With the Fed all but certain to raise interest rates later this month (for the first time since June 29, 2006), the talk around town is all about the strengthening USD. As a holder of lots of USD, this is of course overwhelmingly good news in my eyes.
According to Janet Yellen, the U.S. economy “has recovered substantially since the great recession,” and is FINALLY ready for a rate hike and the tightening of monetary policy.
Sure, stocks and real estate are up big (the so-called wealth effect), but that hasn’t helped the majority of everyday Americans… All it has really done is make the rich a whole lot richer… And even then, money velocity is beyond stagnant, so it’s not like The Haves are spending with reckless abandon either…
When I look around me (locally), high-tech companies are consolidating left and right (just look at all the recent M&A activity) and many employees have gotten the ax. My former co-workers and even some close friends are all shaking in their boots right now, afraid of what may be in store for them later… As such, they are all taking a heavily defensive posture in spite of the mainstream media’s constant headlines of “low unemployment rate” and 4 decade low jobless claims.
Whereas the rest of the world is hell-bent on more money printing and stimulus (Europe, Japan, etc.), it would seem counter-intuitive that the US, instead, is ready to do the complete opposite.
As if multinational companies here are just dying for an even stronger dollar (sarcasm)… after releasing a slew of horrendous earnings reports this past quarter.
From Seeking Alpha:
Johnson and Johnson (JNJ):
Procter and Gamble:
Who cares about earnings per share (EPS)? Everyone knows that earnings can be financially engineered…
Look at the
growing declining revenues; that’s what tells the TRUE story.
A strong dollar will NOT help exports… It’s only going to exacerbate problems…
But in the short-term, it is what it is… It’s not important whether or not it makes any sense…
As an investor, there’s nothing to complain about! Just go along with the Fed and embrace the opportunities that a strong dollar offer up to you.
I relish deflation…
I LOVE deflation!
This means your dollar goes a hell of a lot farther and you can buy up more and more assets!
What am I doing myself?
I’m going to continue to use the exceptionally strong (and growing more potent by the day) USD to exploit weaknesses in other currencies.
U.S. Dollar Index (DXY) near 5-year highs:
Particularly, the following:
The USD is up over 30% in the last 5 years relative to the CAD and AUD. And as readers well know, I’m someone who believes very strongly in market cycles.
What goes up must come back down… eventually.
In a currency war, it’s a race to the bottom… We had our turn in 2009 and 2010 when the Fed unleashed the first few rounds of Quantitive Easing (QE).
USD to CAD (2008-2011):
It worked so well, now everyone else around the globe wants their turn!
So I would say that right now, is just about as good a time as any to begin swapping out of some HOT US dollars and into just about any other currency…
Please Note: I am NOT providing any investment advice or recommendations. I am merely sharing with readers what I am doing with my own capital. There are always RISKS involved. As always, you need to perform your own due diligence and ONLY take actions that you are comfortable with.
Like I have mentioned many times before in the past, I’m not smart enough to time absolute market tops and bottoms… So, I’m not going to bother to try…
Yes, the USD will probably continue to strengthen over the next 6-18 months (let’s wait and see how many successive rate hikes they’ll be manage to pull off before we give the Fed too much credit)… But it’s already reached levels where I am comfortable with performing currency swaps into much cheaper alternatives. I’m going to take the approach to dollar cost average (DCA) over the next year, especially on occasions when the USD is particularly strong.
What am I planning on doing with the CAD, or AUD? Simple, I’m going to keep on buying commodities (mining stocks) on the TSX, TSX-V, and ASX (no holdings yet)!
This only further enhances my objective to BUY LOW!
I already believe that gold and silver mining stocks are trading at record low valuations, down over 80% to 90% from their 2011 peaks… Even in USD, I’m a strong buyer. The fact that I can also trade my USD for CAD or AUD for a 30% gain (relative to 5 years ago) is just icing on the cake!
I will take that trade every day of the week (and I essentially am)!
In essence, I’m using an opportunistic period of deflation (the best time to buy assets) in currencies/commodities to purchase inflation (gold mining stocks) hedges…
Although consumers and investors/speculators LOVE deflation, central banks around the world HATE deflation… They can’t exist in a deflationary environment for long periods of time.
What’s the easiest way to service too much debt (like ALL nations across the globe have)?
Inflate it away… Print more money!
How do you stimulate a slowing economy?
Devalue your currency to try and boost exports (and to some degree tourism)!
Both scenarios will no doubt lead to an eventual debasement of the currency… And don’t worry, inflation will always get another swing at the plate; it’s the central banks’ favorite solution!
And I for one don’t believe that “the end of the world zombie apocalypse” is fast approaching, so no, I don’t believe that commodities are a broken investment…
Precious metals are the ultimate inflation hedge and protection against currency debasement… and they will have their time in the sun again… To some degree they already are SHINING BRIGHT.
Just ask the people in Brazil or South Africa how gold is doing…
From Gold Price:
Gold priced in BRL (5 year chart):
From Gold Price:
Gold priced in ZAR (5 year chart):
Last time around, I used a period of deflation (post financial crisis) to buy up another inflation hedge, real estate. Unfortunately, real estate isn’t cheap where I live anymore…
So I’m going to continue to focus on gold and silver mining stocks this time around.
But I won’t plan on converting these currencies (CAD/AUD) back to USD until the USD weakens substantially again at some point in the future (which it will). This will require some patience, of course, but for deep value discounts, I’ve got plenty of that!
As it pertains to yen or euros? Darn, I only wish I had booked vacations to Japan and Italy NOW instead of in late 2014!!!
Oh well, you can’t win them all… But I am loving the currency arbitrage opportunities that are present today.