WEAK DOLLAR/STRONG DOLLAR
The U. S. stock market experience over the last year has been unique, featuring large declines, aggressive rallies, and specific sector declines and advances. It has been anything but an organized cohesive market. Volatility has increased, bringing with it an increased sense of insecurity and angst.
In a macro-economic investment shop like ours, each tweet or news story carries with it a new opportunity or a well-defined area of the market to avoid.
The tariff tool used by the Trump Administration to achieve trade “fairness” has been the most disruptive of the policies, immediately adding to the risk factors for companies doing business in or with China.
Most recently, the Administration’s attack on pharmaceutical prices has brought the “wet blanket effect” to the healthcare sector, increasing the profit risk for not just “pharmas,” but any organization involved in the distribution of drugs.
Such is life in the day to day struggle for investment survival. Dealing with sudden policy change has simply become an increased part of our job description. The truly exciting part of our business, however, shows up in the promise of seeing a trend or thesis unfolding before others do. Thinking about such change and anticipating its cumulative effect prepares us for the right portfolio moves to capture the benefits should that change occur.
Recently, our economist, Dr. Victor Canto, has been sounding the alarm for a weaker U.S. dollar. He feels that it will correct its recent strength if a China trade deal becomes eminent. Afterall, much of the dollar’s recent strength can be attributed to the weakness of those currencies representing the supply chain of the Chinese economy.
As a new agreement to “talk” emerged from the recent U.S./China meeting, the dollar exchange rate has weakened somewhat, giving rise to a gold rally and some strength in other metal mining issues. All, obviously, looking for a weak dollar.
If this is the beginning of a fall in the dollar, we can anticipate an increase in the price of all commodities valued in dollars. Taking this one step further, we can, therefore, anticipate increased profits for all commodity related companies. Should we then begin adding commodity producing stocks to your portfolio?
Let’s stop here and think this through again, rather than simply following the trumpet call of the gold crowd.
What Dr. Canto is saying is that the dollar exchange rate will likely drop when measured against most currencies. This is very different than simply calling for a weak dollar. What is really meant here is that other currencies are apt to rise in relation to the dollar. If this actually takes place, then we can expect no change in the dollar price of gold or any other commodity. In other words, the market’s recent reaction to the gold and precious metal prices is not sustainable if caused by a weakening dollar exchange rate. Perhaps the recent strength is coming from another source or reason…we are searching for this. Without such a reason, we have to assume that the precious metals move is premature. Furthermore, without a China deal, the weak dollar exchange rate thesis is far from being conclusive.
There are many who believe that China will do a trade deal because they are hurting economically. Too much debt has created liquidity problems for them. These problems are being exacerbated by tariffs, but that doesn’t mean that they must opt for a trade deal on our terms. The Chinese are tough and may choose to endure the pain, hoping that Trump is defeated next year. They have endured much worse over thousands of years, and besides…they are better at building walls than we are.
We will keep studying this issue. It’s not that simple…it never is.
