A Weak US Dollar Doesn’t Matter Folks!
Art by Daryl Cagle
People have been freaking out lately by a weak US dollar. I’m here to tell you it doesn’t really matter. Did you know that 60% of Americans have never left the country and less than 25% of Americans own passports? Most of the 40% who leave come back, so it’s only a temporary amount of time when their purchasing power may be relatively hurt.
An even better statistic states that only 20% of Americans speak a foreign language. Hence, where the heck are the 80% of Americans going to go if they can’t communicate with the locals? Ok, so they may understand what “I want a double quarter pounder with cheese please” in English means, but we aren’t going very far if we can’t speak another language. Sure a vacation is fine, but it’s not like we Americans are suddenly going to relocate overseas and establish roots.
If you are an American who makes a US$ denominated salary, buys US$ denominated assets like property, consumes Levi’s jeans, and never plans to leave the country, what are you freaking out about? The US Dollar can depreciate by 90% against the Euro, and it still wouldn’t really matter.
INFLATION FEARS OVERBLOWN
Economic theory states that for every new dollar printed, inflation will rise by a commensurate amount, eventually. You can read more about the IS/LM model at work here, but it’s boring as hell. The issue is that the output gap is running at 7-8%, so there’s still a ton of slack and you don’t have to worry about inflation.
Yes, it might suck that your BMW becomes prohibitively expensive in the short run, but in the long run, if European and other foreign producers desire to sell to the US, they will find ways to lower their prices accordingly. In the meantime, shouldn’t you be buying American in this economy anyways?
You might argue that so much of the input costs of the final good comes from foreign labor and parts. That’s true, but all you have to do is move down the cost curve in your consumption patterns. Instead of buying the TV from Best Buy, you go to Costco. Instead of buying the couch from Pottery Barn, buy from WalMart.
GOOD FOR EXPORTS
A weak USD helps US exports, making our goods cheaper to foreigners. If we can’t sell goods at home due to a weak economy, what a blessing it is to sell to foreigners! We dump our inventory on them, and make some money in the process! The problem is the US is a relatively closed economy with exports as a % of GDP hovering at 11%, or #157 in the world compared to Singapore, at 173%. In this regard, a weak dollar only helps a small percentage of the economy, but also argues the point that we are a self sufficient country.
The most interesting exchange rate competition lies between the Korean Won and Japanese Yen. Over time, you’ve seen Korea’s export economy resemble that of Japan’s export economy. Toyota is matched up against Hyundai, while Sony battles with Samsung Electronics. Korea’s export manufacturers are eating a lot of their counterpart’s bento boxes recently!
FUNDING OUR DEBT
Many fear that if the USD continues to depreciate, foreigners will stop funding our debt (buying our treasuries). That could be true, but frankly, foreigners like the Chinese are STUCK with over $800bn in US treasuries! If they stop buying our pitifully yielding 3.3% 10-year Treasuries, their US Treasury portfolio is going to tank, and they are going to lose billions more! Would you chop off your arm if you only had to chop off your pinky (accept lower rates)?
China can’t help but not continue funding our debt because it is one big “virtuous” cycle. Americans need cheap money to leverage ourselves to buy cheap Chinese goods (we imported $340bn worth of Chinese goods last year), and China likes selling their cheap goods to us. The world knows Americans are addicted to consumption and in a way, foreigners are like junket Casino operators who extend credit to addicted American gamblers. One day we will have to pay back the loan, or face a big man in a dark alley ready to break our knee caps. But, for now, the USD will remain the reserve currency of the world as foreigners can’t live without our consumption power.
CONCLUSION
Let’s be very clear here. The fear of a weak USD stems from the protectionist mentality of America’s business and political leaders whenever a recession hits. A weak currency invites “foreign invaders” who end up purchasing more of our assets, goods & services which for some reason folks don’t like.
There’s also a pride issue for those who really care about our currency. We’re embarrassed when we see that the USD no longer buys 100 Yen to the dollar. But, who cares? Honda Accords are made in the US anyway! A weak US dollar is a symptom, not a problem. Get over it and start chanting, “USA, USA, USA!”
Update: In “Samurai Predictions and Resolutions for 2010” you’ll see why a weak USD doesn’t matter. The reason is simply because I’m bullish on the USD!
