US Dollar: Double Bang for Your Buck

In the past I mentioned that the weak dollar is used as "the excuse" for all that ails. The reality is that the very low price of the dollar is cause for great optimism. Do you want to buy a dollar when it is over priced or when it is cheap?

Today, a flood of dollar buying is in evidence. US exports of manufactured goods just went up more than 13% over last year. Both foreign and domestic businesses must consider locating plants in America right now because it is cheaper to build a plant with US dollars than with Euro Dollars.

Investors in US stocks will get a double bang for their buck over the next several years. In 1996, when the dollar was almost as cheap as it is now, was at the start of the second half of the 90's business cycle. As the business cycle progressed, US stocks soared in value in dollar terms. In terms of other currencies, US stocks rocketed off the charts. History does not repeat but it certainly rhymes.Over the next several years, the odds are good that the dollar will bounce off this major low and as it does, the incentive for foreign investors to buy US assets will be great.

EXTREME PRICES

The flip side of the US dollar price is the corn price. At or near the end of each commodity cycle surge, the price of corn gets out of whack. In 1974 the price of corn traded at $4 per bushel, a year later the price was down to $2.50 and within three years corn traded at $1.80 per bushel. By the end of the 1970's, oil had once again soared in price and corn traded for $3.95. By 1982, the price had fallen back to $2.15 and by 1986 the price had fallen to $1.45.
In 1996, at the mid cycle turn, corn traded at $5.50 per bushel and it fell to $1.90 per bushel by 1998. As recently as November of 2005 corn traded at $2 per bushel but in January it was trading around $5.40.

Tons of corn syrup goes into tons and tons of food products. Coke and Pepsi use very large quantities in drinks and Pepsi sells corn chips to match. The volatility of the price of corn is the main reason that the government issues two sets of inflation figures. The core rate of inflation does not include food or energy. The price of food and energy goes down in real terms over time but they each spike up in 4 and a half and 9 year patterns.

The bond market is forecasting inflation of about 2%. The most recent CPI headline numbers show 4.3% inflation. The long term average is 4.1% but we live in a time of "disinflation" forces. The USA is set up to see very low inflation for the next several years, partly because as our dollar strengthens the price of foreign goods will fall.

FEAR OF INTEREST RATE CUTS

In case you are not aware, the dollar has not fallen in relative value for the past 6 months. Once the FOMC started cutting rates, the dollar stopped falling. The prospects for economic growth increase as US interest rates are cut and this makes the dollar more attractive to own. Pundits consistently state the relationship between interest rate cuts and the dollar strength upside down. They focus on the real short term effect of lower US rates causing money market investors to seek higher yields in other currencies.

When a few economic numbers were weak last week, the dollar bears come out of hiding, gold soared, oil soared and the pundits whined that the FOMC is between a rock and a hard place. They constant fear is that the economy is getting in worse shape so the FOMC needs to cut rates but the FOMC cannot afford to cut rates because that would cause a decline in the dollar.

One can look at a chart of Fed Funds Rates and the dollar and determine in about 5 seconds that the relationship is the other way around. The dollar fell and fell some more as the FOMC raised interest rates in the mid 90's cycle and in the mid 2000's cycle. Then, when the FOMC cut rates in 1996 and late in 2007, the dollar started to turn. By 2,000, the dollar had retraced its steps all the way back to the prior peak.

Are governments concerned about inflation? Sure they are! As the dollar climbs back up the mountain, the price of US corn (we only grew 100 million acres last year) will rise in price for the rest of the world. The price is ready to tumble in dollar terms. Falling corn and oil prices in dollar terms will mean US interest rates can remain relatively low. Low interest rates means the value of assets are discounted at lower rates. The price of US assets is ready to soar!

Comments

[westwest888:]

So assets are going to soar? Should I buy more houses or more stocks? Or should I not listen to you because your analysis is flawed. Standing where we are in 2008, you can have a mix of: asset deflation and dollar devaluation. They can't move against each other. We're heading for real estate and consumer credit deflation to the tune of $10 trillion+. The Fed is going to attempt to juice the money supply with at least that much to prevent deflation, and create commodities and consumer price inflation by doing so.

But I'll be watching your asset appreciation theory and no inflation theory from the sidelines. Good luck.

