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TMFDeej (99.46)

Dollar Down = Stocks Up

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October 15, 2009 – Comments (17) | RELATED TICKERS: USD , UDN

According to Barclays Capital, "since 2003, dollar weakness has gone hand-in-hand with equity rallies." The bank's economists estimate currency depreciation helped to reduce the trade deficit, which added 1.1 percentage points to gross domestic product growth in the first half of 2009 from a year earlier.

From the stock market's perspective, Barclays Capital notes in its U.S. Portfolio Strategy weekly letter that more than 30% of revenues for Standard & Poor's 500 companies come from abroad. Thus, dollar weakness boosts earnings of large, U.S. multinational corporations through increased competitiveness and positive currency translation effects, as foreign revenues are converted into a greater number of shrunken dollars.

It's no surprise that technology, energy, materials and industrial sectors benefit the most from the dollar's decline. Barclays plotted the performance of those groups (inversely) against the Fed's trade-weighted dollar index, and the lines moved in lockstep.

Barclays expects dollar weakness to persist in the months ahead, which would support the cyclical rally through year-end, it says. Bad news for the buck is good news for stocks. Booyah!

That underscores why, for all the angst the dollar's decline has produced, it has failed to upset the stock market...

As long as there is no ready substitute for the dollar, Wall Street can celebrate the currency's steady decline. And U.S. GDP will be boosted by a cheap greenback's spur to exports and deterrent to imports.

Weak Dollar Equals Strong Stocks, For Now

17 Comments – Post Your Own

#1) On October 15, 2009 at 12:29 PM, alstry (35.69) wrote:

What are we exporting???.....our top exports are trash.

I believe exports are less than 10% of GDP......what happens when we can't afford a gallon of gas because no one will accept our currency and we don't have an easy way to get different currency?

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#2) On October 15, 2009 at 12:35 PM, Harold71 (29.14) wrote:

I wonder how long this idiotic bond market will keep holding with an uber weak currency?

See you at Dow 4,000...and Gold $2,000.  Or a similar ratio thereof.

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#3) On October 15, 2009 at 12:40 PM, Melaschasm (88.28) wrote:

Do not worry.  If a weakening dollar causes hardship for the American people, our government will print more money to bail us out.  ;)

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#4) On October 15, 2009 at 12:49 PM, russiangambit (29.96) wrote:

> As long as there is no ready substitute for the dollar, Wall Street can celebrate the currency's steady decline. And U.S. GDP will be boosted by a cheap greenback's spur to exports and deterrent to imports.

Deej, I think you are really way too confident in the dollar's reserve currency status. At this right it could stop being such as soon as 6 months from now. That is where we are headed.

My real life job is to mitigate disasters (in IT projects). I identify them ahead of time and then work to prevent them before the project goes life. It is called an IT architect -)).

Anyway, economics and finance are not that different. We all see issues ahead of us, all the time, the question is always will we do something about it?

I really do hope that Berananke will be forced to defend the dollar because if dollar looses it status, it will get really bad here in the US. 

So far I see no intention to defend the dollar . And people are misguided when they rejoice at the dollar fall. It already fell something like 15% this year. That equals 15% loss in the purchasing power. Or you can say that equals 15% inflation  in terms of purchasing experience. Don't you think it is enough? It doesn't bother you that our purchasing power erode 0.5% every day this week?

How much further do you think USD needs to fall for exports to benefit? I think it has fallen enough. Any further fall is very dangerous .

I understand that people are looking for reasns for the stock market to go up, but dollar's fall and inflation are not it.

Intresting artcile on Bloomberg this morning about the dolllar. "Dollar to Hit 50 Yen, Cease as Reserve, Sumitomo Says "

http://www.bloomberg.com/apps/news?pid=20601109&sid=a_A5nqmw9Dq8

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#5) On October 15, 2009 at 12:59 PM, kaskoosek (98.49) wrote:

 Harold71

We are living in the twighlight zone, because the fed's interest rates are zero. At the same time GS and JPMorgan get free money in addition to full access to the markets. It is what I call interest arbitrage. Bonds can stay high due to this manipulation. 

