How to Profit from Current Dollar Anxiety

Is the dollar in as much trouble as the pundits say? A better question to ask is whether it matters - and how we can profit regardless.

It seems that nearly every pundit out there is telling tales of woe and despair over the crumbling dollar against the globe's currencies. Ok, the headlines are proclaiming that the dollar has been plunging - but let's look at the details behind the headlines.

Misleading Dollar Measurements

And the key thing to look at is what folks are using as a measurement of the dollar's value. This comes down to two indexes. The first is the dollar index which is a composite of the six traded currencies on the US listed futures market: the Canadian dollar (CAD), Swiss franc (CHF), Swedish krona (SEK), euro (EUR), British pound (GBP) and Japanese yen (JPY).

The second is the trade-weighted dollar index that was created by the US Fed, which includes the above six currencies along with the Australian dollar (AUD).

There's a problem with both measurements: Neither includes the dollar's movements against some of the US's largest trading and investment partners' currencies, which of course include Mexico and its peso (MXN) and China - along with Hong Kong (CNY & HKD).

And the picture gets even muddier when you look at the weightings within both indexes - especially the dollar index, which is dominated by the euro with its 57 plus percent weighting.

Why is this important? Simple: because while it might make for great press - the hype of doom and gloom - you as an investor can't afford to let hype guide your decisions.

Instead, let's look at the facts of what's really going on with the dollar.

So far this year, the dollar has indeed given up some value - but not as much as you might have been led to believe. Against the Chinese renminbi - the dollar is down a mere 0.2 percent and against the additional Chinese currency - the Hong Kong dollar - it's flat as a won ton.

Next, against the other major Asian power - Japan - the dollar is down only 2.5 percent.

Heading over to Europe, the dollar is down 4.1 percent against the Swiss franc and 5.8 percent against the euro.

Back in North America, the dollar is down against the Mexican peso by 3.1 percent and the Canadian dollar by a bit more than 15 percent - but that's after the dollar had soared by a similar amount in the 4th quarter of last year.

Actual Market Performance vs. Dollar Demise Hype

So as you can see, the case for dollar doom appears a bit less than recent headlines make it out to be. But let's dig a bit further and look at the real impacts of what's going on behind the scenes of the currency market.

Pundits like to talk about dollar ruination as it affects trade, commerce and investment flows. The idea is that with the end of the dollar, our trade will collapse and the world will simply stop selling to, financing, and investing in us.

Well, if indeed the dollar were dropping like an Acme anvil in a Warner-Brothers cartoon, we should be seeing the real world impacts on the flows of trade and investment - right?

Well...it's not showing up.

Sales of goods and services to the US from our major trade partners keep climbing - even with most of the world in crummy economic shape. The biggest seller - China including Hong Kong - has been increasing sales to the US by some 7 percent in the last reported monthly data, amounting to near 26 billion. The European Union came in with gains of 8 percent to 25 billion. Japan sold more by some 4 plus percent at 8 billion. And back in North America, both Mexico and Canada saw gains amounting to 14 plus and 18 plus billion respectively.

Meanwhile, it you look at our sales to those same countries, we sold less - slipping by 2 plus percent on average.

We keep buying and they keep selling.

More importantly, the world keeps financing and investing in the US markets. The Fed tracks the transactions month by month as it watches all of the markets for bonds, stocks and other securities that go in and out of the US via all of the listed and over-the-counter markets.

And during the past 10 years the gains have kept coming - meaning that the world keeps sending its savings and investments flowing at an ever-greater pace into the US market, currently running at an increase of over 44 percent - and that's even with our regular bubble and collapse cycles.

And so far this year - as the dollar is supposed to doom us and our markets - the inflows of capital from outside the US are soaring even higher by more than 96 percent.

And this despite the so-called trade-weighted dollar index being down some 12 percent for the past 10 years and down 2.8 percent year to date.

So, if the dollar's demise is supposed to crush our markets - no one told the guys that actually do the heavy lifting when it comes to real buying and selling, and not just hyperbole.

And for those who are touting that the dollar's doom will bring inflation - citing the real goods markets of commodities as a yardstick - it's not showing up. For the past year, the Commodities Research Board's CRB index of commodities is down more than 15 percent and even crude oil is down over 19 percent.

