“The dollar’s weakness is definitely a factor for stocks right now. The good news is we don’t think it will get much worse from here.” — Elizabeth Weymouth, global investment specialist, J.P. Morgan.
I had to chuckle when I read Weymouth’s precise forecast. According to the Journal, “Ms. Weymouth says her firm expects the dollar won’t fall much below 74 European cents in the next few months.”
What is the U.S. dollar worth now, after the most recent bloodletting? A mere 76 European cents — down 10% on the year and at lows not seen since March 2005. Not a lot of room for error in that forecast. And what proprietary measures went into such a forecast? A bunch of highly compensated individuals sitting around a room tossing out guesses? “Well, it’s at 76 cents now,” someone says. “Let’s say it won’t go below 74 cents.”
It’s a comic old world. The prestigious Financial Times, arriving every morning as it does, all dressed in pink, offered its own upbeat thoughts on the dollar. The headline boldly declared, “A Lower Dollar Helps the Global Economy.”
Wow! So why don’t we just obliterate the U.S. dollar and grind it to powder? Let’s keep making the dollar worth less and less.
Oh wait; we’re already doing that. The surest bet in all of finance is that the dollar will lose value over time. The dollar’s value has dropped more than 95% since the creation of the Federal Reserve in 1913, which is very ironic when one considers that the Federal Reserve is the government agency responsible for safeguarding the dollar’s value. Ever since the severance of the link between the dollar and gold in 1971, dollars are no harder to create than pressing a few buttons.
Of course, the picture is more complex than “strong dollar good” and “weak dollar bad.” There are nuances…
Let us think about the consumer. The average consumer labors under higher energy prices on the doorsteps of winter. He works to stay ahead of rising costs for health care and medicines. The stock market, despite recent strength, is not much higher than it was six years ago. So no help from the old portfolio.
Plus, as we have seen, the American consumer finds his house is suddenly not worth as much as it was last year. This house, remember, is the cherished asset that has been climbing in value every year. For years, every time the homeowner wanted a few extra bucks, he simply refinanced and “extracted equity” from his house. But today, when he sticks his hand into the piggy bank, he wiggles his fingers around finds nothing at all to extract.
And now he finds his U.S. dollars do not go as far as they once did. Buying the stuff that the rest of the world makes costs more today than it did last year. The slide in the dollar, therefore, is a tax on the purchasing power of American consumers.
However, there are a few folks who benefit from a weaker dollar – mostly tourists and U.S. exporters. Suddenly, American-made wares look a little cheaper in the eyes of that buyer from London, that bargain hunter from Brussels, that eager shopper from Toulouse.
Not that the euro is such a hot currency. It is the dollar’s sickly sister. What’s to like about the euro? It, too, is a product of governments — none of which can control how much they spend. Some might make the case that the European economies are stronger than America’s. Perhaps.
But in the matter of paper currencies, it is mostly a race to the bottom. Eventually, all paper currencies find their true level at the zero mark. That’s bad news for dollar-holders, but good news for the holders of gold, commodities and tangible assets of all sorts.
We are tempted, therefore, to say, “Join the New Year’s revolution. Sell dollars; buy tangible assets.”
Happy New Year!
For The Markets and Money Australia