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.