Saturday, March 9, 2019


DOLLAR STRATEGY:  NOT WEAK, NOT STRONG, BUT STABLE

     Periodically we pick up the newspaper, or a Fortune Magazine, and we read confusing articles proclaiming the need for a weak U.S. dollar, or a strong U.S. dollar, many times interchanging the exact same arguments for either case.  Now, as JAM Views members we know to first pause and remember (1) the pontificator is more than likely incorrect, and (2) their views are driven by their own self-interests (not to mention confirmation bias and recency bias).
     I have to admit that even while running an investment firm for two decades, when it came to exchange rates I would have to regularly pull the finance books off the back shelf and refresh my memory on what helps what and why.  So, I thought this week we could endeavor to present a simple lesson on the strength of the dollar, so that we can more easily debunk Uncle Harry's rant about Trump's trade policies over Schlesinger's Easter Brunch.
     First, know that we are not dealing with absolutes.  The dollar is strong or weak only in relevance to the rest of the world currencies (similar to how stocks are overvalued or undervalued mostly in comparison to current interest rates).  Currently, the U.S. dollar is about 5% "stronger" against the world than its average since 1971 (when we abandoned the gold standard), so pretty "normal."
     The main arguments for a strong dollar promote selling our U.S. Government bonds to the world at higher prices, adding more capital without the Federal Reserve having to buy our bonds, and giving the U.S. strong purchasing power and influence around the world.  "He who owns the gold makes the rules."
     The primary arguments for a weak dollar are for promoting U.S. exports.  If the dollar is weaker compared to the Japanese Yen, the Japanese will find the Harley Davidson's to be much less expensive, and U.S. manufacturing jobs will thrive, at least in the short-term.
     It seems simple enough, but the real world never works the way the elites claim it does (seems to be a recurring JAM Views theme).  For example, the Swiss and the Dutch are at the top of the list for best-performing currencies (strongest) since 1900, but the major parts of their economies are exports.  Also, history is replete with countries devaluing their currency (making it weaker) to boost their export economies, and hurt imports, only to see them quickly ravaged by inflation, devaluing more, and destroying everything.
     The answer for the U.S. dollar now, and always has been, is stability.  The Federal Reserve and U.S. politicians can only do damage to the free markets, and they try their damnedest every day to make it worse.  As we have taught in JAM Views, "money goes where it is treated best."  Artificial inputs only screw up systems which are constantly searching for equilibrium, balance, homeostasis.  The British economist, John Maynard Keynes, has been screwing up economies with artificial steering since 1913 when Britain replaced gold with foreign-exchange reserves.
     Our friend, Steve Forbes, explains it best.  Last year he wrote, "Economists and policymakers regard as holy writ the fantasy that the economy can be steered, as if it were a car...The Federal Reserve, or any central bank, can no more control an economy than long-ago Soviet central planners could...with 7 billion people around the world and countless millions of entities of all kinds engaging in more than 100 billion transactions each day...the only sensible question to ponder is how much damage will our central bank do?"
     The answer is stability.  Remember how CEO's complained during the previous Administration that they couldn't make long-term investments because they didn't know if tax rates and regulatory costs were going to keep going higher?  Note how the stock market always falls when there is "uncertainty."  Listen to Coach "K" say, "I don't care if the refs are calling it loose or tight.  I just need them to be consistent!"
     If the U.S. dollar was allowed to find its own proper value, without misinformed politicians and technocrats attempting to justify their own existence (and government paychecks with your tax dollars), then the system would find the correct interest rates, correct inflation rates (maybe it's 2% as the Fed claims or more likely it's closer to zero), and correct exchange rates.  U.S. companies and workers would maximize efficiency and productivity with the requirement to be as competitive as possible, and the U.S. would efficiently import the correct goods from the correct countries which maximize our own self-interests, just as with Adam Smith's butcher and baker.
     Since the Egyptians and the Romans, monetary stability has been maintained over long periods by a gold standard.  Forbes, again, said it best in one of his never-ending campaigns to return to the gold standard.  "Markets work best with fixed weights and measures.  Everyone knows how chaotic life would be if the number of minutes in an hour or ounces in a pound fluctuated.  The same is true for money, which is supposed to measure value.  Until we blew it all up in the early 1970's, the U.S. had a fixed value for the dollar since Alexander Hamilton established it with a gold standard in 1791.  It's no coincidence that the U.S.' average pace of economic growth since then has fallen sharply."
     During brunch slip Uncle Harry one more mimosa, light on the OJ, and let him know that all the fake news is gobbledygook (economics term), and as he goes for another trip to the buffet, stress "less is more."  Let's continue to do whatever we can to keep governments out of free markets and to allow the citizens of all currencies to thrive.  Now that we understand the basics, pay attention to the mistakes countries make every day in attempting to manipulate their currency.  "First do no harm."

"The rating agencies guys wore blue suits from JC Penny, with ties that matched too well, and shirts that were starched just a bit too stiffly.  They appeared to know enough to justify their jobs, and nothing more."  Michael Lewis, The Big Short



* Thank you to the WSJ, Forbes, and Fortune for the above statistics and quotations.

* For more information on Jeff's Books, Blog, and Legal Challenge, please visit www.jeffmartinovich.com.

** To access JAM Views directly please visit jeffreyamartinovich.blogspot.com 

SUBSCRIBE TO JAM VIEWS

* PLEASE USE THE BELOW SHARE BUTTONS TO SPREAD THE WORD!

No comments:

Post a Comment

TIME TO REBALANCE?      You've likely heard that the stock market is the only store in which consumers refuse to buy products on sal...