Talking Points

Weak Dollar Policy Mark Zinder Action Shot

A mother was tucking her seven-year old son into bed one evening and before exchanging goodnight wishes, the young boy asked, "Mom, is it true that God answers all prayers?"
"Yes dear, it's true." She answered.
"Great" replied the son, "Because tonight I am going to pray for a new bike."
Exhausted and unprepared for the discussion that needed to follow, she simply kissed her son on the forehead and wished him a blessed night.

The next morning, sitting at the kitchen table, head in hands, sipping the coffee that had grown cold, the mother waited for her son to awaken so she could have the conversation she had dreaded since the previous night. She heard her son's bedroom door open and waited patiently as he ran around the house, then outside and back in again, before walking slowly into the kitchen. The mother looked up at her son with a heavy heart and said, "I'm sorry God didn't answer your prayer."
She was startled when she heard him reply, "But Mom, he did.
He just said no."

I have written before that two people can see the exact same thing, but see it differently. It is our job as advisers, planners, and wealth managers to make sure that our clients, who are reading and hearing and seeing the same things we are, can see things from a less obvious perspective.

With hindsight as our guide, we can begin to establish that our early concerns of becoming a socialist nation as our government nationalized our banking and automobile industries were completely irrational. A steepening yield curve has helped the banking system to regain firm ground and GM has quickly emerged out of bankruptcy. Do not be led into a false sense of complacency however, as we are still facing multiple headwinds: both high unemployment and the lowest manufacturing capacity utilization rate in recorded history are the two that most readily come to mind.

Consider that roughly 70% of our economy is dependent on the consumer. It is easy to see that the high unemployment rate is reducing consumer spending, but also consider that the savings rate in America, now approaching 5%[1], is also having its own ill-effects on our consumer led economy. An interesting dichotomy: as Americans we need to save more, but to get out of this recession, we need to spend more as well.

Keep in mind also that China's economy is an export driven economy with nearly one third of total GDP depending on exports. With our keen sense of "things to come" back in the 1980's we, in America, after being bitten by Japan's exporting prowess, began a campaign to buy American made products. It has been rumored that, in their wisdom, Japan started to manufacture goods in a city called "Usa" so they could place on their manufactured goods, "made in Usa", or, more prominently for us to all see, "made in USA". In 1994 China pegged their currency, the renminbi to the US dollar [2], thereby making their goods cheaper for US consumers. Consequently, a huge trade imbalance began forming with China and the battle cry to make China float their currency began in earnest. It was commonly discussed from the IMF to Washington that the renminbi was undervalued by roughly 30% to 50%[3]. Letting it float would be ruinous for the Chinese economy and making them float it would be ruinous for ours- if you keep in mind that China owns more US Treasuries than the US Treasury has in US Treasuries. China finally agreed to let it float in "bands" that would never exceed 5%. Today, even though the renminbi is over 21% stronger it is still estimated that their currency is undervalued as much as 40%.
There is a possible solution to this apparent problem. Even with China's reluctance to allow its currency to float freely and with one of the highest savings rates in the world at nearly 40%, the Chinese are beginning to become consumers. A case in point is that automobile sales in China are up 48% in June of this year alone[4], and nearly 80% of these purchases are made with cash. Quite simply, if they will not allow their currency to strengthen maybe the United States must allow our currency to weaken. Even though the US dollar is the world reserve currency and a strong dollar policy has been the historical norm, a weak dollar policy would make our goods cheaper overseas. This would in turn decrease our unemployment rate as we ramp up our manufacturing plants to meet the demand for our comparatively less expensive products.

Also, keep in mind that roughly 80% of commodities are traded in dollars- meaning if you reside outside the United States and want to buy oil, you must first convert your currency to the US dollar. With a weaker dollar, this means foreign countries would now get to buy their commodities at a discount.

With this knowledge now at hand, you must ask yourself, "Do I see it differently?" However, more importantly, "How can the client's I advise benefit from what could be a weak dollar policy?"

Here are a few ideas: purchase stocks of US companies that derive their profits from overseas, so when they bring those profits back home they get more dollars for them, strongly resembling the appearance of improved earnings. Unhedged international bond funds will also perform well, keeping in mind that upwards to 75% of the return of an international bond fund is due to currency exchange. This is true for international equity funds as well, just not to the same degree. If you agree with me in regards to a weaker dollar, then it is imperative that the international bond fund be unhedged. Some funds will actually use the word hedged or unhedged in their title, PIMCO being a point in case. As a former employee at The Templeton organization, I know that they also do not hedge currencies in their portfolios, making them a potential candidate for someone looking to profit from a weaker dollar.

In conclusion, it is not hard to emphasize with the mother's anxiety as she chose her words carefully when explaining a life lesson to her son. It is my hope that, now armed with a better idea of what the future may bring, our clients can see the benefits of what our government and the Federal Reserve have already accomplished and how they may continue to do so in the future. We are all witnessing the same thing - we just may be seeing it differently. Hopefully what reads "Made in China" today will read "Made in USA" tomorrow, but this time USA will stand for the United States of America.