Readers, do you agree with the thesis that a weak US dollar doesn’t matter? If so, why do you think it’s necessary to have a strong US dollar? And please, do mention how many languages you speak.
Keigu,
Financial Samurai - “Slicing Through Money’s Mysteries”
Follow on Twitter @FinancialSamurai and sign up for our RSS feed!
Related posts:
That is a welcomed, fresh perspective on things. It is certainly appreciated.
John DeFlumeri Jr.
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Well of course I’m going to disagree :-).
Ah Keynesian economics, I hate it.
It’s also really two issues that has people concerned, it’s not only the pursuit of a weak dollar but dramatic increasing deficits and deficit to GDP. How else does the govt plan on repaying the debt? Via inflation.
Let me ask these questions..
What do we export anymore other than raw materials? What do we psychically make here in the US? This is something we can’t just flip on overnight.
You mention about the output gap and not having to worry about inflation, how is this different than what we saw in the 70′s? Isn’t this similar to what we had during that period? How did that period turn out? We had stagflation something economists thought could never happen.
While we may not go outside of the country much what is more important is our imports will increase in price and our standard of living will decrease because of it. I have to say we have been foolish to think the world revolves us, and will be changing for the years to come.
Increasing the money supply does not increase wealth. Only real output does, which we have not increased. We cannot be a big consumer nation, have no manufacturing, and want a weak currency. They don’t go together. Otherwise we need some massive changes to happen within our country. It’s possible these will happen but it won’t be overnight. Our standard of living will continue to decrease during this process.
More importantly we want a STABLE currency first but a strong currency is also important with our current consumer consumption and little manufacturing environment.
I’m confused about this statement: “Instead of buying the TV from Best Buy, you go to Costco. Instead of buying the couch from Pottery Barn, buy from WalMart.” How is this different, the goods still come from the same place no? The input costs are still the same, regardless of where it’s purchased from.
A weak dollar IS the policy of our govt regardless of what they say, their actions are stating otherwise. So while you are hearing one thing, realize it’s the exact opposite in what they are doing. At best, they are being dishonest to the public.
I look at what’s happening now as playing with fire. Fire is a important tool but if handled improperly can lead to disaster. If a controlled weak decrease in our dollar that happens over many years (say 15-20) it wouldn’t necessarily be a bad thing. If is quick and sudden (less than 5) it could kill us. There are too many variables and dependencies to ensure all works out OK and the govt is taking a big risk to ensure it happens properly. It’s like landing a 747 on an aircraft carrier, it can be done but what are the odds?
From a biz owner and investment standpoint doesn’t your argument basically state you are better off investing in other countries or multi-national businesses until the dust settles? I’m not even factoring in other govt policies and intervention which then even adds more to my argument of slow growth.
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Larry – I like! You caught me on the “value” chain” usage. Yes, all input costs are the same, but for some reason, consumer still tend to pay up for an exact same good due to the perceived brand value. Point is, you can always find something for cheaper to keep your costs steady if input costs rise. Substitutable goods are everywhere.
We’ve had 20 years of low to declining inflation and therefore i-rates, you think we’re going back to double digit inflation now? We may have a gradual rise to 5-6%, but the days of double digit inflation are long gone due to the efficiency of cycles. Even if we do have massive inflation, the world is saved since Americans are all leveraged to the hilt anyway.
As a business owner, con’t to invest in America! From my beginning paragraphs, what foreign businesses do doesn’t matter since we’re a closed economy anyway. You’re not competing against a foreign webhosting company.
I’d love to argue more, but I’m on the bus and gotta go! FS
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Logically it makes sense based off that but not sure how it affects the larger picture. Clearly it is not good, although tourism does go up when the dollar is down. either way increased inflation in our country is not good for consumers buying more in country and usually taxes tend to increase as well.
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I’m inclined to agree with you on this one.
I’m sure there are situations where a stronger dollar would boost multinational, US based, company profits. In return, they could hire more US workers. Then again, US multinationals love to outsource to cheaper countries. So on the flipside of that argument, a lower dollar may indeed boost company profits due to the lower US Dollar.
