ETF Expert

There was a time that a strong U.S. dollar meant that American companies could buy a lot of cheap stuff from the world. And Americans themselves could do what they did best… consume.

Today, the more the U.S. dollar falls, the better many “so-called” American companies will do. Since a large percentage of them earn more than 50% of their money from overseas operations, profits come in the form of strengthening foreign currencies. The weak greenback, then, is contributing to healthier corporations.

It is ironic, though. Multi-nationals are less interested in making cheap stuff in the developing world than they are interested in emerging nations as a source of revenue; that is, corporations are looking to China, Brazil and others as potential consumers, not as a source of cheap labor.

Are we purposefully growing America by letting the U.S. dollar slip-slide away? The U.S. government may not admit that this is the intent, but we barely hear a peep from officials about actions to reverse the trend. There may even be a small bit of arrogance about the U.S. dollar such that… “Hey, where else is the world really going to turn?”

The threat of a U.S. dollar weakening to the point of absurdity may indeed exist. Still, investors need to think about several possibilities, including the chance that foreigners lose faith in U.S. currency and U.S. dollar-denominated debt.

Right now, though, top-level policy makers must be tallying up the positives:

(1) Weak dollar = smaller trade deficit
(2) Weak dollar = importers forced to buy less from abroad
(3) Weak dollar = exporter competitiveness
(4) Weak dollar = increased profitability of multinationals
(5) Weak dollar = reduced outsourcing overseas… possible boost to jobs?

And that’s just the economy itself. Global reflation in the form of excess U.S. dollars is the biggest reason for the increased risk-taking in financial markets. People use the negligible interest rate dollar to buy lots of stocks, bonds and higher-yielding currencies. 

In fact, all of the world’s currencies are trending higher against the dollar:

As long as the dollar devaluation desires of the U.S. government remain intact, then any of the above currencies are likely to work for you. Keep in mind, however, most of the easy currency gains in resource-rich, rate-raising countries have been made already.

The Fed doesn’t see importers passing along their higher costs to consumers in the current environment, which is one reason that traditional inflation may remain subdued. But it could be a costly gamble on the Fed’s part. After all, U.S. companies that don’t generate 50% of their profit from overseas, but rely a fair amount on components/parts, may not have a choice for their own profitability. Moreover, as long as key commodities like oil are priced in U.S. dollars, Americans will be experiencing plenty of inflated prices.

If the U.S. economy truly does begin the recovery process, wouldn’t the beaten-down buck have to strengthen? And if the buck regains some of its luster, won’t that cause reduced profitability of multinationals and larger trade deficits? Won’t carry trade investors have to sell global assets to pay back loans before dollar appreciation gets out of hand?

The biggest threat to market-based wealth would be a sustained spike in the U.S. dollar. Of course, nobody thinks it can happen. Meanwhile, the biggest threat to the U.S. economy would be the complete demise of the U.S. dollar. Here’s to hoping for some stabilization!

If you’d like to learn more about ETF investing… then tune into “In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod.

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