Tuesday, April 13, 2010

The dollar is still very weak

This is a chart of the Fed's measure of the dollar's strength vs. a large basket of other currencies and adjusted for inflation differentials. I think this is one of the best dollar indices available. As it shows, as of the end of February the dollar was only slightly higher (about 3-4%) than its all-time lows. This, despite the mountains of concerns that have supposedly arisen over the risk that Greek indebtedness could seriously threaten the future existence of the Euro. This is more evidence to back up the assertion in my previous post that market pricing still reveals relatively high levels of concern about the future of the U.S. economy.


Benjamin Cole said...

I agree. We are becomng less and lass a credible debtor. Other parts of the globe are more promising, especially Asia.

I hope we put our fiscal house in order.

One hope is that dollar becomes so weak, we go back to being an exporting nation. May happen in the next 20 years.

dave said...

Would you explain to Benjamin that changing the unit of account DOES NOT change the terms of trade.

Benjamin Cole said...

Even if the unit of exchange hitherto has been artifically pegged too high, or sinks below its "natural" level due to pessimism about the USA?

John said...

The world is full of people right now that think the US dollar is trash. I find it amusing that barely eighteen momths ago it was virtually the ONLY currency anyone wanted to hold.

Bear with me on this one because I want to make a point on the dollar.

My wife and I are tennis players. I love to play but I can take or leave watching, depending on who's playing. My wife, however can stare at the tennis channel for HOURS and not be bored. We were watching a women's match one evening and one of the players was Jelena Jankovic, from Serbia. This fortunate young lady (currently ranked #7 in the world) designed and/or sponsered a line of women's tennis clothing that became extremely popular among chinese women. Well, she financially hit a home run.

As my wife and I were watching the match one of the announcers mentioned that Jelena was building a twenty thousand square foot home with a ten car garage near San Diego (not far from you, Scott). My wife wowed at the size of the house but we surmised (correctly it turned out) that she had parents, siblings, etc. in mind. But what hit ME was not the size or the garage, or even San Diego, but that she and her family CHOSE the United States to live and invest their money. They could have chosen anywhere on the planet to live. Now I know SD is nice. But there are a LOT of nice places in the world. Yet they chose the US. Why? Well, if you know anything about Serbia, you would know that it is in a region that arguably is the most politically unstable in modern history. Look up 'ethnic clensing' and Serbia would likely be mentioned. I could argue that the US is the the exact opposite. It is THE most stable country in modern history. To me, the Jankovic family wanted to live in a peaceful country where there were laws that would protect both them and their wealth.

I realize that this is just one tiny decision. But every owner of wealth has a vote on what form it takes and in what currency it is denominated. The IRS does not care that you or I own Swiss Francs as long as we declare our legal income from it on our tax return and pay our legal taxes. Investors every day choose to buy or sell any number of currencies in a free market and it has been and is the collective decision of the world's wealth holders the the US dollar is the world's reserve currency. It is not mandated by any legislation or treaty. The US dollar will be fine as long as there are Jelena Jankovics in the world who understand and believe that their money is wanted here and will be treated well here.

I am not worried about Uncle Buck.

Benjamin Cole said...


I think there is a great deal to be said for having a stable government, and a system of courts and contract and property law. We will get political flight capital here.

Transparency in financial markets is vital.

That said, the mainland Chinese are not migrating here anymore. The earth is tilting back to East Asia. Sheesh, 1.5 billion people with generally good work ethics and a strong culture. 2 billion if you count other East Asians.

Japan will look like the first inning.

The greatest boom in economic history is happening right now in East Asia, and will happen for the next 20 years, barring some terrible political upheaval.

John said...

Hi Benj,

As my little grandson says, 'correcto facto'. Asia will develop rapidly IF they can solve a few political issues. China has some freedom of speech problems and I'm still not convinced they can transfer power peacefully on a consistent basis over time. If they can pull it off it will be terrific for the global economy. However, China has a history of fracturing and I still am wary of their respect for property rights. They have made tremendous progress though.

My investments are US centered. Many large publicly owned companies operate globally so I don't feel the need to invest directly in the equity markets of individual countries. If I want a country exposure there are many ETFs to choose from. There are many paths to success. As many as there are individual imaginations. I'm just an old country boy that would rather eat roast beef and potatoes instead of Sushi.

Benjamin Cole said...

One weakness of large US public companies: Not enough shareholder accountability.

Curiously enough, the SEC is sandbagging attempts that would "allow" shareholders to place slates up for board elections.

I like that word, "allow." Shareholders have to be "allowed" to put up slates for board membership. In companies that they won, and are voting on. Sheesh.

Oh, I know, some shareholder activists will make hay with this. So what? The activists will not be able to make hay on any company that is well run.

Shareholder board slates will be a real incentive for management to answer to shareholders--a market incentive, not a regulation.

Right now, there is a little bit of being a chump in being a shareholder. Management uses your equity, and you have no real say in the company, except to sell.

That is about as effective as threatening to quit and take the ball home--except when you quit, you no longer own the ball, and can't take it home.

For that and other reasons, I recommend to people, especially young people, to start their own businesses, and be active investors, as opposed to passive investors (shareholders).

John said...


Not a thing in the world wrong with starting and running one's own business. It's as American as apple pie. More people should get an idea and give it a try. No better way to get an education than to have to meet a payroll every week.

I do not share your disdain for owning common stocks. It is a difficult way to invest for most people and requires the use of a fair amount of counter-intuitive logic, as well as strong emotional controls. Its why most individuals should seek professional guidance (NOT me. The 'I'm done' fork was stuck in me years ago). However there are worthy rewards to this type of investing if done properly and over longer periods of time. Its a shame to me that so many still have that 'sucker, bag holder' image of equity investors. Every position does not succeed but over time I have had several multi baggers that have more than made up for the losers. It takes a certain amount of faith and patience to succeed as an owner in ANY form. Everybody gets paid before you do. And its YOU everybody wants to stick with the biggest tax tab.

Benjamin Cole said...

From your lips to G-d's ears, and I hope you do well.

I have noted over the years that hands-on property investors in Southern California have done enormously well. The tax code really, really forces wealth into property. You can leverge, you can expense, you can deduct.

Each to his own, and I hope the best for all.

I sense a big rally in global equities, a 10-yeat bull is about to be birthed. Property may do even better, and you can leverage.

John said...

I want to make one more point here about the US Dollar and then I'll move on (promise).

When I was starting out in the securities business I had a lot of accounts that traded a lot. They generally were small to mediun size accounts and I worked hard servicing them. There was another, much older guy in my office who didn't seem to work as hard as I was working (he was, he was just working differently - and a lot smarter). One day he asked me when I was going to stop scre---g around with play money. I felt like I had been insulted. But he really did me a favor. You see, everyone has their play money and they have their deep down serious-as-a-heart-attack money. I wasn't touching THAT money. That pool is many, many, MANY times larger than the play money.

The world is kinda the same way. The industrial trading money is like the play money compared to the deep (and I do mean DEEP) pools of serious reserve assets held by central banks, large commercial banks and insurance companies. You can also throw in wealthy individuals and families. That money is NOT risk capital and it will forever be invested in the safest places on the planet. Its not going to Russia, China, Serbia, Thailand, or Turkey in any meaningful size. It will be in the large developed economies like Germany, Japan, and the United States, with the US claiming the lion's share. Hot money will always seek the fast growth but the biggest pools are not hot money. All it cares about is safety. And the US offers it in spades.

Well, I took my friend's advice and stopped 'scr----g' around with play money and went after those deep pools of serious money. My business did much better and I didn't work nearly as hard.