No. of Recommendations: 9
First of all, let me start by requesting that this thread does not end up talking about all fiat currencies going to zero and only gold/silver being what should be held. It is about the relationships between fiat currencies :-)

Most of us watch the US dollar in terms of the "dollar index" (currently at 76.25) which is a market basket of currency values compared to the greenback. While still above its historical low (April 2008) by about 7%, it is at essentially its low of the last three years (briefly touched 75 at the beginning of 2010).

Let’s step aside for a moment and consider the major competitors included in the index:

1) The Euro has obvious structural problems in that a number of its constituent entities (the infamous PIIGS) are failing to one extent or another.

2) The Japanese Yen is tied to a country which has had financial problems for a couple of decades with little economic growth and is currently dealing with a VERY expensive disaster.

3) The British pound is tied to an economy which shared our financial meltdown in many parallel ways.

Each of the central banks involved has taken a strategy that they feel best suits their needs.

Currencies are valued on a supply/demand basis as demands for that currency for trade and investing are made. The values are also "assisted" by the actions of both the domestic and foreign central banks.

It is "comforting" to think that the US dollars drop has been "crafted" by the actions of the Fed, but I think greater reflection is required.

Trade is what it is and seems to be growing. That provides a headwind. The tailwind is supplied by the Fed's QE, supplying currency into that portion of the equation.

The part of the system that I think requires exploring is how much of the drop is related to a loss of confidence in the USD being able to hold its value in the future and movements out of the currency forming a self fulfilling prophesy.

Charliebonds has explored some of the ways that inflation may be measured. People have observed by looking at Japan that a zero rate of return can exist for an extended period of time without financial collapse.

I am going to combine these two by pointing out that Japan has existed with zero interest rates during a period of mild deflation, while Charlie has pointed out (despite his calling both the BLS and the "alternative" methods of measuring inflation "right") that we are seeing an increase in inflationary pressure.

So here's the $64K question: What is the result to the value of a currency offering low returns (for bonds/cash) at the same time as its supply exceeds the requirements of trade or investing? While in domestic terms, some investments such as equities which appear to offer better returns are benefitting, we have to remove ourselves and observe our "economic system" from the standpoint of foreign eyes.

One interpretation may be the drop in the dollar as compared to other currencies with obvious flaws has to be viewed as other entities (whether foreign sovereign states, hedge funds, or investors) having a greater level of disease with our currency than we tend to have on a personal basis.

I've often tried an experiment when I've gone to the beach. I close my eyes and listen to English being spoken. I try to judge what the "sound" of our language would be to a foreigner. I know that French and Italian are melodic. I know that Japanese and Arabic are guttural. But I have to confess, I've yet to be successful in "hearing" English as a foreigner would hear the "tonality" of our language.

In a similar fashion, it is difficult for most Americans to contemplate money as being anything but greenbacks. While it's well known that I "dabble" in other currencies, I always find myself evaluating my holdings in terms of US dollars (to do otherwise, considering the dollar's drop would likely be depressing :-).

We are so used to evaluating whether we are "winning or losing" in terms of US dollars that we neglect to even consider how we are doing in "global" terms of purchasing power.

While I have preferences for specific currencies, the easiest method to use is to take your total asset value and multiply it by the US dollar index. Plot that value over time (say the last five or ten years). There will likely be some "exciting" results. You may find, for example that the fall in your asset valuation in late 2008 and mid 2009 were not as drastic as it might have appeared. OTOH, much of your current "gains" may be taken away by this approach. This purely quantitative method will allow you to "hear" the value of your assets in a way that I still have not been successful in hearing our language spoken.

This is the way others see their US investments and it will be an eye opener to you (as well as causing considerable nausea).

As you prepare for whatever monetary events you expect the future to hold, bear in mind that we are not alone and while the Fed is the biggest, baddest guy on the block, there is a finite limit to everything and the change in the value of our currency may be the canary in the coal mine whose music is becoming quieter.