I also agree that most of the fearmongering on this topic is greatly overblown. Most people aren’t aware that the .DXY is still $6 above its lows from 2007. Perhaps my trader apathy is showing here, but I really think the dollar thing is a done story, and all of the fast money has been made. That means reversal time should come around sooner rather than later.
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What exactly does Wal-Mart sell that is “made in the USA” ?
You realize that a weak dollar reduces the purchasing power for everything that I buy, because the vast majority of our goods are manufactured oversees.
You also ignore fuel/oil/gasoline, which is 100% immediately impacted by a falling dollar, or are you saying $4 gasoline has no economic impact?
And there is a very real fear with foreigners purchasing our corporations on the cheap: Anheuser-Busch is now an Brazilian/Belgium company owned by InBev. You couldn’t get more american than Budweiser.
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Weak dollar means we have to attract foreign investments with higher interest rates. That is a huge cost and one we all pay for. If rates go up………it chokes off investments, jobs etc.
What say you Samurai?
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@admin
I think a wipsaw with inflation is not out of the question.
“you can always find something for cheaper to keep your costs steady if input costs rise. Substitutable goods are everywhere.”
Up to a point. From steak to hamburger. What’s next after that cat food?
“You’re not competing against a foreign webhosting company.” Actually in my case I certainly am! We compete locally and globally all at the same time!
With the decrease in the past few years, we have picked up foreign clients in countries like Australia, where it’s very costly to do web hosting because of govt intervention.
FYI, we target specific markets, not specific countries… yet.
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BG – What’s wrong with InBev buying Budweiser? It’s not like we can’t still drink our crappy watered down beer anytime we want. Heck, InBev might actually do us all a favor and improve the formula! Now that’s efficient markets right there!
I’m all for $4+ oil (but 4$ oil has marginally something to d with the USD in the long run). $4 oil is more of a symptom of demand, than supply, let a lone a currency. Hence, $4 is there bc we accept it to be there. If we didn’t, we’d stop buying! I can’t wait for higher oil to cause us to change our consumption patterns and push forward new technologies. I stopped driving to work 18months ago due to oil, so prices have made a difference, and I’m saving more money now.
FS
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Neal – You make a good point about the “government crowding out effect” wrt to raising rates to attract foreigners to fund us. But, this goes back to my original argument of foreigners like China being STUCK! We’ve got all the legacy buyers where we want them to be, and they CAN’T stop buyer our treasuries and funding our consumption. Otherwise, they end up losing billions in the principal investments.
We’re all linked and will rise and fall togther!
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Larry – Nice! I knew you’d come around to my side of the story and argue for those who are freaking out about a weak dollar to relax and enjoy!
That’s great a weak USD is allowing you to take market share!
And for the record, I love $1 cheeseburgers from MCD as much as a good $40 prime rib!
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@admin
yes Bud stinks! I’m all for higher gas prices via the market, than some forced cap-n-tax system.
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@admin
The issue I’m pointing out is a transfer to a weak dollar causes massive changes economically. If you happen to be on the wrong side of the trade, watch out!
As a business owner and investor you can capitalize no matter which way the market goes. You can profit either way. Not everyone is that lucky. The common man will get much pain from what you propose will happen.
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@admin
When the US dollar gets weaker, Americans pay more for oil/gas — specifically because the currency is not worth as much. This has nothing to do with supply and demand, and everything to do with currency exchanges. How much oil you gonna get with a TRILLION Zimbabwe dollars (answer: maybe a gallon).
The US economy is oil driven (if not all economies), and the US uses more Oil (in barrels) than China, Japan, Russia, India, and Germany combined (the next 5 largest oil consumers). Though we don’t use as much relative to US GDP, and the combined GDP of the other 5 countries — so keep things in perspective. We are not “inefficient” with the oil we do consume, though we consume the vast majority of it. The US is 23% of the world GDP, and we use 24% of the world’s oil (see the balance)?
In the end, I see:
Weaker dollar == higher energy costs == doom for US economy
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Also isn’t your argument then saying you should go into debt? :-)
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@BG You should start a store called “Doomsday R’ Us”!
You’re wrong. Fundamental supply/demand drive oil prices, not currencies.
I agree with FS. If prices are too high, people just substitue. Prices then go lower. It’s all one big happy family.
