Flow of Funds Washes Out Pessimists

This does not mean that the dollar is a buy; rather, it suggests that at least through the third quarter, there was no sign of a dollar crisis. The greenback has sold off at the end of the last couple of years only to bounce back early in the new year.

Could the greenback repeat 2005 in 2007, when after selling off hard at the end of 2004, it trended higher for most of 2005? Maybe, especially if the Federal Reserve, the stock market, commodity markets and emerging markets are right and the U.S. has a soft landing. I will be looking for signs that the U.S. economy is going to accelerate again by spring 2007.

But the hard-landing camp has been in no way humbled by the November jobs data, which appear to be fairly constructive. The hard-landing camp pins its arguments on U.S. housing market weakness crippling the consumer and dragging the economy down. Last summer, several big-name economists warned that the U.S. was already on the leading edge of a recession. The labor market is no tighter now than it was in September or October, and the tightness in those months didn't dissuade the pessimists.

What will it take to convince the doom-and-gloom camp to change its view? Surely the official data showing that household net worth is at record levels won't sway these pessimists. Surely the fact that personal income in the U.S. rose 5.8% above year-ago levels, well above the rate of inflation, won't, either.

Unfortunately, from where I sit, there seems to be very little that would convince those unhappy campers the U.S. is having a soft landing until the U.S. reports or is anticipated to report a 3-handle on its GDP.

Although it's fashionable to argue that the U.S. is slowing down and Japan and Europe are picking up the slack, I wonder if just the opposite is true. Europe faces a triple threat next year in the form of higher interest rates, higher taxes and a strong euro. Structural reforms have been limited in most eurozone countries. Growth probably has already peaked in the cycle. Japan's economic recovery is the longest since WWII but is showing its age.

Ironically, as the doom-and-gloom camp took control of the foreign exchange and debt market, the U.S. economy grew more than twice as fast as the Japanese economy and slightly faster than the eurozone's economy. Now that's what I'm talking about.