True Dollar Value Over Long Term
Most investors know that there is the ever present inflation that they have to overcome to even break even with their investments. The problem, in our country, is they don’t understand that with continued Federal Reserve interference with interest rates that they are fighting a losing battle, IF they are investing in markets traded by the U.S. dollar. For instance, let’s go over just last years inflation rates, just as an eye opener, per month.
jan feb mar apr may jun jul aug sep oct nov dec annual
2008 4.3 4.0 4.0 3.9 4.2 5.0 5.6 5.4 4.9 3.7 1.1 0.1 3.8
As you can see, if you weren’t at least getting a 6.0 return monthly on your investments you were not making money. Most investors would want not only an investment to cover inflation however, but actually make a profit. If you’re not in the game to make a profit then you are in the wrong game entirely. The wise investor would be satisfied with a 3% gain over and above the inflation rate. So rounding up to the nearest percentage point, you would want at least a 9% return on your investment. How many investments do you know with such a return?
Clearing stayin in the dollar is the most unwise choice. You should shop around for a currency that places a very high value in either maintaining its currency value or even increasing it. As it stands now, the only places that fit that bill are China, Japan and maybe Australia or Norway or Brazil.
China
China, for all its faults, and clearly manipulating its currency value does, in fact, maintain the Yuan, year after year. If the Yuan then is stable and doesn’t fluctuate then all profits are purely profit and doesn’t have to compete with a monthly inflation rate. In fact, China is now opening up a bond market. This is clearly in preparation of divesting itself of the U.S. dollar.
China controls the value of its currency to give its exporters a price advantage on international markets, arguing it needs to prop up its industrial base to create jobs at a fast enough rate to maintain relative peace in its vast and diverse population.
China is reluctant to let its currency rise more quickly for fear of disrupting its job-rich export industries. Since Chinese officials regard a U.S. recession next year, and thus a sharp fall in their exports to the USA, as a “virtual certainty,” they see no need to compromise on currency, says Nicholas Lardy of the Peterson Institute for International Economics, who was recently in Beijing.
In yet another step to internationalize the yuan as a global currency, China will be selling yuan-denominated bonds on the international market for the first time.
The 6 billion yuan ($876 million) bond sale is slated for Sept. 28, the ministry said. Hong Kong is Chinese territory but has its own currency and regulatory system and often is used by Chinese companies to deal with foreign investors.
The yuan, also known as the renminbi, or people’s money, does not trade on global markets despite China’s huge foreign trade, but Beijing is gradually expanding its use abroad.
Japan
Japan’s new policy is that it seeks to strengthen the Yen. Thus, trading in Yens is a very sound investment.
Japan’s new government has watched but not acted as the yen has risen steadily against the dollar, in a gamble that a strong yen could spur domestic demand and lower the country’s reliance on exports. The Japanese currency gained more ground in Asia after shooting through the symbolic 90-yen-per-dollar level on Friday, with the dollar trading at around 88.73 yen. The yen is now about 30% stronger than its precrisis level.
But the new Japanese government under Prime Minister Yukio Hatoyama has dismissed calls to intervene, in contrast to years past, when the Bank of Japan sold yen and bought dollars to keep the currency weak. A rising yen hurts Japanese exporters by making their products more expensive abroad. Instead, the new leadership and the Bank of Japan have made comments suggesting a strong yen, which makes imports cheaper, would help spark a rebound in consumer spending missing in Japan since the 1980s. That would lessen Japan’s dependence on exports for growth, a dependence that caused the economy to go into a tailspin when world trade halted late last year.
It is an idea that feeds into the global agenda outlined by the Group of 20 nations last week to rebalance the world economy away from overreliance on U.S. consumers. Finance Minister Hirohisa Fujii reiterated the strong-yen policy at the G-20 meeting, sparking the yen rally and pushing its value to 89.85 yen to the dollar. “I don’t think it is proper for the government to intervene in the markets arbitrarily,” he said at a meeting with Treasury Secretary Timothy Geithner before the summit.