As I have covered them in eye glazing detail in other posts, I won't extend this one by going into foreign currency hedges against the drop in the dollar (on a relative basis compared to other currencies), but that is one obvious method. Another might be foreign equities or bonds valued in stronger currencies. Precious metals offer another method of protection, but as I've pointed out in the past, they can behave in unexpected fashion when things hit the fan (as they are a valuable, easy to sell commodity, rather than money). Another tack might be stock in companies which mine, pump or farm commodities.

Whether you agree that you should be concerned or not, the above described method allows you to easily keep your eye on the ball rather than be complacent.

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No. of Recommendations: 2

I am having problems with the Dollar Index. Louis Yamada uses a trade weighted index that would be helpful, but even that could be inaccurate because a lot of dollars flow through China then onto Australia, Canada and other commodity exporting countries.

I am just guessing, but the data I have is sparse and unreliable, it seems that the dollar is nearing its true value. Remember, dollars are tools, just tools to be used in trade. Impact of the dollar on trade and industry is not a function of where it is a given moment, rather it average value over a time period.$USD&p=W&b=5&g=...

While this index, the $usd index, probably does not represent an accurate portrait of the value of the dollar and its use in international trade, it is the one I can see easily and it is at least a shadow of the truth. I made the dollar invisible and put in the 1 year, 4 year and 10 year moving averages, (50 week, 200 week and 500 week) You can see the averages are well above the dollar. These averages though are what return profits, determine numbers that go into spreadsheets that determine business decisions.

As these numbers fall, you can expect the businesses to start making investments based on them. The decisions do not have to generate exports to have a major impact on the balance of trade. The high price of oil is creating major wealth in the shale oil fields. The cost of extraction is high and a lot of the money has to stay local because of the effort required to extract the oil, this oil does not get exported, but it does displace imported oil. The same with timber, a lot of Canadian wood products were coming into the country, (despite the huge costs associated with their godless single payer health insurance complete with high taxes, death panels and rationed service) that timber is less likely to compete with the Canadian dollar as high as it it is. Finally, much of the South American food and other agricultural products are finding home grown competition.

These things tend to make me very bullish on the heartland. While the people from the coasts tend to laugh at the people in the middle of the country, they can typically drive through the middle without having gun stuck in their window and their fingers bitten off for their jewelry. This is not the case in many places on the planet.

Currently in Nacogdoches, there is 1 Fannie May repo available. In South Dakota, 116, mainly in the commercial and banking centers. A quick look at Zillow confirms that housing prices are still falling, but what the statistics are not showing is that the value of the houses sold are falling. I.E. the repo in Nacogdoches is 1700 square feet. I am unwilling to pay even 50 dollars a square foot for it, yet am very happy to build a new house for 92 dollars a square foot.

I caution everyone to be very careful about nationwide statistics, the changes are not finished, and there will be opportunities, but they will not be the ones we had starting in the 1980's.

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By "foreign equities or bonds valued in stronger currencies" do you mean opening an account in an non-US brokerage (like TD Waterhouse)? Or do you mean using a US brokerage account to buy ADRs like BBL/BHP?

There was discussion last year about currency advantages investing in BHP vs BBL ( ie. ) but it was more about taking advantage of valuation differences than currency hedging.
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BHP is a valid example of a stock which is commodity based and fits that part of the profile. While there is somewhat of an advantage to buying it on one of its two foreign exchanges to save the management costs of the outfit running the ADR, as well as in some cases getting higher liquidity (like Nestles which is thinly traded as NSRGY in ADR form, but far more liquid on the Swiss exchange), a better example might be a foreign food producer, utility, or similar which serves their domestic market.

While my way of addressing this frequently involves foreign banks accounts, and what I’m doing is exceedingly common amongst foreigners, to Americans it seems incredibly stupid, risky and somehow unpatriotic. At least that’s my theory as to why so few even contemplate the strategy.

Whatever vehicle, or group of vehicles you choose to address this should be weighed. This sword cuts both ways. If the dollar rises, you want an investment which, in its own right will generate enough income or gain to partially offset its drop in value. The importance of political and economic stability cannot be stressed enough if these are to be "LTBAH" type investments. As any specific investment can unexpectedly develop warts (BP, Tokyo Electric Power, Icelandic Krone), spreading the investment risk is very important.

