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Is the drop in the dollar really a bad thing?

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October 06, 2009 – Comments (22) | RELATED TICKERS: USD , UDN

I've been bearish on the U.S. dollar for a long time now.  However, I'm not one of those ferocious grizzly bears who believes that the dollar is about to implode and we're headed for hyperinflation.  I'm more of a cuddly Koala bear who believes that we are headed for a relatively orderly, steady decline in the value of the dollar.

Everyone automatically assumes that a drop in the value of the U.S. dollar is a bad thing.  And certainly a complete implosion of the USD like the grizzlies are looking for would be, however the more I think about it the more I believe the gradual decline in the value of the dollar that Koalas like myself are looking for wouldn't necessarily be a bad thing.

China's weak currency has enabled it to turn itself into a global power that produces a massive amount of goods for the rest of the world.  A change in the value of the Yuan relative to the value of the U.S. dollar would help correct some of the trade imbalance that has built up over the years.  The problem with the U.S. economy is that is has become too focused on consumption and services and not enough on making things that people, particularly those in foreign countries want to buy. 

I know that having a strong currency appeals to a sense of national pride that people have.  "Grrrrrr, we're powerful and everyone has to use our currency."  Well I have news for you, after years of mismanaging our economy the rest of the world is catching up.  One of the ways that balance can be restored to the system is for our currency to drop in value, making the things that we produce in America cheaper for foreigners to buy and more competitive for us to purchase.

I see lots of people here on CAPS who don't understand how the world works.  They are uber-bears on the U.S. dollar, yet they have a portfolio that's full of red thumbs.  Ahhhh guys, stocks will not drop, particularly stocks related to natural resources, if the dollar continues to fall.  Did you ever notice that the market goes up every time the dollar drops?  You might want to refine your CAPS portfolio a little.

Not only would a weaker dollar be good for trade, and in turn eventually the economy, but it would be good for the environment as well.  As someone who works in the auto sector, I'm hardly what one would consider a "tree-hugger."  I'm not even sure that global warming exists.  I'm on the fence on the issue.  Of more importance to me is that we stop shipping our hard-earned money over to the Middle East for their oil.  Doing so is a good idea as a matter of national security alone.  We shouldn't be giving tons of money to countries like Iran (OPEC's second largest producer). 

More importantly though, more expensive oil and in turn gasoline would force the U.S. to focus on developing domestic sources of power.  We would be better off using our own resources like electricity generated from natural gas and coal to power plug-in electric vehicles than using conventional gasoline that's made from oil shipped from overseas.

I won't even get into how a drop in the value of the dollar would help out with that whole massive national dept thing and the collapse in asset values that we have experienced.

Wow, that was quite a rant before I got to the point of this post.  I originally started writing it because I came across an interesting rumor this morning.  A UK paper called The Independent published a story today called The demise of the dollar

The piece contends that a number of countries in the Middle East have ben having secret discussions with China, Russia, Japan and France to switch from pricing oil in U.S. dollars to a basket of currencies including gold, the Euro, the Chinese Yuan, and a new planned unified currency for the Gulf nations.

On a related note that should be subtitled "How Soon We Forget" I' am currently reading an excellent non-fiction book on World War II called 1942 by Winstron Groom of Forest Gump fame.  The U.S. lost thousands of lives and spent zillions of dollars fighting a huge war to free China and France from Japan and Germany respectively during WWII, yet here they are barely a generation later working against us.  As someone who values loyalty above most other personality traits, this bothers me to no end.  They should be kissing our feet, not having secret meetings about how to stop using our currency.

I digress.  The Independent clains to have confirmed this rumor with "Gulf Arab and Chinese banking sources in Hong Kong."  It also claims that U.S. authorities are aware that this meeting occured.  Now I don't know whether this is true or not, but the move makes a lot of sense from the perspective of these countries.  If I was them (and I didn't owe the U.S. one) I'd be doing the same thing.

As someone who believes that at least the United States, if not the rest of the world will experience subpar economic growth for a number of years to come, it's difficult to be bullish on oil unless the value of the dollar continues to fall.  I have kept a decent position in a foreign, dividend-paying E&P in my personal portfolio as a hedge against dollar weakness.  I have always preferred oil to gold because it actually generates cash flow rather than just sitting there and actually costing money to store.

