About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Thursday, April 18, 2013

US Dollar -- Please Not Again

Viewed against the major currencies the US dollar has been in a long term decline
ever since then Fed Chair. Volcker was suckered into a strong dollar policy over 1983-
86 following the deep global recession of the early 1980s. The US, Germany and Japan
were supposed to form a three engine complex to pull the globe out of recession, but
Japan and Germany both broke the deal and went their typical mercantilist way. Between
1980 - 85, the dollar nearly doubled in value and the US lost a tremendous amount of
competitive position which it never regained. Long Term US$ Dollar Chart

In the Clinton - Rubin era circa 1995, the US grandly encouraged another strong dollar
era, with the USD this time climbing 50%. This stupid move was also disastrous for the
US competitive position as it paved the way for aggressive mercantilism from China.

A strong dollar favored foreign investment and off-shoring, but it greatly undercut US
export potential, reduced the base of production and led to a downshift of earnings
potential for the US work force.

Over the past decade, the USD again went into sharp decline as players realized the depth
of the erosion in the US trade position and as new Fed chair Bernanke politely attacked
China mercantilism.

The dollar remains in a bear market, but has been range bound over the past five years as
trade fundamentals have improved and as interest in the currency as a safe haven has
increased.

By Its deeds, the US has made it clear that it is not interested in a strong dollar policy and
has no desire to repeat the disasters of the 1980s and 1990s.

Barring another dumb and furious rally in the dollar, the US should see its trade position
gradually improve in this decade on continued rather moderate consumer demand, a shift
in manufacturing to more specialized products, a rebound in hydrocarbon production and
growth potential and further development of new services and technologies. Whether that
is good enough to stabilize our currency remains to be seen. As well, the US will have to
make sure it remains far less tolerant of foreign mercantilism than it has in the past.

Market players, fearful of an unsettled eurozone and stresses that may develop in China
if it does indeed opt to better diversify its economy may continue to eye the dollar as a
prospective safe haven and will be keeping an eye on Japan as it tries to overcome a
punishing long term deflation. A little mild upward pressure on the dollar is no big deal,
but a powerful rally would be most unwelcome at this point as it would ultimately
negatively affect US employment. Thanks, we do not need that.

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