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Page last updated
February 15, 2003

 

 

I

The Euro, Real-estate and The Great Dollar Crash

www.catapultresearch.com

The media have issued a fatwa on the USD. You'll note that all the major media publications have been telling us the dollar is about to crash, burn and never reappear! . Much is made of the fact that the US deficit as a percentage of GDP is quickly moving towards the 5% mark. But as a percentage of GDP, the deficit has been large for quite some time, so why all the fuss now about a dollar crash? Such coarse use of statistics has rarely provided useful forecasts, neither taking into capital account flows, nor the impact of companies importing goods from their off-shore operations. From time to time the national debt is highlighted as the cause of dollar weakness but there appears no consistent correlation historically. If you look at debt in proportion to government earnings then the Japanese yen should be heading south at an alarming rate. Indeed, many European countries have more to worry about. Could it be the media have taken note of the fact that USD has been moving down of late and decided to increase circulation by telling people something they already know and believe? Heaven forbid! If you are as sceptical of these media fatwa's as we are, you will see reason to go the other way.

As the above chart of the Euro clearly shows, there are plenty of Gann cycles which may suggest a possible high here for the Euro. As of June 10th the euro will be 366 trading days from high; 239 trading days from low; 180 trading days from high; and 90 trading days from 90. A nice 90 day run up into high is often a precursor to a "turning point" in Gann analysis. The ideal pattern would be 360; 240; 180; and 90. We have something approximating this pattern, which leaves the door open to a change in trend. But what might cause such a USD rally? Could it be that Greenspan is right and that the economy is recovering, and investors may soon grudgingly have to acknowledge all the good economic news which they have so assiduously ignored? We suspect so. As more and more evidence of a US economic recovery comes to light, investors will soon begin to see reason to buy stocks again. They may also see reason to buy big ticket items they deferred after September 11th, such as the purchase of a larger house. Everyone knows the US Real Estate market is now in a bubble, but nobody knows when the bubble will pop. Those who wanted to buy a house but waited, are now feeling a lot of internal angst. This angst is nowhere better expressed than in the Fannie Mae chart, where you can see that a monthly close above 80.24 will signal a fast move higher, one that could take this stock as high as 108! Another burst of housing activity would certainly boost the stock price of Fannie Mae towards our target of 108...one last hurrah before the bubble pops. (Caveat: A monthly close below 75.50 on Fannie Mae would confirm the beginning of an accelerated move down).

And what on earth does the Euro have to do with the US Real Estate Bubble? Well perhaps the media are focusing on the wrong targets after all. Looking at the deficit as a percent of GDP to forecast the demise of the Dollar is correlating unrelated issues and looking for a pattern. Unfortunately it can stay in "overbought" territory for long while before a correction finally materialises. A better clue as to when the US Dollar bubble will pop is offered by the popping of yet another bubble, the "Real Estate Bubble." And how will we know when Real Estate Bubble is popping? Simple, watch Fannie Mae! Again, if Fannie Mae breaks above 80.24 and closes the month of June above this mark, it confirms a final leg higher for this stock, which as I stated may take it to some ridiculous level, perhaps as high as 108 before the classic Mexican Swan Dive that follows shortly thereafter. Clearly even now the housing market is showing all the classic signs of a bubble in the advanced stages of bubblemania. It used to be that people had to put down at least 10% or 20% of the value of a house. Nowadays people buy a house with 5% down or less. It used to be that your mortgage could not exceed 25% of your disposable income. Now borrowers routinely take out mortgages that are higher than 40% of their disposable income. Corporate layoffs are likely to increase in pace even as the economy recovers. Many households depend on two incomes to afford the mortgage. If even one of the two household breadwinners loses his or her job, it throws everything into chaos. In fact the only reason you are not seeing more foreclosures even now is that banks find it more financially attractive to work with those borrowers who are tardy in their mortgage payments rather than foreclose on the house. But there is always a straw that breaks the camel's back. I suspect we will see massive foreclosures as we move into 2003. Banks will begin to panic at the thought that "workouts" aren't going to work any longer. If the banks suddenly come to understand their risk of owning lots of surplus housing in a real estate market that is heading south, they may suddenly change policy, increasing foreclosures at a record clip in order to beat other banks to market with unwanted properties. The last thing they want is to be sitting on loads of foreclosed properties in a housing market that is collapsing. It creates a panic mentality, typical during a crash.

At the same time the Real Estate market is crashing, the dollar is likely to crash. If people are losing their jobs, they clearly aren't going to be good "consumers," which in turn means the US economy will turn down. Foreigners who were happy to own dollar assets while the stock market and real estate markets were headed higher, will suddenly dump all their dollar assets, bonds, stocks, and real estate. We have the makings of a real disaster here. But like the boy who cried "wolf", the media are likely to get their timing completely wrong. They are calling for a dollar crash now and when it doesn't come on cue, investors will not heed the next call for the real dollar crash. And the media are very unlikely to call for a dollar crash as and when it finally comes. They will be too busy celebrating the good times alongside everyone else.

So bad news for the dollar but good news for the euro? Certainly we can see after a dramatic fall back to the historic low for the euro at $0.83 and perhaps even further with the final bubble top of the dollar, a move for the euro back towards par in 2003. But "euroland" hasn't changed its stripes, the euro is still inherently unstable and will not become the reserve currency of the world. The real beneficiaries of the dollar crash will be gold and commodity currencies such as the Canadian and Australian dollars. The question for the euro is not will it become a global reserve currency, but will it survive intact the pressures of higher interest rates and spiralling government funding over the next few years. It really has not been tested yet.

To learn more about the timing of the Great Dollar Crash, visit www.CatapultResearch.com.

Note on Fannie Mae.
Fannie Mae ( Federal National Mortgage Association until January 1997 ) was created by the US Congress in 1938 within the Federal Housing Administration to purchase FHA insured loans to bolster the market for home loans from banks and other lenders. In 1968, it became a private company, privately capitalised and on a self-sustaining basis its role was expanded to buy a broader reach of loans. Its objective is to enable almost anyone to buy a house, particularly low to middle income Americans. Fannie Mae will purchase mortgage loans from banks, credit unions and other lenders (the primary market) up to just over $300,000 in this secondary market in which they are the biggest player. These loans are held in their portfolio and they thus take the risk of repayment. Lenders selling these loans thus replenish their capital enabling them to lend more. In order to fund this secondary market activity, Fannie Mae sells its Mortgage Backed Securities (MBS) to investors. A significant part of its earnings come from the difference between the yields on MBS and the cost of the mortgages they purchased from primary market participants. These securities are guaranteed by Fannie Mae (rated A- by S&P) so that in theory no matter what happens to the underlying mortgages, the investor will receive interest and principal repayments! The stock is actively traded on the New York Stock Exchange and the company is the third largest corporation in the US by assets.

James Smith
CEO & Founder

Bruce Allen
Director, European Office

Catapult Research Inc.

Editors Note:
James Smith, C.E.O. and founder of Catapult Research, Inc. and Bruce Allen have been analysing market behaviour since the 1970's. Specialising in timing and long term forecasts, they have correctly forecast major market stock, currency, commodity and capital market events worldwide.

All of the charts in this article are "produced on GannTrader, courtesy of GannSoft Publishing, Inc."



 


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