Again, I don't know if the rumor is true, but it makes a lot of sense and the article is an interesting read.

Deej

22 Comments – Post Your Own

#1) On October 06, 2009 at 10:20 AM, catoismymotor (< 20) wrote:

I hear koala bears can be kinda raunchy.

+ 1 Rec.

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#2) On October 06, 2009 at 10:24 AM, kaskoosek (81.48) wrote:

Actually you were never bearish on the dollar.

I can link you to a couple of articles where you defended the greenback.

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#3) On October 06, 2009 at 10:27 AM, brickcityman (< 20) wrote:

You're little tangent in the middle of that post is to me one of the THE CHIEF problems with our economy...

 

The "greatest generation" begat the "baby boomers" and imbued them with a sense of entitlement and an expectation that all the countries we "saved" and enemies we defeated would forever gravel at our feet.

 

It should be no suprise to anyone that resting on one's laurels is not a successful business strategy.  It may work in a socialist system, and capitalism can look an awful lot like socialism when competition isn't materially present.  But we rested too long and are now awakening groggy and stiff jointed to a new world order.

 

I've said it before and I'll say it again... If you want someone to blame for our current mess, blame it on the guy retiring three offices down...  He presided over the erosion of large portions of economy that were hard to challenge in the 80s and 90s.  Since then we've tried ever more to transition to a service and intellectual economy and on that front we are quickly becoming just one of the herd playing games without our money and banking system so as to continue pretending we are still "The Best".

 

If you ask me, these Pop-Conservatives (e.g. Oreilly, Beck, etc.) do the greatest disservice of all by not challenging their followers to move us in a new and better direction.  Instead they are more apt to foment worship of a bygone era and mis-directed anger.

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#4) On October 06, 2009 at 10:45 AM, TMFDeej (99.30) wrote:

Hi kaskoo.  Thanks for reading.  Her's a sampling of my bearish dollar thoughts from the past several years.  I think that you are confusing my stated belief that the U.S. dollar will not implode with a belief that it will remain strong. 

I've always been bearish on the dollar, just not as bearish as the grizzlies.  Here's a few examples of my bearish stance.  If you can, please show me where I have been bullish on the U.S. dollar long-term.

Euro Soars to Record High - February 27, 2008

Those of you who have read my CAPS blog (both of you ;)) know that I have been and continue to be bearish on the U.S. dollar. The decline of the U.S. dollar continued this morning.

Shift in focus of personal portfolio - January 24, 2008

I disagree with the sentiment that the dollar has reached a bottom and believe that it will continue to weaken over time. This will cause many foreign economies to grow more quickly than the U.S. and provide additional juice to earnings results for companies that earn money in foreign currencies. It will also make the goods of U.S. companies that export less expensive and more attractive to foreigners.

Warren Buffett agrees with my decisions... - February 11, 2008

The U.S. dollar is likely to fall during the next decade if policies don't change.

These are just a few examples.  If I had the time, I could come up with a bunch more.

Deej

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#5) On October 06, 2009 at 10:53 AM, russiangambit (29.40) wrote:

Sorry, Deej, this is a classic example where you already made a decision and then you try to justify it.

The dollar is a syptom, not the cause of the current situatation.

> see lots of people here on CAPS who don't understand how the world works.  They are uber-bears on the U.S. dollar, yet they have a portfolio that's full of red thumbs.  Ahhhh guys, stocks will not drop, particularly stocks related to natural resources, if the dollar continues to fall.  Did you ever notice that the market goes up every time the dollar drops?  CAPS portfolio a little.

I guess we only need to understand how the CAPS world works and my position is that in weak dollar, weak economy environment the weak companies, especially those dependent on the input of their goods from China and the rest of the world will udnerperform SPY. Companies and currencies linked to natural resources are a different thing, I grant you.

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#6) On October 06, 2009 at 10:54 AM, Escutcheon (< 20) wrote:

It will take a generation or two for the U.S. labor pool to become competitive with china and others in the wage department. So the dollar needs to weaken, but doesn't its buying power also weaken?

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#7) On October 06, 2009 at 10:59 AM, brickcityman (< 20) wrote:

Question to #6...  Does becoming competitive mean living like the Chinese? 

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#8) On October 06, 2009 at 11:01 AM, Huayra (< 20) wrote:

Is the drop in the dollar really a bad thing?