2008 Feb 25 08:23 AM

[Fat Arby:]

Can we have a strong dollar and a weak equities market? SURE!@! IN fact, that's the likely scenario. When Bernanke reaches zero, the dollar might be in the 2.5 per sterling pound, but as soon as interest rates start climbing [because, in all likelyhood, there's too much interest in the US not becoming another Japan, even if we do have to take radical measures] the dollar will come back to below 2 and maybe to 1.5. However, this bodes ill for equities. At this juncture, there's simply TOO MANY dollars. The Fed prints and prints and prints more dollars which ends up devaluing the currency which is why commodities go up. In gold terms, they're the same price, but we don't buy things with gold anymore.

2008 Feb 25 12:40 PM

[Fat Arby:]

I want to reccommend a book for you (the author), one that will surely put this into perspective: The Dollar Crisis , by richard duncan. You'll see that Bernanke is NOT YOUR FRIEND. Believe it or not, Japan's current economic crisis was created by the US with Bernanke at the head. This was some sort of sick economic experiment which only benefits the VERY rich who have nothing to gain from a strong equities market or a strong currency or high interest rates. They're the ones with assets in only the best parts of the world, so they could GAF about the little guy or the middle class or the working poor or the very poor.
I was very poor once; went to soup kitchens every day, scrounged for food in trash cans at night, sucked the marrow from chicken bones from trash cans in jail {true story} and asked for vegetables others weren't eating, had a hussle to get a snack or a tylenol, so I can tell you that all's not hunky dory with the goddamm economy!
I'm still an undergrad, and you can bet your bottom dollar that when I do finish a degree in econ or pre-med i'll have an education that a lot might envy.
So, I'm telling you this from the bottom of my heart, US equities need to be punished because there are A LOT of bad guys heading these corporations. They have no regard for those who have to sit through toxic fumes to collect precious metals from OUR waste or who punish workers in sweatshops or children so that they can get cheaper and cheaper labor.
This is not a peace dividend; this is WAR.

2008 Feb 25 01:04 PM

[sbenard:]

The US Dollar Index futures plunged to a new all-time low today. So much for your credibility. The EURUSD Forex cross reach a new all-time high over $1.50 for the first time also.

My Dollar Index futures charts show that volume indicators have shown heavy SELLING of the Dollar consistently for the past 3 weeks, accelerating DOWNWARD today at the fastest pace since Thanksgiving. I'm not sure what USD buying you're seeing, but they aren't the ones on planet earth. The ones here are being SOLD in record volume. You can see the latest daily USD chart on my blog, where the USD has NEVER been lower:
globalcapital.blogspot...

2008 Feb 26 11:02 PM

[ACEMAN:]

J Miller has it right but he could be a bit more concise. The reasons for the bullish dollar is the expansion of M3 correlates with oil and M3 correlates with inflation and as international liquidity becomes tight, the US dollar will spring forward.

2008 Feb 27 09:26 PM

[Freddy L:]

I love the blind optimism, but where are the numbers to support it?

This part is my favorite "in case you are not aware, the dollar has not fallen in relative value for the past 6 months." No you are right, we are not paying anywhere between 30-1000% more for just about everything (except maybe consumer electronics) then we were not even a few years ago but just MONTHS ago! Healthcare, oil, silver gold and other base metals, commodities, rent, foodstuffs, housing (even with the recent downturn in home prices we are still way above 2001-2002 levels), foreign currencies ... the list could go on.

Your past observations don't include the mortgage meltdown that has only just begun combined with a currency that is backed by a government that has spent trillions of our dollars irresponsibly. The fed reserve is run by a bunch of crooks that are running a ponzi scheme by issuing more debt to pay off old debt to pay for it. They keep telling us inflation is at 4% or whatever statistics they make up (they don't even show us m3 anymore) while inflation is actually through the roof. You can thank the cronies of the Reagen and later the Clinton administration for figuring out ways to screw up the CPI to make inflation much lower then what it really is. Its great for them, lowers entitlement payments, social security payments, and the TIPS they pay out! Figure out what inflation really is and you can find out the US hasn't had any real grow for years! Just helicopter Ben just spitting out more dollars. If you want a good idea of what the market is doing go look at a chart of the DJIA divided by the EUR. The Chinese and the Saudis who are heavily invested in the dollar aren't stupid and when they REALLY start unloading their positions (which they will) then all hell will break lose. Thankfully I will be well invested in foreign currencies, short on American stocks, long on agricultural stocks, heavily invested in metals (not just gold and silver but BASE METALS people!) other commodities, and foreign bond and foreign market ETFs. 3 years from now you are still trying to staring at your technical charts trying to figure out why the price of corn still hasn't fallen and why your investments have fallen about 90%.
Cheers