 

Politician in washington are the most inept and corrupt group. Instead of doing actual reform and re-enacting glass steagal, they made GS a bank and provided funds to private equity players like black rock. The US taxpayer get the shaft, while these guys get all of the upside.

 

I think it is time to load up on pitchforks. Unlike deej who does not understand the a falling currency is unsustainable, because no one puts money in a falling asset class, this will all come crashing down. We are going to have a reset of epic proportions through hyperinflation. Taxation will not correct this problem, because it will lead to capital flight. This eerily resembles Zimbabwe. 

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#6) On October 15, 2009 at 1:37 PM, alstry (35.69) wrote:

Kas,

What are your thought about Pre Soviet collapse.....

WOW....discussions on this thread are actually dealing with the issues facing America.....and not whether the market is up or down a few points.

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#7) On October 15, 2009 at 1:50 PM, Gemini846 (90.28) wrote:

I could have been mistaken, but I didn't think Deej was being overly positive on the dollar. This is kind of like the housing bubble meets musical chairs. It's all fun and games till the music stops.

That bloomburg article is sobering. In all honesty our congress needs to step in and replace the greenback with money and strip the fed of its power to sink this country. Unfortunatly this round of politicians is either too stupid or to power hungry to care. They're all in thier 60's so it doesn't matter if thier grand kids get screwed.

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#8) On October 15, 2009 at 2:06 PM, outoffocus (24.49) wrote:

I appreciate this article because it sheds light into why the Fed wont defend the dollar.  As long as the weak dollar remains profitable for the multinational corporations, who cares if the little guy gets screwed.  If anything this further supports the stagflation theory.  Multinationals don't create jobs in the US.  If anything they are sending jobs overseas, which allows the multinationals to be twice as profitable at half the cost.  This further weakens the American consumer and hence the domestic ecomony while increasing inflation.  Once again we've created another unsustainable situation for ourselves.  At some point something has got to give.  Until that something gives I guess I'll continue to invest in commodity stocks and foreign equities.

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#9) On October 15, 2009 at 2:20 PM, lquadland10 (< 20) wrote:

Exective order 11110 Lets bring back the Silver Certificate Dollar.

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#10) On October 15, 2009 at 4:48 PM, Rehydrogenated (35.54) wrote:

So what does everyone think that people are going to buy with their "reserve status" dollars? The only option is to buy US assets with US dollars and who wants to buy US assets when the US is going to crash or those assets make money in declining US dollars? Our only export is trash or something like that. Who wants to buy trash?

I guess they can buy oil...

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#11) On October 15, 2009 at 8:41 PM, Imperial1964 (97.91) wrote:

Didn't the US engineer a dollar devaluation (on the order of 30% as I recall) during the great depression in order to get US exports going again?  This time it is the same thing via different means.

Of course I am not very happy about import prices going up and all our wealth and standard of living going down slowly, but I think it is better than continuing to sell hundreds of billions of dollars worth of assets and debt (that we and our children will have to pay) to foreign governments every year.

The account defecits we have run this decade are not sustainable.  A sufficient devaluation in the dollar will correct the problem and is inevitable at some point.  I would rather it happen now than continue to mortgage our future for consumption today and the devaluation happen eventually anyway.

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#12) On October 15, 2009 at 9:24 PM, russiangambit (29.96) wrote:

Imperial, yes , normally currency devaluation is one of the tools during a crisis. But we've been experiencing significant currency devaluation for the last 10 years. When is it time to stop? It is not going to solve the problem all by itself because all it does - it steals wealth from the citizens to pay for government's obligation and citizens have no say in it whatsoever. What needs to be done and what is always done in a crisis, eventually, is cutting the spending. Military would be a good place to start. 