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@The Genius
Educate thyself:
http://www.cnbc.com/id/33394782
“The CEO of oil giant BP believes the drop in the dollar in recent months is a major factor behind oil prices breaking through $75 a barrel. “
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The dollar and Oil are tied together since Oil itself is based upon dollars. There are other factors but a dollar debasement will cause the price of oil to rise, simple economics.
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@BG
Good point on the 23% of GDP, 24% of world oil consumption. You’d think there would be economies of scale where we’d be able to consume less as a % of world GDP.
There’s definitely a USD/oil correlation, but it’ more about fundamentals. Oil peaked around what, $160, and the Euro/USD bottomed around $1.65ish and we’re at $1.45 now. So, if the USD depreciates by another 0.20, you think oil is going to rocket 100% from $80 to $160? I don’t think so. Go look even further beyond the past 18 months.
Everything will be alright BG. The higher oil goes, the more excited I get, b/c it’s more of a reflection of demand recovery, which is great thing.
FS
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@Larry L, New York
If there’s massive inflation, going into debt now is the absolute right thing to do! Our assets inflate by definition, and our debt gets cheaper. Yup, no brainer.
Too bad I don’t think inflation is going to get much higher than 6-7% over the next couple years, unless it’s just a sustained raging bull market.
FS
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@Matt SF
Whoo hoo, 1 person agrees with me! I like your trading mentality, and the reversal to the mean. That’s how I think too. If one thing gets too out of whack, a natural correcting mechanism occurs. That’s the beauty of economics. Things always rationalize itself out.
$300 oil? No problem as people consume less and look for alternative fuel sources like palm oil.
A weak USD? No problem as every foreigners buys up our assets and drives prices up again, as well as strengthening the USD in the process.
Luck Budweiser guys. They made out like bandits. Tell them a weak USD is bad. They’re rolling in dough and loving it!
FS
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@admin
I’ll take even 6-7%!
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“We’re all linked and will rise and fall togther!” I like that, Samurai.
Many countries do have problems like ours in foreign trade, global financial issues and/or other things that are linked to exchange rate. I am currently in Asia and noticed the big changes in their exchange rates with the U.S. dollars in the last few decades. I also noticed the big changes in their social structures, life styles, and even ways of thinking in political issues. We are all small individuals. But we can make big and constructive changes to things that we think are not fair if we use our intrinsic good nature and abilities together!
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admin Reply:
November 2nd, 2009 at 9:00 pm
Lovingkind – Sounds good! Sounds like wherever you are in Asia, there’s been a great amount of progress! It definitely is true the world has gotten much smaller with technology advancements. The video I posted earlier called “Did You Know” highlights this. Thanks for visiting! FS
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interesting points. I didn’t know that 60% of Americans have never been outside the country, wow.
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Thanks for mentioning the video you posted in The Latest “Did You Know” Video for Fall 2009. I revisited it (was too busy to finish it last time) and was amazed to find how modern technology have changed our life. (I still haven’t learned to use Twitter or Plurks!)
People in some European and South East Asian countries seem to speak more foreign languages, partly due to the physical locations of their countries. People can easily drive or take buses/trains to their neighbor countries. They also live more closely to their “next door” neighbors…
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@Charlie
And 20% don’t speak a foreign language either! You go to Europe, and practically everybody speaks 2 languages fluently, it’s amazing. I should have asked each person to state how many languages they speak well before each post :) I took Spanish for 10 years, but it still sucks. FS
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@Lovingkind
What’s amazing though is the lack of English spoken in the developed country of Japan. You’d think they’d want to learn to speak English, especially given their love affair with US pop culture, but nope. Every time I go to Japan to see friends, or for business, I’m stuck using my broken Japanese language book.
It is their country though! FS
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@admin
Yes…..I agree Sam (I can call you Sam ….can’t I?) But that doesn’t change the fact that weak dollar pushes rates up and that chokes our economy so a weak dollar actually hurts the American consumer – or at least the American worker because she finds it harder to find work.
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Neal – Ill have to disagree. Take a look at rates (10 year treasury) for the past 20 yrs, the USD is weaker than ever, yet rates are hovering right at their all time lows.
What more does the American consumer need to spend that they’ll be hurt on? We already spend enough!
