Sunday, May 11, 2014

The dollar doesn't get much respect

If I've learned anything from our (quite enjoyable) vacation driving around Europe, it's that the dollar doesn't go very far.

As the above chart shows, from a long-term perspective the dollar is trading at relatively low levels, in inflation-adjusted terms, against two broad baskets of currencies. It's comforting to see that it is still about 5% above it's all-time lows of mid-2011, but it is still over 10% below its long term average (96).

My calculation of the dollar's Purchasing Power Parity vis a vis the Euro is shown in the chart above (green line). This suggests that the Euro is about 20% overvalued against the dollar, which is another way of saying that things here in Europe cost on average about 20% more than they do in the states. My real-life experience this past week in Germany, Switzerland, and Austria confirms what my PPP model tells me. (I have been using this model, by the way, since the mid-1980s.)

The strength of the Euro is likely one reason that Eurozone inflation is quite low—low enough to draw the attention of the ECB, which appears to be gearing up for some kind of Quantitative Easing to forestall the alleged "risk" of deflation. With the ECB preparing to actively relax monetary policy at the same time as the Fed is preparing to begin tightening monetary policy (as soon as it finishes tapering QE3, which should happen by the end of this year), I think it's reasonable to assume that the dollar could enjoy some gains vis a vis the Euro over the next few years. The dollar could get a really serious boost if Washington could get its head out of the sand and pursue growth-oriented instead of business- and capital-unfriendly policies, but that awaits the outcome of the November elections at the earliest.

With the dollar generally weak against almost all countries these days (with the notable exception of the unofficial "blue" rate for the Argentine peso and the black market rate for the Venezuelan Bolivar, both of which are being crushed by a mountain of bad policies in general), I think it makes sense to engage in non-dollar investing on a mostly currency-hedged basis, because the long-term balance of risks favors, I believe, a stronger dollar.


theyenguy said...

A weaker dollar is coming.

Please consider that on Friday May 9, 2014 there was a global currency event. Debt deflation commenced with most Equity Investments and most Credit Investments trading lower, as all The Currencies, that is the Major World Currencies, DBV, and the Emerging Market Currencies, CEW, except the India Rupe, ICN, traded lower at opening, with the result that the US Dollar, $USD, UUP, popped higher, and closed higher at 79.95, causing disinvestment out of Global Financials, IXG, Nation Investment, EFA, Dividends Excluding Financials, DTN, and World Stocks, VT, as the Bond Vigilantes called the Interest Rate on the US Ten Year Note, ^TNX, higher from 2.60% to 2.62%, in exercising their control over the US Federal Reserve. Electric Utilities, PUI, XUI, and Global Utilities, DPU, such as China Utility, HNU, traded strongly lower on the higher Benchmark Interest Rate, $TNX.

Inasmuch as investors fear that the word central banks have crossed the rubicon of sound monetary policy, and have made money good investments bad, currency traders sold out of the Euro, FXE, and investors sold out of Banco Santander, STD, which led the European Financials, EUFN, the European Stocks, EZU, and the European Small Cap Dividend Stocks, DFE, lower. Greece, GREK, led the Eurozone Nations, lower. The Euro, FXE, fell strongly lower form its recent high near 138 to close at 136.

The failure of credit, that is trust in the monetary policies of the world central banks to stimulate investment gains on May 9, 2014, marked by the trade lower in the Worlds Major Currencies, DBV, and Emerging Market Currencies, CEW, was a defining inflection point and was the most significant event in economic history since President Nixon took the US off the gold standard in 1971; the world pivoted from the age of credit, where the investor was the centerpiece of economic activity, into the age of debt servitude, where the debt serf is the centerpiece of economic activity.

While Junk Bonds, JNK, traded higher on May 9, 2014, other High Yielding Debt, such as European Debt, EU, led Aggregate Credit, AGG, lower; the 30 Year US Government Bond, EDV, traded down more than the US Ten Year Note, TLT; Floating Rate Notes, FLOT, traded lower; the Steepner ETF, STPP, traded higher, reflecting a steepening of the US Sovereign Debt Yield Curve, $TNX:$TYX; and the Zeroes, ZROZ, led Popular Notes And Bonds lower; all establishing the failure of credit.

From May 9, 2014 forward, all Credit Investments, together with all Equity Investments, will be trading lower in a see saw destruction of fiat wealth.

Deleveraging out of currency carry trade investments such as Cemex, CX, and derisking out of debt trade investments, such as Blackstone, BX, introduces Destructionism which replaces Inflationism, with the result that the much feared global economic deflation is inevitable.

The chart of the Dollar, $USD, UUP, which is actually a basket of currencies, is terrifically bearish.

Look for Major World Currencies, DBV, and Emerging Market Currencies, CEW, to sell off, bringing the US Dollar, into a global currency, credit, and equity collapse, known as Financial Armageddon, and foretold in bible prophecy of Revelation 13:1-4.

One should be invested in non-dollar wealth preservation strategy.

Spot Gold, $GOLD, traded lower to close at $1,289; it is in an Elliott Wave 3 Up, on its way to an Elliott Wave 5 High. There is coming an investment demand for gold out of the Defensive Stocks, DEF, that is Utilities, PUI, XLU, Energy, XOP, IPW, and Consumer Staples, KXI, and into Gold, GLD.

In the age of the failure of credit, wealth is preserved only by the safe storage and physical possession of gold bullion.

Hans said...

We all hoping that you and Ms Grannis are fully enjoying your well deserved holiday! Pictures pretty please. PPP

Despite the upheaval in EuroLand, I am shocked that the US Dollar has not appreciated against it.

I view this as a warning of future events for America, with very unpleasant consequences.

zumbador said...


Hopefully not a bad question but what would you suggest and/or consider within the investment markets as the possible investments to: "engage in non-dollar investing on a mostly currency-hedged basis"?

Thank you

Scott Grannis said...

My intent here was mainly to say that if you are a dollar-based investor, then investing in non-dollar denominated assets should be done on a currency hedged basis.

By inference, I am saying that dollar denominated assets seem generally more attractive than unhedged non dollar denominated assets.

McKibbinUSA said...

Did someone mention "deflation"...?

Benjamin Cole said...

Sadly, I think Scott Grannis is right; the dollar will rise again the Euro in coming months. Probably against the yen too.

The Fed should be printing money like crazy, but we get the monetary noose instead.

Meanwhile, PCE inflation at one percent and falling, and unit labor costs are down--down!---since 2008. We have deflation in unit labor costs in the USA.

The Fed is fighting the last war, the one on 1970s-style inflation Well, it is a independent federal public agency, and so you can expect it to adapt to changing market conditions with the flexibility of a steel pole cemented into the ground to about half-mast.

McKibbinUSA said...

I think the Fed war against Main Street USA is only picking up steam -- the truth is that saving Federalism will require that Main Street USA be annihilated in detail -- let's face it, Fed people hate Main Street USA and view the issues of ordinary people in America as a hassle -- big picture, watch for the standard of living for the 99% crowd to decline steadily over the balance of the 21st century -- the only way to avoid a declining standard of living is to somehow join the 1% club -- but make no mistake, the Fed will wipe out Main Street USA and leave ordinary Americans in poverty (much like the American Indians) in order to save Federalism from itself...