Below is, perhaps, the single greatest chart in the history of the U.S. dollar. To stock market technicians, that’s the mother of all “descending wedge” patterns. It’s the U.S. Dollar Index, as measured and reported monthly by the Treasury Department, going back more than four decades. Where our buck goes from here will say a great deal about the short-term future of the greenback.
But beyond the short term, it’s meaningless, despite what others might insist.
For in the greater sweep of time, our dollar remains on life-support — and that means you ultimately need foreign currency exposure in your portfolio. And it’s times like now, when currencies are effectively on sale, that you want to be a buyer.
In the chart, look at the trendlines I’ve marked. Both track a downward trajectory — lower lows and lower highs. Not the chart of a long-term winner.
But amid all the angst over the yen (Japan’s excessive money printing), the euro (the European Central Bank’s threat to ramp into quantitative easing) and the Federal Reserve (to what magnitude will Yellen & Co raise U.S. interest-rates?), the dollar index has spiked higher. It’s now approaching its trendline.
Technically, if the index breaches the trendline, the dollar should keep rising for a while (and if it does break trend and rise sharply, the world is in a hell of a fix because of the knock-on effects a stronger dollar will have on emerging-market nations — not to mention their companies that have used the weak dollar in the post-global-crisis era to take out dollar-denominated loans. A strong dollar will spark repayment problems that could fuel another crisis.)
If, however, the dollar index fails to break trend, then it’s a downward slide that will see the index reach new lows.
Which it will be — break trend or bounce off the trend line — is the great question for 2015.
False Strength in the Dollar Rally
The reality is that the dollar is not rising due to fundamental strength. Just as a stock’s price is the ultimate reflection of a company’s future prospects, the dollar ultimately is a reflection of America’s fiscal reality. And our fiscal reality is worse than the most upsetting nightmare. Governmental debt exceeds comprehension. Out-of-control spending stems from out-of-touch political leaders. Ill-designed social safety nets (think: Medicare, Obamacare, Prescription Drug plans, Social Security) are so larded with future costs that they alone could bankrupt America (and, honestly, we already are bankrupt).
But unlike a poorly run company’s stock, the dollar has two crutches that keep it from falling to its knees. It serves the role of the world’s reserve currency and it’s the place investors park their money in times of worry and fear. Both imply demand for the dollar, which implies dollar strength, even if only temporary moments.
Thus, the dollar is rising today not because the fundamentals underlying our currency dictate a rise, but because fearful investors are simply pushing it higher by way of their outsized demand for greenbacks in a world littered with worries (Russia, China, Greece, the euro zone, Japan, oil prices, the Fed’s next move).
Ultimately, all of those fears go away.
And when they do … boom goes the dynamite, as they say.
Buy Foreign Currencies on the Dip
The dollar will — will — resume its downward trend. The world’s other currencies will — will — rise in value relative to the dollar (except the yen; but that’s a different story for later). It’s only a matter of when, not if. The only proof you need is the dollar index chart I showed you and the knowledge you already possess regarding the size of U.S. debt, the untenable situation with Social Security and other burdensome entitlements, and the inability of America’s political leadership to chart a financially prudent course.
Investors who buy foreign currency exposure today at cheap prices will reap the financial rewards. Thus, as 2015 unfolds, you want to use dollar strength to buy cheap currencies. It’s a strategy no different than buying stocks on a dip. You use moments of strength in one asset (the dollar) to buy temporary weakness in other assets (the Canadian dollar, the euro, the Aussie dollar, the New Zealand dollar, to name a few).
To accomplish that, I recommend you own the EverBank Investor’s Opportunity Basket, a currency CD comprised of the Aussie and New Zealand dollars, the euro and the Mexican peso. For the sake of full disclosure, we receive a marketing fee based on our relationship with EverBank. But, honestly, we’d work with them regardless.
All of those currencies have come off sharply against the dollar. All will rebound sharply when the dollar’s time in the sun is done. Australia, New Zealand and Mexico have good economies. Europe is clearly struggling, but that is partly a function of the Russian sanctions issue that has undermined German manufacturing and other EU economies. Once that crisis is dealt with, Europe and the euro will rebound.
Success as an investor means taking advantage of opportunities when they present themselves. The dollar’s strength is not permanent. It’s borrowed, and must be returned once investor sentiment moves from fear to greed.
That day is coming — meaning that now is the opportune moment to take advantage of cheap currencies elsewhere in the world and to position your portfolio for the rest of 2015 and beyond.
Until next time, stay Sovereign …
Jeff D. Opdyke
Editor, Profit Seeker