Trump Is Making the Dollar Great Again

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club

For years now, I’ve argued at investment conferences with dollar bears who insisted that the greenback had nowhere to go but down.

They generally pointed to three primary reasons:

  1. The U.S. trade deficit
  2. Our sovereign debt
  3. The demise of the dollar as the world’s reserve currency.

Of course, you can talk until you’re red in the face, but facts and opinions don’t settle arguments like these.

Markets do.

So take a look at this chart:

Since bottoming in May 2014, the U.S. dollar is up 13.9% against a basket of world currencies.

The dollar bears weren’t just mistaken. They have been on the wrong side of a historic upturn in the currency, racking up massive losses for themselves and their followers.

Their pain and suffering is far from over, in my view. A dispassionate look at the facts demonstrates that we are in a new era of dollar dominance.

False Warnings

Let’s consider why the dollar bears have been so wrong, starting with the federal debt, a subject I’ve written about at length here before.

The national debt is inexcusable and poses a genuine risk to future growth. But it doesn’t pose an existential threat.

At least... not yet.

Debt - be it consumer, corporate or sovereign - becomes a serious problem only when the debtor can no longer service it.

That is not a threat today. Annual interest on the debt accounts for just 6.5% of all federal spending.

True, it will become a much larger percentage in the future. But with stronger economic growth, spending cuts, tax simplification and entitlement reform, there is still time to achieve fiscal sanity.

Meanwhile, don’t kid yourself that other Western democracies aren’t grappling with the same problem. No major industrialized country is balancing its budget or running a surplus.

Now let’s turn to the U.S. trade deficit. It topped $550 billion in 2017 - exceeding 2016’s levels.

This is not cause for alarm.

Unlike a household deficit, a trade deficit isn’t a debt that must be repaid.

And a trade deficit equals a capital surplus. When we buy steel, cars, jewelry and electronics from foreigners, those sellers get dollars in return. Many of them are put in dollar-denominated assets like U.S. stocks, bonds and real estate.

Much of this foreign capital goes to finance mortgages and consumer loans, helping to raise our standard of living.

When a country runs a trade deficit, it means the purchasing power of the currency is strong, and consumers are wealthy enough - and optimistic enough - to spend.

As for last year’s Black Friday and Cyber Monday sales numbers attest, Americans are opening their wallets. That’s positive for the dollar.

The Dollar Is Still King

As for the greenback losing its status as the world’s reserve currency... that has always been a ridiculous fantasy.

The U.S. economy produces almost a quarter of the world’s annual wealth. Our country is the primary defender of the free world - and plays an extraordinary role in world leadership.

No other country attracts more students, more immigrants and more direct foreign investment.

What is the alternative to the dollar as a reserve currency?

Certainly not the euro, a political experiment between powerful, large countries and profligate, smaller ones that still threatens to come apart at the seams.

Not the yen, the currency of a country that has fought a debilitating two-decade fight with deflation and whose national debt as a percentage of GDP is more than twice as large as our own.

Not the yuan, the currency of a communist nation that doesn’t recognize even the most basic rights of its citizens.

And not the Swiss franc. Switzerland is a fine example of fiscal probity. But Pennsylvania has a larger economy.

That’s why foreigners continue to load up on U.S. dollars.

The commercial banks of Japan, Germany, France and Great Britain, for instance, now have more dollar-denominated liabilities than those in their own currencies.

And there are good reasons to believe the demand for dollars will only increase in the weeks ahead:

  • The Fed is allowing $10 billion a month of its $4.5 trillion balance sheet - acquired under the bond-buying programs during the financial crisis - to roll off every month.
  • The U.S. is stashing increasing amounts of cash at the central bank.
  • The U.S. tax overhaul will motivate American companies to repatriate a large chunk of their cash stashed abroad.

A rising dollar, of course, is a good thing for Americans.

It helps keep inflation down, since imports become more competitively priced.

It holds down energy prices and undermines globally traded commodities. (That’s why the same analysts that were wrong about the dollar were also wrong about natural resource prices.)

It makes international travel less expensive for Americans, thanks to more favorable exchange rates.

And it drives capital flows our way and helps support U.S. stock and bond markets. (Foreign investors can look forward to appreciation in both the securities they own and the value of our currency against theirs.)

True, a firmer dollar makes U.S. exports more expensive in foreign markets.

But the trade-off of low inflation, greater purchasing power, cheap energy and rising asset prices is a decided plus.

So don’t short the greenback. Celebrate it.

We’re in a new era of dollar domination.

How to Trade It

If you’re looking for the best way to play a strong dollar, there are a number of ways to do it.

But there are two specific plays I like most…

Another Way to Benefit From Cheaper Imports

As Alex said, a strong dollar makes imports cheaper. That keeps inflation down and raises our standard of living.

But there’s another way that savvy Americans can profit from the trade effects of a strong dollar: by investing in the developing-world exporters that get a boost from their own currencies’ weakness against the dollar.

Alex’s Oxford Communiqué subscribers have been doing this for years with the iShares MSCI Emerging Markets Fund (NYSE: EEM).

Here’s Alex checking on the fund back in April...

The iShares MSCI Emerging Markets Fund attempts to replicate the return of Morgan Stanley’s emerging markets index. It offers exposure to more than 800 large and midsized companies throughout Asia, Latin America and Eastern Europe.

With more than $29 billion in assets, the fund gives you broad diversification, high liquidity and low expenses with high tax efficiency.

“But why should I invest my hard-earned capital,” an investor once asked me, “in places I wouldn’t even visit myself?”

First off, anyone who hasn’t visited Hong Kong, Argentina or the Czech Republic doesn’t know what they’re missing. But the real answer is performance and diversification.

Emerging markets will be an engine of world economic growth for decades to come. Consider the demographics. These countries contain three-quarters of the world’s land mass and nearly 85% of the people. China and India alone make up nearly one-third of the world’s population.

Consumers in emerging markets need everything we take for granted in the West: housing, automobiles, healthcare, credit cards, computers, smartphones, insurance and so on.

However, countries like Brazil, India and China are not going to let Western firms come in and pick all the low-hanging fruit. If you want to reap the maximum benefit from the world’s biggest economic development story, you need to have part of your portfolio in these markets themselves.

Also, consider the diversification value. These stocks don’t move in lockstep with those in the developed world. In technical terms, when ours zig, theirs often zag.

- Samuel Taube with Alexander Green

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