2008 Feb 29 05:51 PM

[Freddy L:]

Sorry last sentence should read: 3 years from now you will still be staring at your technical charts trying to figure out why the price of corn still hasn't fallen and why your investments have fallen in value by about 90%

2008 Feb 29 05:53 PM

[Freddy L:]

"I project oil to be lower in price a year from now and much lower three years from now. Mark it on your calendar." - Jack Miller, December 09, 2005
Article seekingalpha.com/artic...

Thanks for your advice Jack, I have December 09, 2008 market on my calender just for you!

"American Airlines Bullish on Indian Market, Will Benefit From Fall in Oil Price " <-- Jack Miller, December 15,2005
Stock Price at time of article ... about $22.00 Current stock price $12.81 (as of Feb 29, 08)

"Gold Bugs To Get Squashed" - Jack Miller - December 08, 2005 (title of article) <--Wrong
"My bet is that gold will be substantially lower in price one year from today." - Jack Miller, December 08, 2005 <-- Wrong
"[E]nergy companies will only go up in value strongly if oil prices go up strongly from here. It can hardly happen."
"Oil Prices Coming Down Soon?" - Jack Miller, February 02, 2006 <-- Wrong

"My estimate of your chances of success in gold are less than 50% and your chance in big pharma is more than 90%." - Jack Miller, Article on May 2006 <--Wrong
Check out the index for pharam or the ETF "PPH" it was hovering at around $70 in May 06 and its hovering around $70 now.

"The fuel cost of flying an airline passenger is a small portion of the total cost." - Jack Miller May 30, 2006 <-- WRONG!!! Are you serious???? The fuel cost per passanger is BY FAR the highest cost that airlines have.
www.airlines.org/econo... Fuel for airlines is their HIGHEST expense!

2008 Feb 29 06:35 PM

[mediafright:]

Jack, you are right on the money atlease for the next few months. I see the same thing, $ going up, Corn and Other commodities/PMs coming down. I hope this bodes well for Tech, Ethanol, Solar etc.

Thanks !!

2008 Mar 01 12:03 AM

[silver-bullet:]

Hard Assets: Double Bang for Your Buck

Regardless of strong or weak US$, I am cautious analyzing its strength. The US economy today is primarily a financially driven economy, as oppose to a production driven economy. Yes, we produce more figures and digits than we do hard assets.

Money expansion is sound when followed by hard asset expansion. When money supply exceeds our productive assets, then money looses its value to represent wealth. The fed can tweak interest which ever way, but the volume of money in our economy cannot be tweaked away. Therefore being in cash can be a liability in inflationary times.

To me, the CPI figures published by the government is fraudulent. Do you honestly believe your cost of living has only gone up 4.01%? Consider your property tax, gasoline, food, health care cost, insurance - stuff we use on a daily basis. It is pretty obvious the CPI has been doctored by our government, only a fool would believe it. Even China is honest in acknowledging inflation is a problem it needs to resolve.

I believe commodities, raw materials, base metals and water will invariably go up. Essentially its volume cannot be increased as quickly as paper or electronic money.

Outside a US centric world, I see Asia (which holds 60% of world population) as the engine of global growth. Currently US consumes about 27 barrels of oil per person per year. In Asia, it is about 2 to 3 barrels. They have see our lifestyles and wants a piece of it. If their oil consumption increase to 4 to 5 barrels a year, there will be global energy squeeze and inflation.

50% of global building cranes are in China. This fact alone spells a commodity crunch now and into the foreseeable future.

Wealth is in : Raw Materials, Base Metals, Agriculture and Water. The store of wealth is not in paper money, it is in real money: Gold and silver.

2008 May 07 12:04 PM