The Dollar, Deficits and International Trade
(for the Yacht-less)

Trying to make a topic like this understandable is only slightly less daunting than explaining the meaning of life, but I recently had an insight about this topic that I want to pass along, so here goes . . .

I’ve been thinking about all this since the dollar began plunging against the value of most other currencies in early October. Prices of imports went up due to the dollar’s loss of value.

The dollar goes down in value when there is more selling than buying. This works just like when investors sell stocks of companies they don’t like. They trade shares of stock for dollars. This pushes down the price of those stocks. Foreign investors holding dollars can sell their dollars and buy other currencies. They trade dollars for Euros or Yen. This pushes down the value of the dollar.

A declining dollar is not all bad, but certainly has consequences. What I wanted to tell you about is the long term cause of this trend, and its long term effect on us all.

The gap between the wealthy and poor in virtually all countries has been growing, and is something that must be addressed because the middle class is what drives most economies and the middle class needs to grow to accomplish this. Although redistribution of wealth is a dirty word in many circles, our massive trade imbalance is accomplishing just that.

Revenues from exports offset the cost of imports, but when imports cost more than exports bring in, the difference must be paid in cash and is called a trade deficit. Ironically this result of free-market capitalism is effectively redistributing our wealth. Who’s getting it? Countries who are better at free market capitalism than the US.

When cash builds up in the hands of foreigners, they begin looking for things to buy with it. When we are talking billions and trillions of dollars, these folks aren’t going to be satisfied with doo-dads from Wal-Mart, they are going to want to buy the whole company. More importantly they can afford to buy the whole company.

Last year the foreign owned Dubai Ports company made the news when it tried to buy the operations of several key US seaports. Two years ago, China tried to buy Unocal, but was rebuffed by regulators. When Japan was at the top of its economic cycle, we saw them buy up icons like Rockefeller Center and Pebble Beach. When you buy Alpo, Nestle, Dannon, Frigidaire, TV Guide, Lean Cuisine, Glidden or 100 other brand name items you are buying from companies that are already foreign owned.

Expect a lot more of this activity - foreigners buying US assets with all of those dollars we have been giving them. We have already redistributed our wealth overseas. To think that foreigners will not eventually demand productive assets in trade for unproductive dollars is pure fantasy. We owe them and they know it.

During the November elections, calls for isolationism and increased trade barriers were surely heard overseas. If there are some things that foreigners are not allowed to buy with their hoards of dollars, wouldn’t those dollars seem to be worth less than before? Then just how far is it from worth less to worthless? That is the $64 billion question.

Before I could even articulate this issue, I knew it existed and had built into several of my investment strategies ways to protect my clients from a potential devaluation of the dollar. It is called intelligent diversification.

Savvy investors should always have some assets in investments not denominated in dollars. Investments denominated in foreign currencies are one way. Hard assets, such as gold, oil and real estate that are counted in ounces (gold), barrels (oil) and acres (real estate) are another.

The most popular strategy I run in client accounts, recently expanded and renamed the All-Star Lineup, includes 20 categories of investment and currently has 46% of its assets in areas that are expected to stand up well to a declining dollar.

If the dollar, trade deficits and international trade worry you, but you don’t know quite what to do, give me a call to discuss this forward looking strategy, and let me become your designated worrier.

  Frank and Ernest

I admit I read the Sunday comics.  Not all, but a few are in my “don’t miss” category and Frank and Ernest is one.

 Recently Frank and Ernest were looking through a microscope at investment activity on “Cell Wall Street”.  “Of course amoebas are buying stocks that will split . . . and the fat cells are looking for rapidly expanding companies." 

 “Those flesh eating bacteria are interested in hostile takeovers . . . I wonder what those atoms are buying?” says Frank (or is it Ernest?  I never know which is which).   The reply:  “they're not buying stock.  The individual atoms are looking for bonds."

 Maybe I’ve been staring at charts too long, but I thought this was pretty good.