Consider this statement, extracted from a research report published by United States brokerage Punk Ziegel this week:
“This help is quite likely because the dollar is plunging in value. This decline is not hurting the United States, at the moment, because interest rates have not spiked. Moreover, foreign producers are ‘eating’ the reduced profits implicit in this move in order to maintain their market shares in the US economy.
“There is a limit to how much these producers can take, however, and it is evident that when they increase their prices their home economies will suffer. This probability is not lost on central bankers who must support the dollar to save their local economies. They will do this.”
The analyst in question, Richard Bove, makes this assertion in assessing the threats to his argument that investors have a “once in a generation opportunity” to buy US bank stocks.
Put simply, Bove reckons recent action by the Federal Reserve creates guaranteed profits for US banks, allowing them to borrow cheaply and lend at hugely attractive margins.
But the Fed’s “easy money” scheme is imperilled, quite literally, by the fact that it has limited resources – $921 billion (Dh3.38 trillion) in assets at the last count – which is only about half the assets of a bank like Citigroup.
So Bove suggests that in order to succeed the Fed will need the support of foreign central banks – which he believes will be forthcoming because foreign governments, such as those in the Middle East, want to stop the dollar plunging.Is that a heroic assumption? In my view, yes. I suspect Bove needs to travel outside the US a bit more.
Awaiting a foreign financial rescue that may never come