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Currency Report: 4/28/2011



April 29, 2011 – Comments (3)

[Ed's Note: With much sadness, we note the passing of a long-time Fool member, missash. For twelve years, missash brought a wealth of education and good humor to our community, and he will be greatly missed. We extend our condolences to his many friends and family.]


Author: washcomp

Board: Macro Economics

I won't bore you with the leader board, but suffice it to say that most major currencies advanced against the US dollar all yesterday afternoon and into the evening. The index has moved back up to 73.19 from a low last night of 72.87. Between the time I checked prices before I ate supper and then again before going to bed, I "made" a lot of money on my foreign currencies. This depressed me somewhat and I'll explain why:

Around 2 1/2 years ago I started talking about the inverse relationship between the S&P and the US dollar index. While I am not presumptuous to take credit for this observation, I had never seen it mentioned anywhere and, in general, it was scoffed at. Nowadays, it's common place to see the relationship mentioned in the trade press as an "of course" sort of thing. As early as the 1970's, I've been using foreign currencies (and yes, at various times accumulated physical precious metals) as a hedge against a drop in the dollar. While the dollar index didn't exist in those days, the inflationary environment was obvious, as was the potential "solution". This methodology was not employed from the standpoint of a "person of wealth", but rather frequently during times when the funds employed were difficult to accumulate, but have constituted at least 10% (currently about 25%) of my total assets, so it was not an inconsequential bet.

As most of you are aware by now, this has forced a concentration of my attention on the macro implications of currency moves (and because of my living in the US) as they relate to the US dollar (which is simplistically presented by the US dollar index).

It is an unnatural behavior for most Americans to do what I've done. While it is natural for many foreigners to hold US accounts for parallel reasons, few take the trade on the opposite direction. To the average American, holding foreign accounts is deemed risky, somehow unpatriotic, or the realm of only the wealthy who are trying to avoid taxation in some nefarious manner (I report my earnings and the presence of the accounts to the IRS religiously each year) so my methodology is taken as somewhere on the lunatic tin hat "survivalist fringe, but I call it simple prudence.

So anyway, each night I tabulate the total of all my investments and assets to see how I'm doing (and then start a new spreadsheet each year so I can compare year to year). This got me thinking - since such a large percentage of my net worth is in other currencies, and those are not accumulating in size (other than by interest), the purchasing power on a global basis of those caches may not be increasing, but the rest of my assets may actually be decreasing. That was the rational to my "Global Net Worth Over Time" posts of multiplying all US dollar denominated assets by the US dollar index, and seeing how things were going.

I won't bore you with the gory details, but the cross post I did last night by Mungofitch is telling. He is an ethnic Canadian living in the Euro zone (he has publicly disclosed this in his posts), so he uses a mixture of Euros, Canadian and US dollars to do his evaluation. To summarize, in terms of US dollars, the SS&P has increased this year, in terms of Canadian it is flat and in terms of Euros it has dropped about 6% (IIRC).

So what does all this mean?

US Cash has lost over 20% of its value in the last year. While, according to the US government, we are experiencing little inflation, prices are clearly rising for "some" reason. Without the increase in wages normally associated with inflation, for the government or the Fed to admit this movement would imply failure and be both politically and monetarily costly. There have been posts which indicate that this movement supports debtors. In one respect, I agree, but it also presupposes that those in debt can continue to sustain their standard of living in the face of increased costs.

Because of the "engineered" paltry returns on cash, this movement is forcing us to consider taking on more risky investment behavior (from the standpoint of asset allocation) that we otherwise would.

I cannot even pretend to be able to predict the behavior of various markets given the distortion inserted by the Fed's support of a bond bubble (yes, bonds are in a bubble right now). What I would say is that if the dollar continues to fall, a prudent approach which might be considered is to pick up a "lump" of an equity index fund or some heavy duty stable dividend payers or select commodity plays (or PM's if that's your cup o' Rosy), follow it with a tight stop and try to preserve as much of the value of your assets as you can.

It is important to understand that this strategy is not designed to "make money", but rather to protect the value of the money you currently have (though the IRS will happily take their cut from your "winnings"). In the fight to protect the value of your asset base, it is important to realize that while the absolute number of dollars you are holding is not going down, their value is (and frankly, the increase in the equity market is only partially making up the difference - but it's better than nothing.

Some of us have formal investment backgrounds (I don't) and some of us (including myself) have, in their ignorance of the "right way" to do things gone on unusual tangents (like me). That said, sometimes a completely unorthodox way of looking at things is useful (as exemplified by some of the investment books which have now become classics when compared to the common thinking of their time).

I am not trying to give investment advice (as I am particularly unqualified to do so), but rather to make you think and broaden your scope of vision in a way that I have found "somewhat" useful.


3 Comments – Post Your Own

#1) On April 29, 2011 at 12:20 PM, NajdorfSicilian (99.81) wrote:

'Around 2 1/2 years ago I started talking about the inverse relationship between the S&P and the US dollar index. While I am not presumptuous to take credit for this observation, I had never seen it mentioned anywhere and, in general, it was scoffed at.'

 Is this some sort of joke? The relationship was noted well before 2009.

 Of course, the USD will often reverse that trend and rise when the USD is powering ahead such as in the late 1990s for several years.

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#2) On April 29, 2011 at 12:22 PM, NajdorfSicilian (99.81) wrote:

'US Cash has lost over 20% of its value in the last year.'

 This is similarly ludicrous and shows a clear misunderstanding of basic financial topics.

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#3) On April 29, 2011 at 1:46 PM, OrmontUS (< 20) wrote:

CryingofLot makes an interesting point.  From a purely USian point of view, many items may not have risen in price by that amount.  Well, maybe gasoline, food, clothing - things like that, but not housing or some products from Asia.  That said, from  a "global" standpoint, the ability to buy products in Europe, Japan, Australia or elsewhere has, in fact, changed by this value. While I guess the argument is philosophical to a certain extent, it is also pragmatic (though price increases at the retail level may be at differing rates for a number of reasons) as it does affect what we are able to buy locally as well.As far as the contention that the relationship of the S&P and the dollar index was noticed by other before me, that very well may be the case, but I had never seen it before and took a "bit" of heckling when I tried to present it originally.  I guess the fact that others have noted it doesn't necessarily make it false :-).As to the comment that, during the 1990's, this relationship didn't hold, I actually referenced it in today's follow up post: Jeff




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