Depends if you are a US Investor, US company or US consumer.

For US investors it may have some upside if you invest in US companies with oversees sales, as it stimulates exports. If you already have stock holdings in non-US companies you will also profit. If you are planning to buy in the future you will be adversely affected by currency rates.

For US companies it may have some upside, as long as your rise in profits compensates for your rise in production costs, as commodities become more expenses, since they're US denominated.

For US consumers more downside then upside, since the 2 big items outside core CPI are food and oil. And a lower dollar means less purchasing power and higher prices for US consumers.

It will be important to start stabilising the dollar by decreasing spending, increased taxes and increased interest rates.

 

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#9) On October 06, 2009 at 11:08 AM, Entrepreneur58 (37.91) wrote:

<<<>>>

You may want to look up the word "dislocation"

Dislocation - A breakdown.  An event which results in displacement or discontinuity.

Dislocation is what we are going to get eventually with all fiat currencies.   They are an experiment that has gone awry.

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#10) On October 06, 2009 at 11:18 AM, catoismymotor (< 20) wrote:

At this time I would rather have a devalued dollar because it would encourage purchases of our products and services by foreign parties using their currency. A tide of cash, greenbacks or not, would go a long way to boosting the economy.

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#11) On October 06, 2009 at 11:21 AM, Escutcheon (< 20) wrote:

Answer to #7... I hope not. I think we will meet in the middle. I just do not understand how a weaker dollar will not lower living standards for lower wage workers. The investor class could benefit I guess, I don't know.

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#12) On October 06, 2009 at 12:02 PM, leohaas (32.49) wrote:

"The problem with the U.S. economy is that is has become too focused on consumption and services and not enough on making things that people, particularly those in foreign countries want to buy. "

What is wrong with services? What if we can stop outsourcing them? Wouldn't that be a great boost to our economy? No doubt a lower dollar will help reverse service outsourcing!

"I'm not even sure that global warming exists."

This one we only hear from Fox fans and people working in the car industry. The data is conclusive. The world is warming up. No climatologist has any doubt on this issue. The question is how much human activity is contributing, and what we can do about it (if anything).

"More importantly though, more expensive oil and in turn gasoline would force the U.S. to focus on developing domestic sources of power.  We would be better off using our own resources like electricity generated from natural gas and coal to power plug-in electric vehicles than using conventional gasoline that's made from oil shipped from overseas."

Bingo! You hit the nail on the head. Why do we keep on spending billions in nations where they hate us? Some of these haters do that with so much passion that they are willing to commit suicide to kill as many of us as possible. We need to dissociate us from those countries now. Maybe they'll hate us with a little less passion. At the very least, we need to stop making their lives comfortable by buying their oil!

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#13) On October 06, 2009 at 12:12 PM, catoismymotor (< 20) wrote:

# 12 - I could not agree more with your thoughts as expressed in the last paragraph. Well said.

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#14) On October 06, 2009 at 12:40 PM, booyahh (< 20) wrote:

A weaker dollar means:

1) The US can export more, so we'll end up producing more

2) Imports become more expensive, so we consume more American goods and products. We also will end up consuming less oil from countries that hate us, and more domestically produced oil, natural gas, coal, wind, solar and nuclear power.

3) Outsourcing becomes more expensive.

Let China, the EU, or whoever else, have a strong currency, or gold, or whatever "basket of currencies" they blabber on about.

In this age of globalization, having a strong currency puts you at a disadvantage. American goods are higher quality than Chinese goods, and a weaker dollar can allow us to export again.

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#15) On October 06, 2009 at 1:20 PM, Escutcheon (< 20) wrote:

Booyah,  I like the idea of buying less oil from countries that hate us. But if we do the price will drop and China and others will be able to buy oil much cheaper, imports will become less expensive. I still think we should do it, but I don't think it will close the trade gap. The big difference is the cost of labor and taxes. The dollar will stay weak and the factories will stay idle I'm afraid.

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#16) On October 06, 2009 at 1:45 PM, KamranatUCLA (29.45) wrote:

deej

a weak dollar is a bad thing, because we have nothing to export.

we have given our country to few rich people, gave them our money, resources, brains...and what do they do? What anyone would do...take that money and invest it in China and take advantage of the cheap chinese labor and take advantage of poor chinese kids.

