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Your President Is Lying About a “Strong Dollar Policy” – Why Dollar Weakness Matters

by Darwin on January 31, 2012

I couldn’t help but notice today that Pfizer started the trend we’ll see from every multinational today blaming lower 2012 forecasts on a stronger dollar (CNBC).  Pfizer has lowered their revenue projections by a full $200 Million.  Two Hundred Million Dollars!  … due to a stronger dollar.  And that’s just one company.  A strengthening dollar is about to sap Billions of dollars out of US corporate profits this year.

Why Is a Weak Dollar Good for Stocks?

To break it down, companies that sell within the US only are largely unaffected (directly).  However, it’s a global economy.  So, large cap stocks benefit from a weakening dollar in two ways.  Primarily, there’s the direct conversion from foreign currency to US Dollars.  So, if a Euro was worth $1.30 in 2008 ago and was worth $1.43 a year later, someone in Europe is still paying 1 Euro for that good or service – but translated back into US dollars, the corporation is receiving a 10% increase in revenue on the same service or good sold.  It’s a total freebie!  This “weak dollar trend across much of the past decade is what helped drive corporate profits, and hence, stock market returns.

Aside from that straight conversion back to USD, a weak currency also helps the VOLUME of exports, so net unit sales increase as well.  Why?  Well, because for a given good or service, with a weak currency, the purchase is cheaper in an overseas market (or corporations are willing to slightly discount their goods and services to drive more volume, capturing market-share from overseas competitors and so-on).  So, on both volume and revenue, a weak dollar is really good for stocks. And as you just saw in the Pfizer announcement and many more to come, a strong dollar will hurt profits.

Presidents All Claim They Support a Strong Dollar…They LIE

This isn’t an Obama knock; every president has always claimed they support a strong dollar (Obama, Bush, etc.).  But their actions rarely live up to the hype.  So, why do politicians lie and pretend they support a strong dollar?  After all, a benefit of a strong dollar is lower inflation (since OUR dollars buy more imports and we don’t see inflated prices on food, clothes and all the cheap crap we buy from China).  But politicians don’t really care about inflation.  They care about elections.

What Would You Choose – slow inflation growth or stock market crash?  If you were a politician and your sole goal in life was re-election, would you care more about a slow insidious degradation of the buying power of your constituents OR the obvious panic and decline in 401(k) accounts, tax revenues, pension valuations, home prices and all the other economic factors that suffer when the stock market declines?  Of course, you’d choose inflation (hence, a weak dollar).

How the US Government Weakens Our Dollar Further

The only reason the dollar is strengthening these days is because the Euro is the only other stable, legitimate major currency and Europe is crumbling under the weight of decades of deficit spending, record high unemployment and slow economic growth.  So, in comparison, the US looks rather acceptable.  That’s causing the dollar to rally.  It won’t last forever, but for now, the safe money is flocking to US Treasuries, driving up the exchange rate.  To keep the dollar weak by destroying the monetary base, the Fed and the administration (and yes, the prior administration) have continued to print, print, print.  Quantitative easing, utterly stupid stimulus spending, bailouts and all sorts, and negative ROI tinkering is helping to stave off a dollar that would been even stronger were it not for this incompetent tinkering.

Why Does It Matter?

Well, it’s important that you understand how various policies impact our currency, how a strong or weak dollar may impact your personal situation and if you cast your vote on the issues that matter – you know, national security, fiscal/monetary policy, tax policy and such… rather than social issues alone, then you’re informed.

Do You Care About the Strength or Weakness of the US Dollar?

{ 8 comments… read them below or add one }

Ken Faulkenberry February 1, 2012 at 8:19 am

Kudos for telling the truth. Weakening the dollar is a slow tax on savers, the middle class, and the poor. It helps those who have the resources to take advantage of it. This is one of the reasons we need to a sound money monetary system. #ronpaul

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MoneyCone February 1, 2012 at 1:38 pm

Right now the dollar looks good because the next best currency, the Euro is in shambles (as you rightly point out).

Once the Euro crisis is solved (or dissolved), the focus will be back on the dollar.

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retirebyforty February 1, 2012 at 5:22 pm

Once the Euro crisis is solved, the stock market would do much better too.

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John | Married (with Debt) February 2, 2012 at 3:32 pm

Just goes to show you that the so-called “job creators” of multinational companies do not have our nation’s interests at heart.

In fact, Obama’s Jobs Czar is Jeff Immelt, head of GE, a notorious outsourcer and booster of jobs in other countries.

One thing I’ve learned from working in politics and observing it for a long time: the more outrageous the statement or claim, the more likely people will think it is true.

Great topic.

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JT February 3, 2012 at 1:46 am

Can’t forget the fact that dollar weakness has to come from somewhere, which has most recently been on the long and short ends of the yield curve. Equities or nothing – who wants to fall behind?

I really think the Euro weakness we see is going to at least lengthen the dollar’s role as a reserve currency. The Euro is second only to the dollar in holdings at 26%, which sounds like a whole heck of a lot until you see the USD at like 63-64% of foreign currency reserves.

Next are the pound (who the hell wants to own the pound given high inflation, low yields, and poor GDP growth?) and then the yen (talk about weak currency policy!) before you get down to the nitty gritty of 2-3% “other.”

Truthfully, I really think we are engaging in “strong dollar policy” if only in the sense that we’re letting Europe burn – for now at least – and not pulling out all the stops a la Japan and Switzerland. Strong dollar policy = claiming birdie on a whole in which par is 5, you shoot a 6 and your buddies shoot a 10. High fives all-around!

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FG February 6, 2012 at 2:08 pm

Good post, Darwin! How much has the USD really strengthened? From my perspective as a Canadian, the USD is much weaker than it was, say, 10 years ago. I think this is also the case for other countries. Whatever the talk on a strong dollar policy, the pressure leads toward debasement.

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Mike February 23, 2012 at 2:43 pm

I think you may not understand how a global economy works.

Decreased value of a dollar relative to the euro or some other currency ultimately erodes the purchasing power of your money. A company can see 10% profits “rise” as you state from a result in currency valuations, but the purchasing power of the old (lesser) profit is the same as the new (higher) profit.

People talk about a hershey bar for $0.05 when they were kids and now it costs $1.00 as if it got more expensive. But really, the value of $1.00 diminished by 20 times. Currency exchange values are based on the same principle: inflation. The difference results from differing inflation rates in different countries.

If that wasn’t the case, the US could print $10Trillion and pay back all the Federal debt without any downside, but we all know that isn’t possible. Currency strength is also dependent on what other countries view the inherent value of the money – Zimbabwe has the least trusted currency in the world and now no one there can afford food, even when grown domestically.

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Darwin February 27, 2012 at 11:05 pm

Mike, you’re mistaken on all fronts.

First off, currency exchange is not simply about inflation. That is too simplistic. Exchange rates are based on hundreds, if not thousands of factors. These range from trade surplus/deficits to tax law changes to natural disasters to elections. That’s like saying stock market returns are only influenced by corporate earnings. It is a factor, but clearly not the ONLY determining factor at all.

Zimbabwe was not about people that didn’t understand money or however you’re portraying them. It was about a government out of control, inducing slaughter and chaos, and those printing the money were largely shielded from the effects and couldn’t care less.

Your logic is flawed; it’s as basic as looking at ANY corporate earnings report. There is a line item for currency exchange impact. When the dollar was weakening against currencies they sell goods and services into during the prior period, there is a benefit, and when the dollar strengthened, it adversely impacts earnings. Simple math.

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