Hence, a weak USD doesn’t matter.
Sam is one of my nicknames, so go right ahead!
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@admin
I know! Europeans are great at languages. I don’t think I’ve ever run into a European tourist visiting the US who wasn’t able to ask questions in English. We really should emphasize foreign languages in the US from grade school.
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You make some good points here. Another advantage, of course, is that it makes US exports sell better since they will seem “cheaper” now in other currencies. This can help the trade dimensions of the US economy, which is always a good thing, too.
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If it helps, I speak 2 and a half languages now.
English and French…
half because I am missing vocab but I can pick it up in a couple of months after I get done with effing verbs in French :)
BF speaks 4 languages fluently. :)
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Oh and it’s mandatory to learn English and a third language in France if you go to a good school like a business school
You speak French (obv.), English for business and a third like German for doing business in Europe, but you can pick from Chinese to Spanish if you wanted
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Wow! This is a hot topic and a lot of stuffs on economics. I don’t know much about economics but I think a weak dollar, is of course, has a less purchasing power to buy goods and commodities (not unless if the inflation is not rising).
In addition to that, money remittance of Overseas Filipino Workers (OFWs) around the world would definitely have less value when they sent money to their loved ones here in the Philippines.
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@Tyrone | Millionaire Acts Thnx for stopping by. GREAT point on your perspective and those who remit money back losing out. Actually, do you mind educating me/us on the signficance of OFW remittances for the Philippines? Do you know what percentage of the Filipino population works overseas, and what about they remit a year as a % of GDP? I’m looking online, and it says around $10 billion (i’m assuming pesos, or roughly $2 billiion USD, and roughly 11% of GDP. Does that sound right?
What is the general attitude of local Filipinos wrt working abroad? Is it highly desired if there’s a choice, or would you folks rather stay local?
I’d love to get a sense of how ubiquitous remmitances are, and the history how how this structure came about. Are governments especially lenient on work visas for Filipinos around the world to work in service oriented businesses?
Is there just an ingrained culture to send money back to the family? What about just bring the entire family overseas, or actually NOT sending any money back, so one can save for themselves and bring the family over?
We have one of the largest Filipino populations here in Daly City in the Bay Area. Very good diversity and I love my chicken adobo! :)
FS
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FB – I’ve always wanted to speak French, as I love visitng Paris and Cannes! What a great culture and lifestyle. No wonder Johnny Depp escaped there.
4 languanges by the BF huh? That’s impressive! I think humans learn a new languange out of necessity, and since Americans feel they are the center of the universe, and don’t trvale much international either, we don’t bother!
For the record, I speak another language at an advanced level, but short of fluency unless you give me 3 months of full imersion living in the country!
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@admin
$4 gas may be all good and well for you and for the environment, but what do people do who can’t drive any less and are already on very low, fixed incomes? My mom lives in the country and is retired. She can’t afford to move to a city, but when gas prices go up she’s stuck because there is NO WHERE she can go without driving.
A weak US dollar will mean higher prices on a lot of things, including basics like food and gas. That might not “matter” to you all that much, but for many of people it’s the difference between paying for needed meds or eating — or worse.
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admin Reply:
November 3rd, 2009 at 7:14 pm
Hi Meg – That’s very true. Hopefully your mom being in the middle of nowhere allows her to save money on other expenses, since big city living is atrociously higher.
I’m not so sure about higher priced food, b/c much of our food is domestically grown, with USD input costs. We don’t have to eat imported mangos, and Thai shrimp for example. Let’s just eat our good old fashion hamburgers, chickens, corn, and garlic mashed potatoes! :)
Again, I don’t think a weak USD is the driving force behind oil, hence why I don’t think you should blame a weak USD for the price of oil. The USD is just 20 cents away from its all time low against the EURO, but Oil is still 100% away from its all time high of $160.
Best
[Reply]
@admin
You have a lot of questions. Honestly, I don’t have any idea as the the figures you are asking. However, I know the fact that OFW remittances are a huge part of the GDP of the Philippines. Actually, from what I know, OFW remittances somehow save the peso from devaluation as against other basket of other currencies especially before in the peak of recession. It also contributes to the dollar reserves of the country which I think is a measure to control interest rates by Central Bank.