No one wins. Yes, our money has made a tinty tiny portion of chinese rich, but according to many reports Chinese believe they are not better off from 20 years ago. I read a similiar report about Mexicans and how they feel Nafta has changed things. When we moved our car factories to Mexico we went there to exploit not help Mexicans and the result show that. More Mexicans are poor, alienated, dissatisfied than ever before. There is more rapes and other crimes and the poor has gotten poorer.

I am 100% sure weak dollar is good for the rich. Anything happens is good for the rich. They are on top and they decide things. Weak dollar is a DECISION rather than market forces in play.

Just look at this logic that was the foundation for Reagan and other Presidents' policy. Trickle Down effect:

Give the rich as much money as we can. They will invest and their money will trickle down to the rest of us.

OK. Here Mr. Rich...here is 100 million dollars, make it more and distribute it to everyone. OK Sir, says the rich guy, buys a 99.99 million dollar home and pays his gardner 10 bucks/hour. That's trickle down effect for you.

The rich have capitalized their money in machinary, buildings, if not only their private homes and planes.

The rich have not capitalized in education, social services, health, or even transportation. It's 2009 and we still don't have a fast train from L.A. to NY.

The fundamental problem is that we gave our money to rich people thinking they are smart. I know many rich people who are not smart at all and are just like thieves. Giving our money to rich in America is like giving our money to the mobs at best. They only think about 1 thing, making their situation better. They never think of greater good. The rich in America are very close minded. In German or Iran, the rich are more open minded and do invest in universities, health, and so on. In middle east and in Europe if a rich person lives in a modest house, he would be highly respected, maybe not so in the U.S. When people are living below their means or prefer to donate their money rather than living in a 10 million dollar mansion, they are being looked down at.

Maybe we should learn from Ahmadinjad the President of Iran. He lives in an apartment and he takes food to work that his wife has made for him. What a concept? a President with all his power living like the rest of us.

Don't get me wrong. I love it if a business man comes up with a new idea and gets rich and lives up his dreams. That's different, that's honest. But the rich that we have created are WORTHLESS!!!

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#17) On October 06, 2009 at 3:40 PM, TMFDeej (99.30) wrote:

Hi UCLA.  The fact that we do not produce anything for export is in large part because our currency has been so strong for so long and the currencies of countries like China has been so weak.

Yes, we don't manufacturer nearly enough in the U.S. right now, but a weaker currency is a way to fix that.  The adjustment process may not be pleasant, but in the long run a shift to an economy that produces rather than just consumes is a good thing.

Fighting a weaker currency because we don't make anything just kicks the can down the road and assures us even more years of consuming too much and producing to little.

Do you really believe that Ahmadinjad is poor and isn't somehow profiting handsomely off of the people of Iran?  I don't believe that for one second, despite what the Iranian propaganda says.

I agree that there is too much of an income disparity in the United States, but hating someone just because they are successful is not the answer.  We should be improving schools, providing more college scholarships, and training people how to be successful.  If that was what some of the additional tax money that is being taken from the "rich" was to be used for I have a feeling that people would have a lot less of a problem with it and we would ultimately be a lot more successful as a country than if the money was pissed away by the government on who knows what.

I highly doubt that "rich" people who donate to charity are looked down upon in the U.S.

The problem with the "rich" is not the successful business people who have taken an idea from start to finish and been rewarded for it.  Or even the successful high level executive who has worked his way up the ladder at many types of companies, like manufacturing, computer, etc...  the problem is that too much power has been concentrated in the hands of the finance sector through years of deregulation.  Now the chickens have come home to roost and unfortunately it does not seem as though the current administration has the teeth to do what needs to be done to reign in the sector.  They should listen to Volker's suggested reforms.

Deej

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#18) On October 06, 2009 at 5:00 PM, vriguy (77.45) wrote:

I find it interesting that the Euro and Yen are strengthening against the dollar - In most cases, those countries have all the same problems as we have here. Their governments are running huge current deficits like us, they have a more rapidly aging population than us, with humongous unfunded pension and health care liabilities like us. Their politicians are equally feckless. They have fewer natural resources, and a less entrepreneurial culture.  We've got our share of problems, but a decade from now my money is on us - not on Europe or Japan.