The Best Way to Profit from Currencies

Now that I've gone through the real numbers behind the hyped headlines - let's consider the profits that you can make by the boatload in the currency markets.

The key to currencies isn't to get all clutched up about what's going wrong - but instead focus on what's going right - and where. The winners in the currency market won't be those that hope for a collapse of the US, but rather focus on the winning strategies of individual countries and markets.

I know first hand about how to invest on currency movements - as it was the core of my livelihood spanning over two decades, before my current career as a writer.

Back then, there was the same group of suspects who were always out there bashing the dollar. The stories and the pontifications were the same as today, and I was only too keen to get my share of the business that would be driven to my banks and trading desks as well as my managed accounts.

But while I was happy to accept orders - I felt it my obligation as well as good business to educate clients that they didn't have to rely on shorting the dollar to hedge their portfolios, their savings and their retirement plans. I showed them how the world offered many ways, irrespective of the dollar's movements, to generate even greater returns.

And along the way - they could also get paid a whole lot more yield from markets and currencies around the world that were advancing on positive market and economic developments rather than just reflexive trading.

Now that I'm an investment and market analyst and writer, I continue to offer similar strategies: buying into foreign markets not because of doom and gloom stories about the US, but rather because of great stories of improvements abroad.

This is what's behind my core investments that I've been making for years and years in my past, current and - coming soon - pending publications.

I continue to follow and recommend five core closed-end global bond funds that invest in currencies and markets around the globe, offering better yields and better market returns beyond just the US and the US dollar.

They're working now and they keep working year after year - regardless of whether the dollar indexes go up, down or nowhere.

They include the AllianceBernstein Global High Income (NYSE: AWF), the Blackrock Income Opportunity (NYSE: BNA), Pimco Strategic Global (NYSE: RCS), Templeton Emerging Markets (NYSE: TEI) and the Western Assets Emerging Markets (NYSE: ESD) which merged with Western Assets Emerging Markets Floating Rate - EFL).

So far this year, this set of funds is averaging returns in excess of 53 percent while paying you an average dividend yield of 8 percent. And while the Pimco trades as always at a reported premium - the average for the remaining four funds is running at a 4 percent plus discount of what they're worth at market prices.

The proof is in the numbers. You can fool around with a negative dollar index fund and maybe make something if the gloomers are right - or you can follow my lead and invest in markets and currencies that perform with or without the dollar - your choice.

Disclosures: Long AWF, BNA, RCS, TEI, ESD

Comments

[Analyste de...:]

The mutual- and closed-end fund promoter is back!

What are the FEES on these pricey CEF products, and why should anyone waste money when cheaper ETF indexes abound?
(As an aside, folks, AllianceBernstein has some the MOST expensive funds sold - and be wary of ANY advisor promoting 'pay-to-play' investments.)

PCY (ETF) outperforms AWF, TEI & ESD with lower cost & less volatility, for example.

I'm also not sure how BNA meets the author's stated goal to "diversify beyond just the Dollar" etc. Who's a fan of a mortgage-backed securities loaded portfolio??? Not me.

From GoogleFinance: "BlackRock Income Opportunity Trust, Inc. (the Trust) is a diversified closed-end management investment company. The Trust’s investment objective is to provide current income and capital appreciation in a portfolio of primarily United States dollar-denominated securities. The Trust’s portfolio includes corporate bonds, United States Government agency mortgage-backed securities, non-United States Government agency mortgage-backed securities, United States Government obligations, asset-backed securities, United States Government and agency mortgage-backed securities - collateralized mortgage obligations, capital trusts and foreign government obligations."

Oct 14 01:26 PM

[Jack Vance:]

Analyste de Boston, above, is simply wrong. First, Mr. George clearly recommended the five funds as a basket, and they have earned a 55% return year to date compared to 32% for PCY. Second, the criticism of BNA is a little odd -- the fund can hold a variety of securities denominated in different currencies -- and it's up more than 14% ytd. Where's the beef?

Finally, George isn't a promoter, he's an analyst and blogger. If "Analyste" has different info, I'd like to see it.

Oct 14 02:53 PM

[talld:]

The market theory the current generation grew up with, where such truisms as a diversified portfolio wont get you what it once would. What good does value investing do you if you pick a great stock, but the economy crumbles around it?

