Dollar Watch: Like Deja Vu All over Again

While I was traveling last week in the United States, the US Dollar went into a free fall against the Shekel (see graph 1 below, click to enlarge). The dollar had surged around 25% against the Shekel in the last 9 months, from a rate of 3.23:1 in June 2008 to over 4.2:1 (see graph 2 below, click to enlarge), peaking about a week ago. As I mentioned in a Globes interview about a month ago (Hebrew), this was bound to happen. Despite the predictions of economists at various Israeli banks, the dollar's drop was painfully obvious. You cannot print money with impunity and expect investors not to worry about inflation.

In fact, Obama's hint that the economy may be turning actually probably sped the dollar's drop against both the Euro and the Shekel, since a rebounding economy would forestall concerns about deflation. Unfortunately, I think the problems are deeper.

Anecdotally, New York last week was depressing. Many stores up and down 6th, 7th and 8th Avenues were empty or closing. The US economy is hurting on both coasts (read California and New York and others) and the rust belt is faring no better. Obama seems to be willing to pour good money after bad into failing businesses, furthering his need to print money and at the same time undermine the capitalist system with both populist rhetoric and support for odd taxes. The US economy is in a free fall and is searching for direction. That is not a time to be betting on the dollar which is essentially a bet on the health of the US economy and a more constrained monetary policy.

What does this all mean for Israeli entrepreneurs? With the US government buying Treasuries, inflation is around the corner and with it a drop in the dollar. For those of you who have not yet hedged at least one year of exposure, do so now while the dollar is still above 4:1 before engineering talent gets relatively expensive again. For those of you who were optimistic on the dollar and budgeted anything above 3.7 Shekels to the Dollar, do yourself a favor and re-budget ASAP so you do not delude yourself into losses. And for those Israeli public companies who experienced some extra profitability last quarter due to the rise in the dollar, be aware that the profits may evaporate. To quote Yogi Berra, this feels like deja vu all over again. I gave similar advice a little over a year ago when I suggested there was an impending US recession and I think we are here once again on the Dollar. Dear entrepreneur: Please be conservative so you can conserve your cash in this difficult investment environment.

Comments

[Asbytec:]

Deja Vu means you believe you've seen this before, but aren't quite sure.

All currencies are hurting, the dollar just happens to be leading the way. Sure, the dollar will tank for a bit...a few months maybe. Just wait until EU QE later this year.

But, I'd wait until a few sucker rallies have passed before saying for sure. I mean, we are not out of the woods, despite the euphoria of today's market rally.

Um, the credit markets are still log jammed. The CDS mess is far from being resolved. Unemployment is still high. Auto sales are falling off. The housing market hasn't hit bottom just yet. Credit lines are tight and credit interest rates are climbing. yada yada...both here and over there.

Mar 23 11:51 AM

[LJR:]

This idea that the dollar is strong relative to other currencies because they have weakness in them as well has me wondering. Of course with markets, relativity is everything, but this free for all spending and printing mean weakness, relative or not.

Your advice seems well placed since you are only showing caution here. Good time to be a little cautious (read that - show a lot of caution!!!)

Mar 23 12:40 PM

[shti:]

how does dollar value correlate to the stock market, does stock price have any relation with US dollar value?

Mar 24 01:18 PM

[Candor7:]

I hear a lot of wigging out over the issue of the fall of the USD,as if we need to be US patriots and deny the truth.

Where is the value in the USD, it has very little. The USD is high becaise there us demand for it as a shelter currency and the default currency of international business.

Chine will lead the devaluation of the USd, and on top of that, Obama will help as agreed at G20 with Zhou to to just that.

So anyone who does not have a plan to get out of USD valued assets, needs to get one. Buy stock in Canadian Dollars through TSX, and change from USD to CD or another currency which has value based on the GNP of its nation. The USD is toast, and remember, timing is everything, and Obama/China are running this USD devaluation process together. It will happen so slick you won't even know it , until you look at your portfolio after it happens..

Good Luck.

Apr 05 05:40 PM

[Herr Jordan:]

I'm joking so don't accuse me of Antisemitism, but you have to admit that Jews invented economics out of necessity and Christian stupidity (at least if you concede that Adam Smith was an exceptional case :)

So it is axiomatic that Jews will take the dismal science too literally and actually plan their economy on economic fundamentals.

In the past it's cost them dearly (if you get the drift of my irony) and even if history doesn't repeat itself, it echoes, as Mark Twain said.

I'm still not in a very serious mood but I have to warn you not to take these things too seriously.

In the past, the virtuous have paid the price of their virtue almost as often as the evil have prospered from their bad deeds.

But I refuse to give in to seriousness. I'll leave the rest to your gambling imagination.

Apr 17 12:56 AM