“Rhetoric is the art of ruling the minds of men.”
The Dollar’s Alleged Demise
Anytime the talk surrounding a market move gets so extreme, it’s worth analyzing whether the rhetoric matches reality. The natural starting point today is the Dollar. Anyone watching CNBC or reading any of a number of financial sites in the last week has been exposed to talk about the “Dollar’s decline,” the “demise of the Dollar,” or “the bubble that is the Dollar.” It’s as if the Dollar never had any period of decline in the past. It’s as if the Dollar were making not only near-term lows but much longer-term lows.
Wait a second…the Dollar isn’t making new lows on just about every time frame? Yep, you heard that right. The Dollar IS NOT MAKING NEW LOWS RIGHT NOW, yet the rhetoric would have you believe that not only is it making lows, but that it’s completely and utterly self-destructing.
Let’s take it to the charts for a second, starting with a daily chart of the US dollar index covering the last year of action:
The first thing we can clearly see is that the dollar index is worth more today than it was one year ago. Second, we see that in looking at the beginning of this year, 2010, the dollar is basically where we started. WHAT??? Can that be correct considering the nature of the rhetoric today? I mean seriously, people everywhere are talking about destruction, but we haven’t moved? How is that possible? And why weren’t these very same people applauding the Dollar’s surge from mid-April through early June?
Ok yes, I too am getting a bit excited here. All that being said, the Dollar is not strong right now. The point though is that the dollar is in no way in a catastrophic state of decline as many would have you believe. How can I make this assertion? Well let’s now look at a longer term chart of the dollar (chart courtesy of chartsrus.com):
This chart shows the dollar index since 1971, the year we officially left the gold standard. You know, the year that the rhetorical attacks would have you believe that the Dollar entered a perpetual, unending state of decline. Granted the trend is lower, but it is modestly so over that time. Moreover, there were substantial periods of time in which the Dollar exhibited some serious strength. What many fail to account for in the discussion about the Dollar is that a currency can only be valued on a relative basis. Which leads me to my next point.
Rising Purchasing Power of Emerging Markets
Perhaps as big a factor in the Dollar’s modest decline as US monetary policy itself is the fact that emerging markets are actually emerging. That is, these young, developing countries are making great strides in the path to economic development. Along with a growing economy comes increased bargaining power on the global level. Put another way, as more people earn a decent living in China or India for example, more people in those countries will be able to compete with Americans to buy the same goods.
Considering the fact that at any given point in time (only in the short-run), there is a finite quantity of goods for purchase in the world, the increase in purchasing power in other countries must come at someone’s expense. That someone is the United States. Let’s look at the impressive growth in the BRICs over the past decade and their respective share of global growth, along with a projection for the next decade (Source: Goldman Sachs’ Report on the “BRICs Decade):
Many would have you believe that commodity inflation is exclusively the result of monetary policy in the US to the point where rhetoric surrounding commodity inflation is equally strong to that of the Dollar’s demise and the two (commodity inflation and the Dollar’s decline) move in tandem. Paul Krugman put together a nice little response to the point that we’re not really experiencing any commodity inflation since our aggressive monetary policy action began:
And for those who insist that we need to look at inflation in stuff like gasoline, bread, and milk: well, the BLS has convenient average price data, so let’s compare some of those prices to what they were, say, three years ago…all was well with the world. Over those three years, the price of gasoline has soared by … well, actually gasoline is a bit cheaper now than three years ago. OK, but milk … actually, milk prices are down substantially since three years ago. But it’s true: bread has gone up in price.
Again, I don’t remember people making a big fuss about the deflationary meaning of falling gasoline and milk prices.
Everything is about time frame, but what’s most alarming is the short-sightedness of the state of analysis. People focus so intently on what happened last week and what will happen next week, rather than thinking about what’s happening in the bigger picture.
In reality, the commodity inflation story has been non-existent since the US initiated aggressive monetary policy to fight the deflationary spiral that started in the financial sector. There was in fact a commodity inflation story before our deflationary shock though, and the cause behind that story was the growing demand from emerging markets. That story is no different this time around, as commodities are reflating in price and global emerging stock market indices are outpacing the performance of the developed world.
The Importance for Investors
Those who focus too heavily on the ideological rhetoric surrounding the “Dollar’s demise” will miss out on one of the greatest investment opportunities today. Rather than opening up that FOREX account and trying to short the Dollar because some talking head is pounding the table about irresponsible monetary policy, the retail investor should focus on investing in some of the great growth stories taking shape around the world. This is a longer-term story and some thoughtful research and deliberation should lead you into some outstanding longer-term opportunities.
Disclosure: Long FXI, IFN, ECH