A Strong versus a Weak Dollar

A strong dollar makes imports cheaper. A strong dollar also leads to more purchases of imports versus products manufactured at home. This has led to a decline of US industry and a negative balance of payments. The decline of US industry has led to a decline in middle class jobs and the taxes that these jobs used to support. An overly strong dollar leads eventually to a weaker US economy. A weaker dollar will lead to a more competitive American economy and result in more jobs back home, more middle class jobs, and more taxes paid to the US treasury. But what does this have to do with investing for a devalued dollar? If the dollar goes down in value, the eventual result could well be a resurgence of American industry.

Where Things Are and Where They Are Headed

The US economy has been in a mess. The immediate cause is the Great Recession of 2008 and onwards. Reasons for the recession include excessive government spending. Reasons also include short sighted investing. The ever more common practice of reading the market to gain short term profits takes necessary capital out of play. In our article, Investing and the Continuing Fiscal Cliff Drama, we state that the main problem for investors today is that the investing future is hard to see due to continual infighting on Capitol Hill. However, the long term future may not be that hard to see. The central features of the US recovery have been the Bernanke Doctrine, the policies of the US Federal Reserve as outlined by its chairman, Ben Bernanke and continued spending by the federal government despite mounting deficits. It may well be that the point of all this is to devalue the American dollar. This would reduce the value of a trillion dollars in dollar reserves held by China. It would make the practice of buying dollars to prop it up artificially ever more costly. This pair of policies is likely to reduce the value of the dollar over time to a point at which American industry revives, imports fall, and more middle class jobs generate sufficient taxes to balance the federal budget. Investing for a devalued dollar may well have to do with investing in manufacturing stocks in the good old USA.

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Learning how to invest is a full time job in and of itself. Deficit investing requires the investor to find good companies with solid prospects and find these companies in countries whose economies are growing without excessive debt. Profits made by these companies come back home and are banked in the local currency. Property is purchased which is valued in the local currency. Inventory is valued in the local currency. As any foreign currency outpaces the US dollar all of an offshore company’s assets are going to go up in value as denominated in US dollars. The same argument goes for US companies with overseas facilities. Inventories, cash deposits, and profits in general may be kept offshore where they will appreciate versus the dollar.

Deficit investing, to a degree, requires knowledge of foreign currencies as well a fundamental knowledge of how to pick stocks. The days when picking dividend stocks to populate a portfolio to guarantee continuing returns may be going away. When the US dollar loses value at a higher rate than annual dividends it is time to consider deficit investing and look for companies that make money and then store assets in currencies that are outpacing the US dollar. There are no guarantees in investing but looking down the years the ability of the USA to control its deficit is in question. This contrarian view is written to encourage the long term investor to take into consideration the steady decrease in purchasing power of the US dollar. It simply has taken a higher rate of return on investment in dollars for US companies to keep pace with companies in many foreign countries where the currency remains or is becoming stronger. As usual we are not suggesting that the investor invest in or ignore any given stock.  We are suggesting that they do not ignore the risk of dollar devaluation and consider what we are calling deficit investing.

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