While part of my personal strategy involves domiciling the funds abroad, this makes many uncomfortable (though I prefer the geographic diversity it offers), many potential scenerios can be addressed with domestic investing.

This thought process is non-trivial and the risks (both ways) are very real. All I am trying to do is to get people to realize the risks they have been avoiding thinking about by the simple process of "weighting" your assets by the US dollar index. While the results will upset many, they will also point out why I have been gently pounding this point home for a couple of years.

Incidently, as an additional experiment, this tool can offer hours of enjoyment :-):

For the gold buffs, it offers different tales in different currencies (unfortunately doesn't show Swiss francs). When interest/dividends are added back in, depending on currency, gold has actually decreased in price (as gold may not have increased as quickly in terms of USD as the currency).

For those interested in purchasing non-US/Canadian shares directly, I encourage you to compare both fee schedules and currency conversion costs at your brokers to a shop like Interactive Brokers that allows diret trading in both markets at reasonable costs.

How each of us addresses this is an indevidual decision. Avoiding at least thinking about it is in the same catagory as not making out a will (you know you should do it, but it's so uncomfortably that you never quite get around to it :-)

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No. of Recommendations: 1
Hey Jeff, congrats, you made post of the day!

(When y'all go to see be sure to rec Jeff's post there too.;-)
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No. of Recommendations: 2
Charlie has pointed out (despite his calling both the BLS and the "alternative" methods of measuring inflation "right") that we are seeing an increase in inflationary pressure.


By “right”, I mean this. If you set up a formula and apply it as written, don’t blame the formula for producing an answer you don’t like. It merely did what it was told to do. People who complain that the present method of calculating the Consumer Price Index isn’t representative of present consumer experience don’t understand basic math (or politics), just as don’t those who want to go back to using the pre-1982 method. Both methods are merely formulas that are no more complicated than X +Y = Z. If you define X and Y, you have defined Z. The CPI (2011-version) defines 2011-version Inflation. End of story.

Is the annual-rate of inflation the 1.63% the present method says it is, or is it the 9.07% that the pre-1982 method says it is? Obviously, both answers are correct. Again, think back to my kitchen table example. Does the table measure 30” by 40” or 76.2cm by 101.6cm? If both sets of measurement were done under the same thermal conditions and at exactly the same places, then either answer is right. But let’s build the table out of cast iron, spray it black, and set it outside. If we measure the table in the cool of morning with micrometers, and then again later in the afternoon of a hot summer’s day, then results will be different by the change in ambient temperature and the coefficient of expansion of the table’s material. It ain’t no different with the fleepin’ CPI. In order to lower their costs of borrowing, the Government directed the BLS to change how they measure inflation. The mechanisms and consequences of underlying inflation haven’t changed, merely the methods of measuring the ever-changing variations.

Again, what really is the annual-rate of inflation? The rate is exactly what the BLS defines it to be, and for that we should be patriotically glad. The greedy geezers won’t get an annual COLA adjustment, thus prolonging the life of that Ponzi scheme. More importantly, the US Government can go into the global money-market and borrow cheaply, because it can argue that GDP is high and inflation is low. And why does anyone believe such fictions? Because they fear the consequences of economic truth even more. So anyone who uses anyone else’s index of inflation without digging into the underlying assumptions, methods, and weightings of the index is getting exactly what they deserve, which is a very distorted view of economic realities.

Again, to say that present-day inflation is 9.07% as measured by pre-1982 methods is both useful and correct. To say that present-day inflation is 1.63% as measured by 2011 methods is both useful and correct. To say that my household experience of inflation is 5.18% is both useful and correct. E.g., the present BLS method tells me a lot about why interest-rates are where they are. Past BLS methods, and the elevated number it reports, tells me that horse-feathers are going to hit the fan if deficit-spending continues. My own personal numbers tell me what sort of an investment return I need to stay ahead of price changes. Three measuring tapes. The trick is to know when to use which, and how to read them.

PS Sorry I missed your call. Now I'm out the door for my ride.
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