All That Glitters / Vignettes on Perspective

1Will the dollar and the forex market in general be the big economic story this summer and autumn?

The Bank of Israel has been grinding its teeth and continuing to buy $100 million a day, for more than 10 months now.

Of all things, the Finance Ministry has kicked off a campaign against the purchases, thereby restarting the public debate on the central bank's "exit strategy" from its massive forex market intervention.

"The Bank of Israel should cease its daily purchase of dollars, and perhaps adopt another mechanism, like buying against the trend," or it could act randomly, as opposed to buying fixed amounts at fixed times, ministry accountant general Shuki Oren told TheMarker.

Oren also believes the $50 billion in foreign currency reserves has become a risk factor on the Bank of Israel's balance sheet.

What risk? Linkage, that's what. If most of the reserves are in dollars, and the dollar crashes, the Bank of Israel would rack up losses.

Bank of Israel governor Stanley Fischer isn't happy either. But he has a dilemma. He'd like to support exports and jobs by dictating a high exchange rate for the dollar. But he'd also like to keep prices stable and prevent inflation from rising further. In a reality of free capital movement (which nobody means to change), a state can't dictate both the exchange rate and the interest rate.

Since the crisis erupted, Fischer has made the exchange rate his priority, instead of inflation. But rising property prices and capital infusions could bring inflation to the fore again.

Capital market animals think Israel will be among the first countries to jack up interest rates again, which should strengthen the shekel. If the Bank of Israel also stops buying dollars, the shekel will rise even more. It could even return to NIS 3.50 to the dollar, where it was a year ago.

Some foreign players even think that's the likely scenario. Even now, the dollar is at NIS 3.87 - that was the official exchange rate on Friday. The shekel's appreciation has been due entirely to the weakness of the dollar in world markets, not the Bank of Israel's behavior.

Shuki Oren and the Finance Ministry have to consider whether they're prepared for the repercussions of their demand.

If and when the dollar crosses NIS 3.50 on the downside, they can expect hordes of outraged manufacturers burning tires outside their window, not Fischer's.

2Financial statements. The powerful rally by American stocks, which have gained ground for the last 12 business days, was fueled by strong second-quarter corporate financial statements.

A lot of companies beat analysts' expectations for profits. But not for sales. How's that?

Simple. Analysts had lowered their expectations. In any case their forecasts are guesswork based on sentiment, and meanwhile, companies have cut their workforces and costs.

Traders conclude that the companies are leaner and meaner, and better positioned to profit when the economy rallies.

But it's all based on optimism. This is an opportunity to recall that quarterly statements mean little. They're easily manipulated, and short-term efforts to meet or beat bottom-line expectations had until recently been considered one of the more egregious ills on Wall Street.

The truth is that business at many companies is still in the doghouse. If the figures don't stay good, the stock market gains will grind to a halt.

3Junk bonds are soaring. Like stocks, corporate bond prices surged in the last month, and the most powerful rally was among the riskiest of the lot - junk bonds. In the U.S., the index of bonds with the miserable grade of CCC rose from 40 points at the height of the trouble to 70 today, a level that characterizes a healthy economy.

Some analysts suspect this means the race after returns is losing touch with reality again. After the gains posted by Israel's junk bonds, local analysts are starting to say the same thing.

4Percent alert!

Alan Blinder, a professor of economics at Princeton and formerly deputy to U.S. Federal Reserve Board chairman Alan Greenspan, begs to remind that growth figures can be misleading.

The American economy is improving, Blinder says, and second-half growth could reach as much as 3% or even 4%.

Sounds terrific. But Blinder points out that growth calculations are based on a host of data, some of which completely collapsed during the first half of 2009, like housing, cars, and inventory levels. When they stop falling, the aggregate figure of growth jumps. But that doesn't mean all is hunky-dory.

For example, in the first quarter of 2009, expenditure on housing in America crashed, dropping by 39%. Housing comprises 2.6% of GDP. The trend in the home market doesn't need to rebound: all it needs is to return to zero and GDP will rise by a whole percentage point (because 39% of 2.6% is about 1%).

Blinder isn't predicting a rebound, he says, just a stop in the fall.

It's an interesting lesson on percentages that we'd do well to learn here too. But the public doesn't care about percentages, numbers and GDP, Blinder adds.

What the the public cares about are jobs and wages, both of which will continue to decline in the quarters to come.