Where is the USD going?
For a long time now, many analysts have been talking about the currencies and how they affect us. Some people have been saying that the US Dollar (USD) will devalue greatly and that folks in the America should take their money out of the USD and try to hold more foreign currencies and precious metals in their portfolio. They have been pointing out that the US Government has been running insanely high levels of debt and that this could not, and would not, last long. They have been advocating that it is in no one’s interest to see the USD strong against other major currencies like the EUR (Euro), CHF (Swiss Frank), JPY (Japanese Yen), GBP (Great British Pound), etc. and that a weaker USD would suite everyone just fine. I am a firm believer in this theory myself and have been advising my clients to steer clear of the USD where possible. As it turns out, we were all right and the few that were saying that the US economy was in better shape than we thought were wrong. The USD has been hit really hard across the board and almost all other currencies have strengthened in relation to the USD in the last two weeks. Record exchange rates are being see and I believe that this might correct in the short term but will only get worse in the mid to long term.
From the above main theory, there is only one point with which I do not totally agree with. That is that the fall of the USD is beneficial for all involved… The truth of the matter is that it is NOT!!! This is an extremely serious point that cannot be taken lightly.
What will this mean?
When the USD is weaker, it does not mean that US products become cheaper for US consumers, it does mean that the US products will become cheaper for other consumers like Europeans. As a European myself, soon it will be cheaper for me to buy a book from the US (via the internet) than to go out and buy it myself.. my EUR will be so strong that the mailing fees, and taxes if any, will be less than the price difference. This is the main logic for the analysts to say that the fall will generally be beneficial. I believe that the fall in the USD will not just do that, it will also stop the US consumer from spending. Why? The answer is simple, the US is a consumer society, with little income being saved and most spent every month. Analysts would like the US consumers to save more so they see this as a good thing (which it generally is). There is a problem with that theory though… US goods will stay the same price originally but will gradually get more expensive because of the higher cost of production (due to outsourcing) and due to the higher cost of raw materials. This is because more USD will have to be spent to produce the same products. The foreign goods that were preferred until now will also be more expensive due to the exchange rate difference. This all leads us to INFLATION… The analysts get their way and because of inflation, the US consumers consume less. The (still) largest market in the world will start spending less and will also stop buying houses in the frenzy that they have been. That will in turn lower home prices and will mean that the mortgages and second mortgages currently out will be greater than the underlying value of the home! I do not want to turn this post into a novel so I will leave why this important for another post J. In a very short summary, this will affect the world market due to globalisation and hard times are around the corner… for all of us. With only one clarification at this point… holding gold coins in a bank or under your bed is not the answer either, all you have to do is find a jurisdiction where you will be protected and store you money there. Declare it in your taxes naturally, if you do not it may be illegal… I do not want to be the one that’s leads you down the wrong path.
Investment options with this outlook…
If you do not want to risk too much, I would suggest a basket of currencies held mostly in cash and a healthy percentage in a basket of commodities.
If you want to try and profit from other’s loss… and the definition of investing is actually that… the idea of buying at the bottom and selling at the top involves two parties… you cannot buy and sell if there is no other person at the other end… This leads you to the idea of shorting the equities markets and the USD. You could also invest in a Long/Short Hedge Fund taking advantage of the upcoming fall/crash/cataclysm (you pick a word) of the equity markets. For extreme risk, you could even sell your home at these juicy high prices and rent until the prices have fallen so such that you can buy it back at a hefty profit. The possibilities and risks are endless!
Food for thought… please leave a message with any comments you may have.
From the above main theory, there is only one point with which I do not totally agree with. That is that the fall of the USD is beneficial for all involved… The truth of the matter is that it is NOT!!! This is an extremely serious point that cannot be taken lightly.
What will this mean?
When the USD is weaker, it does not mean that US products become cheaper for US consumers, it does mean that the US products will become cheaper for other consumers like Europeans. As a European myself, soon it will be cheaper for me to buy a book from the US (via the internet) than to go out and buy it myself.. my EUR will be so strong that the mailing fees, and taxes if any, will be less than the price difference. This is the main logic for the analysts to say that the fall will generally be beneficial. I believe that the fall in the USD will not just do that, it will also stop the US consumer from spending. Why? The answer is simple, the US is a consumer society, with little income being saved and most spent every month. Analysts would like the US consumers to save more so they see this as a good thing (which it generally is). There is a problem with that theory though… US goods will stay the same price originally but will gradually get more expensive because of the higher cost of production (due to outsourcing) and due to the higher cost of raw materials. This is because more USD will have to be spent to produce the same products. The foreign goods that were preferred until now will also be more expensive due to the exchange rate difference. This all leads us to INFLATION… The analysts get their way and because of inflation, the US consumers consume less. The (still) largest market in the world will start spending less and will also stop buying houses in the frenzy that they have been. That will in turn lower home prices and will mean that the mortgages and second mortgages currently out will be greater than the underlying value of the home! I do not want to turn this post into a novel so I will leave why this important for another post J. In a very short summary, this will affect the world market due to globalisation and hard times are around the corner… for all of us. With only one clarification at this point… holding gold coins in a bank or under your bed is not the answer either, all you have to do is find a jurisdiction where you will be protected and store you money there. Declare it in your taxes naturally, if you do not it may be illegal… I do not want to be the one that’s leads you down the wrong path.
Investment options with this outlook…
If you do not want to risk too much, I would suggest a basket of currencies held mostly in cash and a healthy percentage in a basket of commodities.
If you want to try and profit from other’s loss… and the definition of investing is actually that… the idea of buying at the bottom and selling at the top involves two parties… you cannot buy and sell if there is no other person at the other end… This leads you to the idea of shorting the equities markets and the USD. You could also invest in a Long/Short Hedge Fund taking advantage of the upcoming fall/crash/cataclysm (you pick a word) of the equity markets. For extreme risk, you could even sell your home at these juicy high prices and rent until the prices have fallen so such that you can buy it back at a hefty profit. The possibilities and risks are endless!
Food for thought… please leave a message with any comments you may have.
posted by Private Banker at 12/02/2006 05:50:00 PM
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