Most of us have to go out abroad and find work because there is not so much opportunities here especially with the level of education most Filipinos have. Bringing the whole family abroad is one of the options but with time of waiting for the petition to come, it becomes a hassle especially if it’s in US.
When it comes to work visas, unfortunately, I think there is no special case. In fact, some countries have this notion of OFWs as merely maids or entertainers. Sad but true.
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@Tyrone | Millionaire Acts
Thanks for your insights Tyrone! Very interesting how the dynamics work in your country. I didn’t realize there was some sort of “petition” for families, although I do know that immigration laws to the US are quite stringent. I remember the US gov’t requiring families to invest $100,000 in the US before being allowed to immigrate. Not sure now.
There’s a lot of wealthy folks in The Philippines too no, the the Ayala family and all no? I appreciate your overseas thoughts!
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@admin
Yeah, there are some wealthy folks here but compare them to the rest and majority of the population, the ratio would probably close to zero. Honestly, I am one of those thinking to settle abroad – probably in US or in Europe – if the right career opportunity comes.
As of the latest list of Forbes, I think there were only 2 people here in the Philippines that were considered in the elite list of “dollar billionaires” around the world. These are Henry Sy and the Ayala Family.
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admin Reply:
November 3rd, 2009 at 10:05 pm
Tyrone – I hear you. What about your President though? :) I don’t understand why The Philippines hasn’t progressed as quickly as Korea, Taiwan, and China. What is it that keeps Philippines relatively small, despite it’s healthy population and large land mass?
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@admin
Keep in mind oil does affect the cost or other raw goods and farming. So while it’s done in the USA their cost is still affected.
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@admin
I don’t know what sources you are looking at, but when the dollar hit it’s lowest point (USD Index) @ 71-72 from April to July 2008, gasoline prices were also hitting their all-time highs. when gasoline hit its lows in January/February 2009, the USD Index was back up to 89.
The USD Index and fuel costs (in the US) are nearly perfectly inversely correlated (-1). Weak dollar == higher prices, Strong Dollar == lower prices.
How you can keep saying that the value of our currency (relative to others) has no affect on our prices is beyond me. I don’t know if one causes the other (or some third thing is causing both), but I’m pretty confident that a weaker dollar is going to lead to higher fuel costs (hell, it already has since March).
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I am american expat who moved abroad when the dollar was strong. I am among that group of Americans who speak a foriegn language and don’t come home. I won’t consider returning until something reasonable happens with health care. Now I earn more valuable money since the us dollar is weak. It may not matter to you but it does to me. I shop differently based on the dollar exchange rate and travel differently based on the dollar exchange rate. It good news for me and amazon.
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Financial Samurai,
Ah I miss reading your posts. I thought I would stop by and leave a little comment. I have been busy on various projects over at DINKS Finance, but I will try to stop by a little more.
Alright, I don’t have time to refute your post (which I totally disagree as you probably expected) but I want to ask you two questions:
1) Have you ever read either of Peter Schiff’s books?
2) Would you be willing to read at least one, if not both of Peter Schiff’s books and then post about where his theory is wrong (since you can’t both be right!).
-David
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admin Reply:
November 4th, 2009 at 8:18 pm
Hi David – I was wondering where you’ve been. Are you sure your other name is not “Michael” who is busy posting a lot of articles on DINKS? If so, it’s cool! I don’t mind anybody posting anything, so long as there are complete sentences! :)
Peter used to e-mail me asking for advice. I mentioned to him he’s got to really go out with a strong stance if anybody is going to read his book. I’m glad he has. There’s been a 25 yr bull market in the bond market, and yes, the bond market is in a little itsy bitsy bubble. But, we’ll be in a bubble for a LOOOONG time b/c everybody is stuck with our currency.
Solution is simple: shrink government and spend less money. Sooooo easy a solution.
I’m actually pretty BULLISH on the US dollar here. We’re closer to the bottom than the top. Have faith! Everything balances out.
Best, FS
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Haha that’s an interesting thought but no I am not Michael. I don’t post at all on DINKS I do other things for them, but I see you found my political blog!