At this point, it almost feels like FED is carrying out targeted and purposeful devaluation of dollar in order to reinflate the bubbles and inflate out of debts. However, it comes with serious consequnces for the dollar in terms of reserve currency status. If dollar loses it status, FED will no longer be able to borrow at reasonable rates. Then there will be no other way to finance the govenrment other than money printing. At least, right now we have options - cut spending, print or borrow. It irritates me to no end that we let average problems grow bigger and bigger and we only attempt to fix them when they become uncontrollable and then we create a bigger problem while fixing existing one.

Money printing is not an answer, it has been tried and tried again, and it never worked. I don't know why people think it will be different this time.The answer is hard work and saving, just like you do in your personal finances. Hoping to solve financial problmes through money printing is exactly the same thing as believing in a perpretuim mobile or alchemy, it is aginst the nature of things and therefore it is not possible. 

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#13) On October 15, 2009 at 9:54 PM, AvianFlu (49.42) wrote:

Russian:
I agree with you.
I think Bernanke has no intent to defend the dollar except when all the cows have left the barn and it is way too late.

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#14) On October 16, 2009 at 2:29 AM, kaskoosek (98.49) wrote:

To the people saying that devaluation will correct the problem.

 

The US has already had a sever devaluation from 200 till now. I do not see any current account surpluses. What would the US export? The country is not competitive anymore. 

 

 

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#15) On October 16, 2009 at 3:11 AM, ozzfan1317 (79.35) wrote:

I hate to be the voice of reason but didnt our currency artificially appreciate when everyone thought the apocalypse was coming as a flight to safety? How much has the dollar depreciated since then depending on how much it may not be as bad as we percieve.

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#16) On October 16, 2009 at 6:41 AM, outoffocus (24.49) wrote:

ozzfan1317

I'm not following the logic of your post.  If the economy was really strengthening should the dollar be apprecieating (stronger dollar due to strong economy)?

As far as you question is concerned, what happened in 2008 was a mass delevering in our system that made cash the only safe asset class at that time.   As a result of this the Fed lowered the interest rates to practically zero and printed tons of money to spur lending between banks. This action made returns on cash negative and therefore made treasuries unattractive.  Because this action is unsustainable on its own, the Fed started monetizing our debt in order to keep interest rates low.  This further negates the returns on cash and sends cash into other asset classes like stocks and commodities.

Thats pretty much a long way of saying that percieved strength in the economy does not (in normal times) lead to a weaker dollar.  If anything its the opposite.  What we are seeing is inflation making its way into stocks and commodities (oil back up to $77 a barrel).

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#17) On October 16, 2009 at 1:23 PM, topsecret09 (71.27) wrote:

Weak Dollar vs Strong Dollar  But,If the dollar falls TOO FAR we risk a financial meltdown In the United States.....The weak U.S. dollar is helping to push oil and gasoline prices higher, making imported goods more expensive for Americans and overseas vacations more costly. At the same time, it's helped U.S. exporters.

If the dollar gains against other currencies, it is said to be strengthening. Its buying power increases relative to the other currencies. If its exchange rate declines, it is said to be weakening.

A strong dollar lowers the price to U.S. consumers of foreign products and services. That helps to keep inflation in check. U.S. consumers also benefit when they travel to foreign countries. It's usually a sign of a strong economy that is firing on all cylinders.

Weak dollar is basically the mirror image of strong dollar. U.S. manufacturers and other exporters benefit as American products become relatively cheaper. More foreign tourists can afford to visit the United States.

Exports are growing thanks to the weak dollar, which makes U.S.-made goods more affordable. Industries with a strong international presence are benefiting the most. Primary-product producers are seeing increased profits, since commodities are priced on the global market.

The dollar’s fall over the past several years is just cause for celebration by many domestic producers. Since its peak in 2002, the trade-weighted dollar has fallen by 25%, making U.S. goods much more competitive in an international market, while filling U.S. malls with Europeans on shopping sprees. The dollar has likely now finished its downward revaluation, and should stabilize going forward. This will allow the U.S. to enjoy the benefits of an affordable currency, while removing some of the risk in corporations’ long-term plans.
However if the dollar continues to sink, it could bring more inflation and even trigger a sell-off by foreigners of U.S. investments, making it harder to pay down the national debt and increasing risks of recession.

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