US moves into back seat
By W Joseph Stroupe

The US dollar certainly could stem its losses or even recover ground, if the ongoing commodities and emerging market rallies become too "animal-spirited" and get too far ahead of the reality of global supply and demand, and a significant correction occurs in these fledgling rallies.

However, there is little tangible sign that this is happening yet. Instead, the rallies have very good fundamental support in that demand in the emerging markets, even without considering the US market as the traditional driver, is already showing significant signs of steady revival. Thus, from a global standpoint, the emerging markets are steadily eclipsing the US as the global driver of demand and growth, in some important ways relegating the US to the passenger seat.

It is interesting to note that the present rally in US stocks which began on March 9, was led predominantly by US banking shares. The rally has transitioned since early May in the sense that its driver has switched from banking shares to commodities-oriented shares. So says The Wall Street Journal in its June 2 article, "New Driver for Stocks":
The resilience of emerging-market economies, particularly China, is helping drive a strong rebound in crude-oil prices to north of US$66 a barrel, as well as big gains in other commodity prices. That in turn has fueled a rally in many US energy and materials stocks. Some also see emerging-market strength helping battered consumer companies.

If you just focus on the US demand as many tend to do, then it is hard to justify the nearly doubling of oil prices in the past months," says Paul Ting, president of Paul Ting Energy Vision LLC. But the news out of China helps explain the move. Crude-oil imports to China were 13.6% higher in April than in the same month last year, and 2.3% higher than March's daily import level.
The same phenomenon is taking place virtually across the board with almost every other commodity. It is therefore very likely that emerging markets are genuinely signaling the rebound of global growth and demand, while the "green shoots" of supposed recovery in the US and Europe are, by comparison, decidedly anemic.

However, even if there should come a significant correction soon in the ongoing commodities and emerging market rallies, there is no guarantee of a new and massive "flight to safety" back into the dollar, for the simple reason that the dollar's rapidly increasing negatives will be very likely to make many investors think twice before returning too much of their wealth there. Or, many investors may purchase Treasuries at low prices and high yields only with the intent of profit-taking as soon as enough investors buy in and drive prices up.

One might call this "flipping" - buying low only with the intent of holding for a short time and selling high for a profit. Such activity by investors would not signify any strategic return to the dollar. Additionally, staying in the emerging market assets for the longer haul is prudent, considering that global growth will eventually spur global demand and such hard assets will only increase in value past the short term.

A new global order emerging
With all the developments detailed above as a backdrop, the ever-clearer global picture that is emerging from this crisis is that of a meaningful and historically rapid transition from the US as the traditional driver of growth and demand to the emerging markets, led by the BRIC countries (Brazil, Russia, India and China), as the new global driver.

As the US economy, the consumer and the financial sectors flounder, and as much of Europe follows suit, the emerging economies and markets are getting on with global trade, business and finance. This transition is occurring in spite of the predictions of many in the West to the contrary, and it is advancing much faster than most observers would have thought possible. Whether he fully realized it or not, US Treasury Secretary Timothy Geithner acknowledged this watershed transition in his speech to his Chinese audience during his recent visit to China. He said: Our common challenge is to recognize that a more balanced and sustainable global recovery will require changes in the composition of growth in our two economies. Because of this, our policies have to be directed at very different outcomes. In the United States, saving rates will have to increase, and the purchases of US consumers cannot be as dominant a driver of growth as they have been in the past.

In China, as your leadership has recognized, sustainable growth will require a substantial shift from external to domestic demand, from investment and export driven growth to growth led by consumption. Strengthening domestic demand will also strengthen China's ability to weather fluctuations in global supply and demand. Globally, recovery will have come more from a shift by high saving economies to stronger domestic demand and less from the American consumer. Well, the obvious question here is why does the rest of the world, especially the emerging markets, still need to accord a key role to the US and to its market and its currency if, as Geithner admits, the US consumer is no longer the driver of global growth and demand?

Stated another way, if the US and its consumers aren't likely to return as the global driver anytime soon, and in truth, they most certainly aren't, then why should China and the emerging market economies still bother to think and act as if the US will return to such a key role? The obvious answer is that they shouldn't.

They should swiftly bring about a new global trade, economic and monetary order to replace the old US-centric, dollar-centric one. That is, in fact, what is happening, thanks largely to this present global crisis that emerged from the US and is still firmly centered there. Now that they have embarked on this path, there is no return to the old order with its outdated thinking and ways.

It is vitally important to see that the fundamental equations of risk assessment are inexorably being rewritten as these developments unfold. Assets traditionally thought to carry very low risk, such as Treasuries and the dollar, are progressively being seen in a much different light, that of much higher risk. Conversely, assets traditionally evaluated as carrying high risk, such as those in the emerging markets, are progressively being seen as much safer stores of wealth and as comparatively less risky than the dollar.

As these risk assessment equations continue to be rewritten, the positive implications for the emerging markets will become nothing less than gargantuan, while the negative implications for the US and the dollar will be no less so.

With US financing and the dollar in deepening trouble past the short term, and even at present, and with little or no viable and genuine signs of an economic rebound in the US, and with the bulk of the under-developed economies beginning to emerge from this crisis early, then we have the prospect of a world where the developed economies will likely continue to stagnate for years, where their currencies become ever-more prone to crisis, but where most of the emerging market economies return to healthy growth rates and where global investment wealth flows out of the developed economies and in their direction.

This will be a world where the US and its closest allies are obliged to continue to suffer the worst of the global crisis while the emerging economies rebound. This reordering of the global economic landscape cannot fail to effect corresponding geopolitical, global financial and monetary transformations of great potency and persistence.

You are witnessing the most remarkable transformation in recent history, from one global order to another that is completely different one, a grand reversal of fortunes wherein the traditionally "under-developed" economies collectively supersede the traditionally "developed" economies to become the dominant forces in the new global order.

W Joseph Stroupe is a strategic forecasting expert and editor of Global Events Magazine online at www.globaleventsmagazine.com

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