Wait, do you really know Schiff personally? Not a joke? Really??? You have no idea how much I look up to him. I became very VERY cynical about my finance degree when my profesor who had an MBA in finance, PHD in finance, and two award-winning articles told us he lost 40% of his 401K with everyone else. I had always thought if I knew some more of the fundamentals of finance (hence why I majored in finance, plus I think finance is the bedrock of a company because let’s face it you have to make a profit or you don’t exist!) I would be able to make more money personally. Not true! But after reading Schiff’s books I became inspired and now I’m all about his investment philosophy.
But seriously you know him????? I want to know more about this!
-David
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@David@DINKS Finance
I feel better knowing that I didn’t see a 40% loss (no financial education for me). I calculated that we were out at 7-8 standard deviations and decided to go 100% stable value a few days before the huge drop in Sept/Oct 08, to end 2008 with “only” a 22% drop in the 401k. Pure luck. I plan to check out one of Schiff’s books based on your recommendation, thanks.
@admin: As for the dollar being close to the bottom, I agree, it is very low right now. When the dollar starts to recover, I expect the current bubbles to start popping (stocks, bonds, commodities, gold, etc). Everything is so highly correlated to the dollar right now, it is not even funny. Everyone is a USD currency trader, whether they know it or not. I tried to rebalance/optimize my portfolio last week, using uncorrelated funds (the proper way with post-modern portfolio theory), and there aren’t any funds that are _not_ highly correlated with each other — meaning they are all highly (inversely) correlated with the USD.
There is either “Stable Value”, or “Everything Else”.
I decided to start moving out of stocks and to start loading up on Bonds and Stable Value, cause when the bubble pops (and hopefully correlation ends), I’m betting stocks will fall the hardest. It ticks me off that my investment strategy is almost purely based on what I think the Fed is going to do to our currency.
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@David@DINKS Finance
It’s a small world David! If there’s anybody you should admire, it should be Warren Buffett! I actually think Economics is more important than finance, but I’m biased.
After getting your masters, getting your PhD doesn’t mean too much in the world of finance. Good for marketing to raise money and maybe build models, but it’s not necessary. FS
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Wait!!! Tell me more about this!!! Do you maintain contact with Peter?? Can you introduce me?? haha
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admin Reply:
November 7th, 2009 at 4:22 pm
David – Haha, he’s a tough man to get a hold of these days b/c of so many blind followers like yourself! Can you get Michael at DINKS to work for me and set everything up? I could use his expertise. FS
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While I am impressed that you know Peter Schiff personally, I don’t really appreciate the “blind follower” label. I suppose you would call me a “blind follower” of Ron Paul, Austrian Economics, Tom Woods, Adam Kokesh, and a whole bunch of others but hey, it’s your opinion, right?
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@David@DinksFinance Sorry, that wasn’t nice of me and it came out wrong. I encourage you to just take everybody’s opinion’s and status with a grain of salt. Everbody is right, until they are wrong. Best, FS
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David, sorry that came out wrong. It’s great you enjoy his views. I just encourage all of us to always question the assumptions and think for ourselves. We’re all right some of the time, until we aren’t! FS
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@David@DINKS Finance You must be still in college. Having such great faith in certain people only occurs when you are young. Call me a skeptic.
The Genius
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@admin
“We’re all right some of the time, until we aren’t!”
Great quote! That goes into my list with:
“Everything follows a trend, until it regresses to the mean.”
“I don’t want a return ON my capital, I just want a return OF my capital”
“If you had to live your life again, you’d need more money”
“You have the same chance of winning the lottery, whether you play it or not”
“Sometimes your best investments, are the ones you don’t make”
“Where large sums of money are concerned, it is advisable to trust nobody.”
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admin Reply:
November 13th, 2009 at 5:37 pm
BG – Not sure if that’s a compliment or a backhanded comment haha. Still not sure why people really think a weak dollar matters. You ever travel overseas? Do you speak another language? Do you spend a lot on foreign goods? Just wondeing. FS
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Not a bad perspective. Although, I think there are plenty of places the average English speaking American schlub could go without having to learn a foreign language. England, Australia, Canada (America’s hat); all have their own currencies and varying degrees of interconnectedness with the dollar (Australia’s actually already starting to come out of this downturn, much ahead of much of the Western world). All of that said, I don’t disagree with your main point, that it’s unlikely too many people are going to flee from the United States, and that for those of us who stay in the states, the effects of a weakening dollar are likely to not be that bad.
