Monday, December 3, 2007

The Complexity of the Global Economy

The weak US dollar has been in the news lately. The dollar's value has dropped significantly enough against other currencies that newspapers are starting to do human interest stories about how tough it is for expatriates to live on a US-dollar salary these days.

Considered in a vacuum, the US dollar's weakness can be touted as a sign of US economic weakness, which will surely bring about a global economic catastrophe. However, currencies do not exist in a vacuum.

When it first became apparent that the markets were truly global, it seemed like a threat to me. Something was always bad SOMEPLACE, right? And if Hong Kong crashed one night, it would take Tokyo with it, and the Dow would follow the next day. But after a few years, it is apparent to me that market movement still goes back to plain, old investor emotion; are we a herd, following the others right off the cliff during the selloff, or are we a pack, waiting in the brush to pounce and split up the carcass? The difference is that now, it's easier for other predators from far away to share in the spoils.

I think that weak-dollar policy has helped the trade deficit, and that the markets will correct for it. As dollar-denominated investments lose value, many overseas will continue to sell... but there's always someone waiting in the weeds to take a bite.

So what does this mean for US insurers? I think it means more and more foreign investment in US financial services companies in the short-term, as investor overreaction to subprime issues allows long-term investors to snap up shares of good companies at garage-sale prices. Over the long term, it's harder to say, although I'm optimistic that there is enough foreign cash out there to avert a potential stock market crisis over the next ten years... but more about that later.