Thursday, November 12, 2009

Impact of Falling Dollar on your Financial Future

November 12, 2009

Even after giving a series of bearish indicators, each one larger than the previous one, the Dow Industrials turn around and breakout to new highs. Each time, since March lows, the Dow Industrials has been making higher highs and higher lows… indicating the continuation of the bullish trend.

We've seen several reversals since the March lows. But the quality of this current reversal is far-below what we've seen thus far. In previous sell-offs, we saw five to six sectors posting sell signals while the rest of the market plowed higher.

This time, however, 41 of the 46 sectors are on a sell signal!

So, why are the market internals so radically different [weaker] from the picture that the Dow is painting? If the new high in the Dow is "for real," why hasn't it been confirmed by a new high in either the S&P 500 or the NASDAQ yet?

Could it be that the declining US dollar is behind the investor strategy to snap up the big American export names that are part of the Dow Industrials?

Let’s take a look behind this thinking…

• It is an accepted fact that a cheap dollar will make US products cheaper to foreigners buying them in their own appreciated currency… thereby stoking demand for US goods. That bodes well for the revenues [and earnings] of the multinational corporations that are part of the Dow Industrials.

• It is also an accepted fact that as the big multinationals repatriate their Euros, yen and francs back to US dollars, they will get a currency-bump boost to earnings as they convert their foreign currency denominated earnings back into US dollars.

To this you can add the dollar related buying of multinationals as in the effect of "carry trade". That is, investors borrowing US dollars on the cheap [at 2.5% brokers margin rate] and then reinvesting those dollars in higher-yielding assets such as equities and commodities.

Does this mean that, if the dollar rallies, the markets will fall? It's certainly seems that that way. If you are watching CNN or Bloomberg, you will see what I mean?

Over the long term, the dollar looks like it wants to go lower. However, it's currently very much oversold. And, as a minimum, the US dollar is due for some type of short-term bounce.

What happens to your financial future with the dollar loosing its value every other day?

What happens when the Fed stops those money-printing presses?

The declining dollar is going to have a major impact on the US consumer. If there is no floor put under the dollar, we are going to experience horrific commodity-price increases here in the United States? The signs of dramatic commodity-price increases are already visible and soon will show-up in the PPI and CPI… it just a matter of time.

In a booming economy, it may not be a big deal… but in a prolonged recession, it's got to feel like an economy killer. Can you imagine the plight of 57 million on social security and the 27 million unemployed or partially employed.

[In October, the number of unemployed persons increased by 558,000 to 15.7 million. The unemployment rate rose by 0.4 percentage point to 10.2 percent, the highest rate since April 1983.

The so-called underemployment rate -- which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking -- reached a record 17.5 percent from 17 percent in September.]

No wonder gold and silver have been going to the upside… dramatically. The buying power of the US dollar is getting annihilated. Fed policy to keep printing dollars 24/7 is just not a viable domestic economic policy. The US government is priming the pump in desperation, pushing full-steam-ahead, praying and hoping that the real economy catches up before the bills have to be paid.

Then there is the matter of additional trillion dollars for healthcare while still funding [fighting] and paying for two wars. Is it a surprise that the US dollar is getting hammered the way it is?

You don’t have to be a noble prize winning economist to realize that…

“Weak Dollar is bad for US.”

The truth is a cheap US dollar policy is great for the rest of the world, but bad for us. Everything we buy becomes more-expensive as the dollar gets weaker and weaker.

The best hedge for this type of scenario is clearly commodities. Dollar-denominated commodities will rally dramatically if the US dollar continues on its downward spiral.

The best way to protect the value of your portfolio is to diversify a little into commodities and the emerging markets. These days, virtually every major commodity can be purchased in the form of an Exchange Traded Fund (ETF). Everything from Gold (Symbol: GLD) to emerging markets (Symbol: EEM) can be traded via ETFs.   You may also consider investment in growth companies like Apple (AAPL) and Microvision (MVIS) that have sales revenues originating from foreign and emerging markets.

Look at oil prices; it recently hit $80 per barrel!

Do you think that's demand-driven?

Think again… it’s the weak U.S. dollar [and investor speculation] pushing up the price of the world's largest traded and US dollar denominated commodity.

It’s a shame that our government is wasting the country's wealth and is in the process of mortgaging the future of our children and grand children. In our life time, there is no question, that taxes are headed higher… much higher.

Prepare yourself and plan for…

• Higher commodity prices leading to higher consumer prices
• Lower employment leading to higher un-employment rates to 12% or higher
• Permanent demand destruction in capital goods and non-essential services
• Higher property tax to pay for state budget gaps
• Higher sales tax to pay for state budget gaps
• Higher income and payroll taxes to pay for healthcare, entitlements and interest on US debt owed to foreigners holding US bonds… like China, Russia, Japan and so forth
• Higher interest rates… when the Fed finally realizes that dollar printing-presses working 24/7 are feeding the Wall Street and not the Main Street. The huge bubble of trillions of dollars pumped into the economy and higher commodity prices will surely show-up as inflation… prompting Fed to raise interest rates.
So much for that trillion dollar Fed attempt to prime the Main Street… while the Wall Street rakes-it-in laughing to the bank.

Thanks to our government, you, I and our children, will be the ones paying for the mistakes and indulgences of other people. The same very people that we, the tax payers, bailed out with cheap dollars… only to find out that these people made billions and are now debating over how to carve out the loot in bonuses.

[Inspired by an article... by Teeka Tiwari]
Anant Goel