Such things as banks used to almost be part of the substrate and did not generally affect things, because they changed so slowly. Now, what was once the substrate has become the playing field, and what was once the investment rules have become rubbish. (With the exception of money management)

I have no doubt that during the last fifty years of your life what you say is true, but the rules have changed, and investing using the common techniques of the past will yeild results no better than random, as things like the collapse of the commercial real estate market, or ... have huge consequences which overpower the common knowledge which people such as yourself has spent a lifetime accumulating.

The next large movement of the dollar will be inverse the market, if things hold, as the pressure is inverse between the dollar and the markets. And that is why it may make sense today to hedge with dollars, even though, no doubt, during your entire life, this was never true before.

Oct 14 03:59 PM

[Analyste de...:]

On Oct 14 02:53 PM Jack Vance wrote:

> Analyste de Boston, above, is simply wrong. First, Mr. George clearly
> recommended the five funds as a basket, and they have earned a 55%
> return year to date compared to 32% for PCY. Second, the criticism
> of BNA is a little odd -- the fund can hold a variety of securities
> denominated in different currencies -- and it's up more than 14%
> ytd. Where's the beef?

Oh, where to start?

1) No one should ever buy a fund on YTD (short term) performance alone. Anyone suggesting otherwise is loopy.

2) When suggesting a basket of 5 funds for retail investors, you don't pick three of the same kind of investment. From an asset allocation standpoint, ESD, TEI and AWF are too similar : no real diversification here.

3) I favor EM Bonds, but understand this second tier of investments in one of the riskiest asset classes. As core holdings, this lopsided portfolio carried GREATER RISK than the S&P500 and cratered around - 50% from late October 2007 through 11/20/08. Most fxd inc investors don't have the risk-tolerance to risk -50% of their portfolio's value in another wave of de-leveraging, sorry.

4) Lift up the stone, you'll see lots of those nasty scurrying bugs which so recently stung investors in the 2007-2009 Crash. And far greater US exposure than advertised or expected: BNA is 100% US bonds & debt (got that, Jack?) RCS 99% US, AWF is 47%, etc.

Sure, I like EM & favor a strong international fxd inc weighting, and I wouldn't dismiss all these CEFs. But this article seems more to exemplify the pitfalls of picking a few recent winners (which had recently been big losers) and cramming them all into a dicey bond portfolio. That's no way to invest against a presumed USD decline longer term, sorry!

Oct 15 12:23 AM

[Jack Vance:]

It's curious you keep raising these straw man arguments. I could have gone back from the present day and found ANY period in which George's suggested basket quite strongly outperformed your suggestion, PCY -- the point being that your statement, "PCY outperforms AWF, TEI & ESD with lower cost & less volatility, for example," is clearly false.

And, talk about cherry picking time frames: "...late October 2007 through 11/20/08." Look, some may find this kind of argumentation interesting. I find it tedious and mendacious. Find another playmate -- this is my last word on the subject. Got it?


On Oct 15 12:23 AM Analyste de Boston wrote:

> On Oct 14 02:53 PM Jack Vance wrote:

Oct 15 09:00 AM

[Analyste de...:]

"PCY outperforms AWF, TEI & ESD with lower cost & less volatility, for example," is not false. It's accurate for the Bear Market, the longest term ("Max") we have for PCY. Anyone can see the huge losses these investments suffered: check GoogleFinance or BigCharts.com. Risk matters, simply.

Sorry Jack, you're the one cherry-picking dates & setting up strawman arguments, not me!

As for fees, PCY has an expense ratio of 0.50%, while TEI has an expense ratio of 1.19%, ESD 1.36%, AWF 1.07% ... mendacity is pretending that CEFs aren't more expensive & risky choices, as we all plainly see.

Before buying, the conservative investor should understand how some high-flying US-oriented "global income" CEFs are brimming with yesterday's toxic sludge. But don't take my word for it - research for yourself. It's almost Halloween: enjoy eating zombie paper, yum!

As the Smirking Chimp sez: "Fool me once: shame on you; fool me twice .... won't get fooled again."

Oct 15 01:00 PM

[searcher:]

I'm nearly as impressed by these jousters as they are with themselves. Nearly. Tedious slumber party patter.

Oct 15 02:40 PM