The policy’s impact is already evident at Japan’s high-street shops, where signs declare high-yen sales on imported goods such as Italian handbags and French perfumes. A strong yen also means companies can purchase oil and other commodities more cheaply on the world market.
Australia
The Australian dollar has been constantly on the rise. In fact the policy seems to have adopted the same policy as the Japanese, i.e. a strong Australian dollar.
The Reserve Bank of Australia (RBA), seems to have no problem with continued appreciation of the Australian dollar. The Australian dollar is already up more than 50% against the U.S. dollar since the October 2008 lows of US$0.61/A$, and up more than 30% since New Year’s Eve level of US$0.70/A$, yet when asked what to do if the Aussie dollar continued to appreciate to for example US$1.10/A$, then RBA chairman Glenn Stevens simply said it would simply reflect the strength of the Australian economy and that the RBA would have no problem with it.
This means investments in A$ would appreciate and not suffer inflation.
Norway
Talk about a healthy economy. They are already out of the recession completely. However, that is due to the complete health of their economy to begin with. They have low unemployment, higher projected wages, and a sound fiscal policy to again raise interest rates. In fact they are doing so aggressively over the next 3 year.
Norges Bank raised its key interest rate a quarter point from a record low and signaled steeper increases than it previously forecast over the next three years as inflation accelerates and unemployment remains low.
Brazil
Brazil has been under constant attack. It also has outstanding loans by the IMF. This soundly renders it a 3rd world country. Regardless of imports, regardless of exports, if it has a loan to the IMF and conceded to privatization of resources to foreign companies, it is squarely in the 3rd world country category. However, it has a very sound and robust central bank that investors can take advantage of. It has a very definite plan about it currency and it is not marred by the previous ridiculous fluctuations we all used to hear about.
On June 1st 1994, Brazil implemented one of the most important steps of Real Plan: the currency was changed. The old “cruzeiro real” was abandoned, and the new currency, Real (symbol R$) gained course.
As a symbolism to gain confidence, the Brazilian monetary authorities defined that, on launching, the Real would be equivalent to the dollar (R$ 1 = US$1). However, the equivalence should be maintained by fiscal and monetary measures, and not by force of law (shortly before, Argentina had launched Plan Austral, which defined, in the Argentinian Constitution, that the Austral would be legally pegged to the dollar).
In the first few months of existence, the new currency caused a surprise to most Brazilians: it gained value against the dollar. This happened for some reasons: the Central Bank increased interest rates; there was liquidity in the international markets; most important of all, foreigner investors believed in the success of the Plan Real, which would (with the fall of inflation) cause redistribution of income, and Brazil saw a massive influx of foreigner investments.
[ I will admit, I am not sure about Brazil. Several sources give conflicting information about Brazil. Roubini talks down Brazil (what a shocker that is, right?) While other sources point to strong policies that it is now adopting. I include it here, just in case I am completely correct. ]
Conclusion
In essence, staying in the dollar is a zero sum game. While most G20 countries are obviously divesting themselves of the dollar, our own central bank continuously pours fuel on the fire. Inflation isn’t even accurately accounted for. As an investor you want the real number, not the pumped up numbers, the dumbed down numbers nor the look good numbers. How can you accurately gauge your return if you don’t have a sound, real accurate inflation rate to compare it to.
Of course stocks are going up. The value of the dollar is going down. If over the course of the year the dollar value goes down a full 6%, your 5%return is a loss not a gain. If the stock price goes up 4% over the course of a year or even 6% it is barely keeping up with inflation.
So let’s look at your “gains”. [these are all hypothetical]
- Stock appreciates 10% in a year
- broker fees 1%
- short-term capital gains tax rate 10%
- inflation rate 6%
Obviously you are in the hole, in the red and under. You should be able to do the real math for your potential investments before you invest. Obviously you already know the fees you pay, the tax rate, and potential inflation rate. You then have to come up with an investment that can give you such a return as to give you over and above all of the expenses just to get into the investment. Sadly, staying the dollar is the worst possible thing to do currently.
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