The Almighty Dollar

Last year saw two very shocking financial events.  One was the abrupt decline in oil (see my 21 January 2015 post).  The second was the steady rise in the U.S. Dollar.  For the first time in 25 years, the dollar gained against all 31 of the world’s major currencies, according to John Mauldin in his Thoughts from the Frontline newsletter, January 5, 2015 edition.  

As you can see from the chart below, the dollar is up about 17% since January 2014. 

Source: eSignal Data

You may be wondering why in the world the dollar is rallying when the Fed just finished printing trillions of dollars, and the United States Government has trillions of dollars of unfunded liabilities. 

The reason is that money has to go somewhere—and it goes where it’s treated best.  It’s all relative. 

A very appropriate analogy today would be the weather.  I have a colleage who used to live in Atlanta.  He told me about a blizzard they had while he lived there.  Atlanta got 2 inches of snow, and the city shut down for a week.  All his co-workers called off work.  They couldn’t handle the cold, and freaked out on the snow-covered roads.  We Northerners listen to stories like that and just laugh.  But, in nights like tonight when the low is supposed to be negative seven degrees, we think that’s nasty weather.  For folks up in Alaska however, nights like these are the norm.  A couple weeks ago, it reached minus 72 degrees with windchill there!  I can’t even imagine.  It gives me a brain freeze just thinking about it.  It’s all relative.      

So too, with money.  Yes, we have our problems.  The chickens will come home to roost someday.  But, right now, we are the best house in a bad neighborhood.  China is slowing down and may enter recession.  Japan has been in a perpetual recession for over 20 years now.  Europe’s economy is at stall speed, and Russia and other commodity-based emerging economies are sinking fast.  The rich and savvy citizens of those nations are exchanging their currencies for dollars and storing them in the U.S. as fast as they can.  

There are four takeaways here:

1.  Currency trends last quite a while, as you can see from the chart below.  The two most recent bull markets in the Dollar lasted seven and six years. 

2. Let’s be thankful we live in America.  No matter how bad we think it is, it’s worse for someone else. 

3. A stronger dollar means lower prices, specifically for imported goods.  We’re already seeing the benefits at the gas pump.  We should begin seeing the benefits at the grocery store and department store before long.  There are some strikes on the shipping docks right now that are probably delaying this process.  Hopefully we’ll see some price cuts soon. 

4. There is one danger from the dollar getting stronger.  U.S. Banks, mostly through foreign subsidiaries, and the bond market have lent trillions of dollars abroad.  Investors may try to dump their foreign currencies and buy dollars too quickly to stem currency losses.  This can lead to emerging market debt defaults, which triggers banking panics.  The last time this happened was in the late 1990’s during the Asian Debt Crisis and (guess who) Russia defaulted on her debt.  The S&P 500 plunged 20 percent in a matter of weeks.   Only that time, the dollar carry trade was several hundred million dollars.  This one is estimated between two and ten trillion.             

Let’s hope that foreign countries start growing again soon, and the dollar doesn’t appreciate too fast.