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admin Reply:
November 14th, 2009 at 8:51 pm
Hi Roger – That’s true about all the other English speaking countries in the world. Australia is rebounding as evidenced by their latest rate hike. I just think America is just too much of a closed economy that it doesn’t really matter.
I hear there will be a heavy rebuttal on this post from another popular website. I can’t wait! :) FS
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Hi Sam (hope that’s right),
I’m an US Citizen who moved overseas to work in 2006, I still reference things to US dollars so when the USD goes down things do feel more expensive for me! I should add that currently I’m paid in a local country salary based on a fixed exchange rate to the US Dollar so when the dollar goes down my salary does go up slightly.
The US is a net importer so when the value of the USD comes down then imports go up- many manufactured items are imported into the US so that will be effected.
The big impact would be if the dollar dropped dramatically, as many items are priced in USD. I work making computer hardware and all our product prices are priced in USD so if the dollar gets very weak it’s a problem for us as we pay salaries (for my workers) in local currency.
I would prefer a strong and stable dollar.
But I’m not a typical American- I can speak some Thai, Spanish and can understand one of the regional Indian languages.
As for countries getting into massive debt (like the USA now) look to your mother country of Japan- they have been stuffing themselves with debt for 20 years since the peak of 1989 and the market is still significantly lower than the peak. There has been pervasive deflation and multiple recessions in Japan and even today they are announcing a war on deflation . So there may well not be high inflation in the US. In fact the period of high inflation in the US was from 2001 – 2007 as home prices and commodities and food spiked up. Be careful loading up on debt right now!
-Mike
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admin Reply:
December 24th, 2009 at 10:42 pm
Hi Mike, thnx for your thoughts. You are not the typical American indeed, living abroad and speaking other languages.
Funny you say that the period of high inflation was from 2001-2007. That was the period when the Fed Funds went to pretty much 0%, and the 10-yr treasury yield bottomed at around 3%. If there was inflation, rates would be high.
So that’s the thing, if I do believe there will be inflation with all this monetary expansion, I’d load up on debt. Alas, I think inflation will cont to be benign, as it has been for the past 30 years.
Sam
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“We may have a gradual rise to 5-6%, but the days of double digit inflation are long gone due to the efficiency of cycles.”
Gee, Sam, that is just what younger and less experienced loan officers said about five years ago when I warned that the economy would not keep going up, up, up! (I train lenders on credit analysis for business loans.) They said it was a new economic paradigm based on information, not manufacturing or agriculture.
The experienced lenders in the room (and I) just shook our heads. Turns out we were right.
On what do you base your assertion that inflation will only rise to 5-6%? And how does our efficiency of cycles deal with the deflationary challenge we just experienced (or perhaps are still experiencing)?
As to the damage this does, a loaf of bread is $2 and a person who retired 15-20 years ago (my parents) with a fixed income has to eat. It was $.25 or so then. Gas at $4 is a much different proposition than gas at $1. You come across as a bit heartless when you imply that everyone can spend more because everyone is making more. Or blithely say thank goodness ‘grandma’ lives in the country because it costs less than the big city.
Inflation hurts. And it steals from everyone. Savings and fixed retirement income loses purchasing power. That purchasing power belonged to someone…and now it doesn’t.
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admin Reply:
December 29th, 2009 at 2:07 pm
Linda – Glad you were able to tell all your clients to sell all their assets and put everything in cash! Well done and no need to have any more clients any more b/c I assume you are very well off.
If as you say we have a “deflationary challenge”, why do you think there will be inflation? That’s a contradiction.
I continue to believe inflation will be as tame as a sleeping panda bear. The 10-yr yield won’t breach 5% in 2010, and you can take that to the bank. Feel free to take the other side and put a wager on it!
Best, Sam
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Cool! I just came to your blog via Google and I seriously loved it! The effort you do in posting here is seriously fantastic and I am pleased about it. Keep going buddy.
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.73 cents of every dollar our government gets is committed to debt. that should scare us if nothing else does. our government is broke. Have been for years. They just refuse to admit it.
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