Bank of Atlanta keeps track of such things, and the chart below is from their website and shows a trade weighted basket of currencies against the dollar. Not a good time to go overseas on vacation or to buy foreign exports, since a weak dollar means you will be paying more for the same service.

I mentioned earlier why this was happening, and this is just another example of the effects.

If history is to be any guide as to what property types would benefit most from cash loaded foreigners, we only need to look at history. ( *cough* Japan). Over-valued trophy properties are likely candidates and industrial warehouse / distribution centers are not. (Unless you are a cash rich company with a legitimate business interest here in the United States).

But, we have seen what happens to foreigners who have a legitimate business interest and it doesn't set a very good example for future industrial purchases. (*cough* Dubai).

Real Interest Rates Are Now Negative

From the man who wrote some of my economics textbooks, Greg Mankiw.
http://gregmankiw.blogspot.com/2008/03/real-interest-rates-are-now-negative.html

From his Blog:
Click on the graph to enlarge and see better an unusual phenomenon: inflation-adjusted interest rates below zero.Nothing in economic theory precludes negative real interest rates, or even suggests they should be anomalous. Nominal interest rates cannot be negative, because people would just hold cash instead of bonds, but real interest rates can be negative. If real interest rates were very negative, investors could start investing in inventories of goods, but this arbitrage is not easy. Storing goods is costly, and many things in the CPI basket, such as services, are not storable at all.In standard models of asset pricing, negative real interest rates are most likely to arise if growth expectations are particularly low or if uncertainty is particularly high. Low growth expectations encourage households to save, which drives down equilibrium rates of return. High uncertainty drives up risk premiums, which in turn drives down the return on safe assets, perhaps below zero. Both forces seem to be working now.

My thoughts:

What Mankiw is demonstrating can be seen in the huge run up in commodities (especially gold and oil) that we have seen in the last year or so. It also explains why the interest rate on my ING account (4.5% when I started a year ago) has now dipped below the “official” inflation rate. Thus I am being penalized for saving money, so I might as well spend it before it becomes useless or invest it in a riskier asset. (Which is exactly what I did when I purchased those Bank of America shares).

Usually in times of a falling dollar (also known as inflation), which is what has been going on for the last 2-3 years, real assets, such as gold and real estate, become particularly attractive, since, being real assets they cannot be touched by inflation.

However, real estate is usually purchased with borrowed money, and in periods of high inflation, you will also see higher interest rates, as investors respond to the real interest rate (adjusted for inflation) and not the nominal interest rate (the one quoted in the paper) in a process known to economists as the Fischer Effect. Perceptions of risk also influence banks and their likelihood of lending money. In an earlier post, I pointed out that the perception of risk is particularly bad right now.

Thus, banks will seek higher rates of return to counteract the effects of inflation (and to also factor in the probability of default), and less money will be lent to pursue entrepreneurial ventures (buying, selling and building buildings). Less money being lent to purchase buildings ( a decrease in the supply of loan able funds) has the effect of reducing the number of potential buyers, (since the price of borrowing money has gone up, only those companies or firms that can expect the higher rates of return needed to counteract the higher interest rates will be funded), which has the effect of lowering sales prices (since sellers are competing against fewer buyers).

Lower real estate prices (a real asset) can be expected (because of the run up in the cost of borrowing) at the same time that inflation is creeping upwards (real assets should increase in value) leads to two contradictory forces: real estate prices should be rising and falling.

The Feds actions are intended to get banks to issue more loans (since the cost of the banks borrowing money from the Fed has been reduced) and it looks like a different mechanism will be needed to get the end result.

If you have seen me in the last year or so, I have been vehemently opposed to the Fed cutting interest rates, as I see inflation as a greater evil than that of economic contraction. A negative real interest rate is the consequence of such cuts a.k.a expansionary monetary policy.

The upcoming expansionary fiscal policy (the “stimulus-package”) should further compound our folly and fuel inflation, inching me that much closer to moving all of my assets out of American dollars.