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#19) On October 06, 2009 at 5:59 PM, portefeuille2 (99.60) wrote:

When bigpeach or leohaas have answered there is often little to add. russiangambit is to me a little like Krugman is to him. I usually agree with the "technical" analysis but sometimes disagree with the "interpretation". Great to see there are some voices of reason out there. camistocks is another one of those of course. I guess there is a high level of agreement among Europeans in discussions with Americans from the U.S. ...

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#20) On October 06, 2009 at 6:03 PM, portefeuille2 (99.60) wrote:

Europeans

Europeans and people with some "background in science"

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#21) On October 06, 2009 at 6:49 PM, stan8331 (96.73) wrote:

Good post.  A free-fall in the dollar would have some really bad side-effects, but a limited, gradual slide can have major benefits.  We may not be able to win business from foreign competitors paying 50 cents an hour for workers making tennis shoes, but America does still produce many things that are not so easily replicated in sweatshops.  Making the things we do produce significantly cheaper for the rest of the world to buy can have a big impact in terms of incoming trade dollars.  

Another benefit of developing our own energy sources is that the money we send to the Middle East and elsewhere for oil actually goes to corrupt regimes that repress their own citizens.  By removing the oil money that props them up, we make it more likely they can be overthrown, and more likely that their economies can become more diversified.  Nothing good comes from our sending boatloads of oil money overseas.     

I definitely agree that significant new regulation of the financial sector is needed, and that the Obama administration isn't pursuing it with enough speed or seriousness.  The financial sector and the healthcare sector are meant to be supporting parts of our economy, not the whole darn thing.  Basically, we became so fat and happy that we forgot how wealth is actually created.  Right now we're enduring some painful reminders, but America still has many unique advantages in the global economy.  I don't think it's the least bit crazy to believe that our best days still lie ahead.

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#22) On October 06, 2009 at 7:22 PM, KamranatUCLA (29.45) wrote:

Deej

I agree..and Volker seems like a reasonable guy. I didn't say Ahmadinejad is not rich, he might be, but the fact that he lives in busy downtown Tehran apartment and doesn't go expensive restaurants is I think something interesting. I don't like what Islamic Republic has done to Iran, but...anyways. My point is that people should go into government to be servers not to get rich. In most countries there is no money to be made in government except here.

Same with medicine, most doctors in Europe or Iran or Russia go to that field because they like to help people not only because of money, money is secondary and not a big factor. A corner store owner makes more money in a bazar in Iran than a doctor, and Iran has produced excellent doctors..in heart, plastic, and other complex and tough fields.

And...like I said I love it when a business man or someone with Idea or invention or just good business sense gets rich by giving service to people or what they need, but I absolutly hate it when people talk about "climbing the corporate ladder". I hate CEOs of most big companies because they are not inventive, creative, or even have visions. They got there because they knew how to play the corporate system! Basically like a lawyer.

I like Steve Jobs. If he makes trillions he deserves it. First because he had vision, second because he pushed engineers, third because he wears a modest jeans and turtle neck to meetings and finally because he respects people and their money.

Now...you tell me...how many of our CEOs are like Steve Jobs???

You just look at the face of some of these mostly white guys and you see that they are absolutly clueless and just woke up ...maybe from a night with a prostitute.

I read an artcile in LA times that most Oil companies executives do drugs, have sex with prostitutes and do other dirty stuff.

I can't see Steve Jobs doing that.

Do you agree that we need more CEOs like Steve Jobs??

By the way I hate Bill Gates. he represtents the worst. He copied windows from Apple and then knew how to work the system with all sort of lawyers. That is not success...that's stealing.

So you said I hate successfull people, NO. I hate thieves, I hate CEOs who became CEOs because they climbed the ladder, not because they were creative, not because they had guts, not because they were good decision makers.

I want those people to suffer and I want the violence to be against those people. And trust me, they know who they are.

Their money should be taken away from them.  I am not saying they should go to jail. I am absolutly against that.

If you read some of my posts I was extremly againt Madoff going to jail....he did financial fraud or financial crime, we don't put people in jail for life for financial stuff....I always said free Madoff.

What's next? put people in jail for declaring bankruptcy?? Like some Arab country??

So yeah i just wanted to clarify things and I think most smart people, most people with intergrity, most educated people agree with what I had to say.

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