Thursday , 29 February 2024

How the Long Term Direction of the Dollar Will Affect Your Investments (+2K Views)

The most important thing that rules the economies of the world is the law of supply and demand. It’s a very simple concept, but few investors understand how important it is to their future financial well being.

In further edited excerpts from the original article* at, Peter Mycroft Psaras goes on to say:

The U.S. dollar is the subject of great debate these days as investors are debating whether it’s good to have a strong dollar or a weak dollar policy. Instead of worrying about this issue, investors should try to deal with the reality of the situation and attempt to figure out the long term direction of the dollar in order to come out ahead no matter what happens.

The Money Supply
The reality is that the U.S. Government currently has the printing presses running at full throttle 24/7 and is increasing the money supply to levels that have never been seen before.

The government in all its wisdom has decided that the free market should not be the determinant of whether a poorly run firm should go out of business or not and has decided to artificially control the markets by flooding them with cash. They are setting a bad example by rewarding failure by creating uncontrollable levels of debt in order to fix these failures.

The world of Main Street runs on the theory of supply and demand. Thus, with the U.S. Government printing at such rates, there will be a tremendous supply of dollars on the market and demand for the currency will never be able to keep up with the supply. Therefore, when there is too much supply and not enough demand the dollar will continue to fall until the printing presses stop.

The Stock Market
Over the last seven years there has been a reverse correlation between the rise and fall of the dollar and the performance of the S&P 500 Index. Because the S&P 500 and the DJIA 30 Indices are heavily weighted with U.S. firms that operate as multi-nationals and do a lot of business overseas when the dollar falls the money that they make selling their products in foreign currencies is repatriated back into U.S. dollars at a much higher number than if the dollar stayed static. Thus when the dollar is weak these companies report much higher earnings and they look more attractive from a growth rate point of view. As this happens across the board, markets go up in unison.

The Bond Market
With interest rates at historically low levels, anyone buying long term bonds is setting themselves up for a destruction of their principal investment as interest rates can only go up from here. Thus when interest rates go up, new bonds will be issued at higher rates and the demand will go to those new bonds and out of the older lower interest rate bonds. Thus as people sell the old ones to buy the new ones, the principal on the old ones will drop. With every point rise in the interest rates, more and more of one’s principal will be destroyed. It will eventually get to the point where bond investors will be forced to hold their bonds to maturity, as that is the only way they will ever be able to get their full principal back. On top of that you also have the weaker dollar eating away at your bonds as their value in dollar terms will also deteriorate as well.

I highly recommend that everyone reading this consult their financial advisors or brokers and see how this scenario will affect any bonds that you may own. If your advisor does not have a clue or has to ask someone else or even worse, tells you that they are in mutual funds and are managed by pros, then I would seriously think about talking to other advisors until one finds one that has an answer to the question: “If interest rates go up, how is that going to affect my principal?”. That is a very simple question to ask and how your advisor/broker responds should either help you sleep better at night or send up a serious red flag.

The Real Estate Market
Real Estate will not be a place to invest, once interest rates start to rise again, as people will find it harder to get loans. Also municipalities, which do not have the power to print money (thank God), are in big trouble these days and will look to increase the property taxes to make up for the shortfall in revenues. This will make the cost of ownership much higher and will not help find buyers for the oversupply that the Real Estate market is currently experiencing. Again, too much supply and shrinking demand, the worst of all possible scenarios.

The Money Market
You can’t be in cash because interest rates are at historic lows and once the Fed starts raising rates it means that they are worried about inflation. Being in cash in an inflation/interest rate rising environment is bad as you are not making any money in real return as inflation will eat away any interest rate gains you might have made. Then the buying power of that cash will constantly go down as the U.S. dollar does, so your dollars will be worth much less than they will be in a few years, so you will experience negative growth in your real net worth. Foreign Currencies might do the trick, but which ones? Also the fees associated with transferring your assets back and forth can be large, if you don’t know what you are doing.

The only place to be is in the stock market, because if the markets go up 10% and the dollar goes down 5% you are still ahead of the game. You are combating the weakness in the dollar by increasing the number of dollars you have at a much higher rate than the dollar is devaluing.