Report here at Nasdaq.
Goodyear Tire & Rubber Co. reported a 10% drop in its second-quarter profit but exceeded analyst expectations as currency fluctuations and some restructuring charges overshadowed its strong financial performance.
The company took a $401 million hit to its sales, suggesting that the strengthening dollar rather than a slower China economy is now a big issue for U.S. auto-parts makers as they attempt to manage their businesses through the second half of the year.This write up misses the mark in the way of explanation.
Foreign tire sellers lowered their prices in USD terms FIRST, which acted to increase their sales and market shares in the U.S. to the detriment of Goodyear's share ....... THEN the international financiers of the tire trade made regulatory adjustments which resulted in what is termed here a "strengthening dollar" in forex terms.
More empirical evidence here that the forex terms are a resultant function of the leading pricing actions of the international merchants.
Hi Matt, great post! I have listened to a podcast with Mike where you elaborated on your thoughts that exporters setting prices on goods/services are more influential then central banks using quantity to affect forex rates. I think you make a great case in that regard. However, when exporters continuously put their products on sale that causes depreciation of their own currency, e.g. JPY or EUR. Combine that with the importing country's Central Bank raising overnight rates (e.g. the Fed) causing even more depreciation of that exporters national currency, how can that have a happy ending for anybody (exporting or importing country?)
ReplyDeleteAs I see it, accelerating currency depreciation (exporter lowering prices/the importer's Central Bank raising rates) on the exporters currency will cause even more drag on the importing countries GDP (e.g.US.) and economic stagnation, or even more disinflation, in both the exporting and importing countries.
Hopefully, my question makes sense. If so, can I get your thoughts/comments on it?
sapien,
ReplyDeleteI think this tire situation was a bit delayed function of the petroleum price in USD terms...
So the foreign tire people passed on the savings on their petroleum to their customers in the form of tire rebates in USDs....
And then the oil is heavily dependent on steel prices and steel has been being marked down ... so this will decrease the costs to oil producers who will probably lower oil prices again...
Gold has a lot of petroleum costs so that is finally being marked down too...
I think youre right it is a bit of a "deflationary" spiral... the producers keep lowering their prices to get rid of inventory with the global austerity and as domestic US oil production increases the OPEC people lose some monopoly rent as US domestic replaces the OPEC people's oil...
IMO the only thing that gets us out of this is if the US govt increases top line spending and that just doesnt seem very likely at least thru the end of this FY.... unless we get a Fed raise in the policy rate then that would help...
Otherwise it looks to play out like you say with the import countries benefiting in real terms in this environment... but it isnt like we dont have a lot of people working in the oil sector to increase US production and putting pressure on OPEC so it is not a "free ride" for the US so to speak.. we are earning this improvement in our real terms...
Also, companies can still make a lot of "money" in this environment.... the US fiscal is stuck at about $4.1T annual but is not going down.... its just not going up...
rsp.
Matt, thanks for your response.
ReplyDeleteIn June, Fed governor Brainard gave a speech noting that $USD appreciation was reducing US net exports/GDP up to 1% in Q4 of 2014 and 1.9% in Q1 2015. With foreign exporter price cutting already creating a significant amount of $USD appreciation coupled with the coming rise in the Fed's overnight rate and ongoing commodity deflation, e.g. oil, it just seems this will have a very adverse affect on GDP. Yes, the $4.1T in top line spending and the FFR increase will add income to the economy, but to who?
It just seems like those who aren't working or are underemployed will continue to limping along while those who benefit in the industries getting showered by US top line spending, e.g. healthcare, pharma, medical devices, health insurance, defense, finance, et al will make out like bandits--for awhile until the economy collapses again due to lack of aggregate demand in other industries. It makes no sense to me but it is what it is I guess.
One last thing, I was thinking today that if I vote in the next presidential election I will vote for whomever the Republican candidate is. That is, if HRC becomes the democratic nominee for president and not Bernie. The sooner we get the balanced budget amendment, privatization of social security, and any other nonsense that the Republicans say the country needs, the sooner the economy will crash and the economy can start over with hopefully new political leadership. Death by a thousand cuts with HRC, like is happening now with B. Obama, just seems like insanity. ;-)
Sapien,
ReplyDeleteIt takes some time to adjust consumer behavior. .. fir instance if people are saving $75/mo at the gas pump once they see that they might upgrade to iPhone 6.. Or if they get a $70 rebate back from Bridgestone they may go out to dinner, etc....
Behavior eventually adjusts... rsp