Making America great again by destroying the dollar is bad for the average American investor
No politician in the United States wants Americans to be worse off and deliberately take steps that are bad for an average American investor.
However the policy of destroying the dollar, though well-intentioned, will lead to American investors being worse off in the long term.
In the short term, investors are celebrating a lower dollar. But it is also prudent to start thinking of defensive steps to preserve wealth.
The dollar fell to a three-year low after comments by the Treasury Secretary Mnuchin on Wednesday in support of a weaker dollar. It was the biggest one-day fall in 10 months. Before his inauguration, President Trump declared that the dollar was too strong. This started the decline in the dollar. But Mnuchin’s comment is like drilling a hole in a dam that is holding back a flood. Initially after the hole is drilled, only a small amount of water flows out. But if the hole is not repaired or more holes are drilled, pretty soon the dam loses its structural integrity and causes a flood. In this case if the flood happens, it will be average investors losing money in the stock market, like they did in 2008 and 2000.
I am politically agnostic. My sole focus is to help investors.
My longtime readers know that I have often expressed opinions that were unpopular at the time. To understand this minority opinion, let’s start with a chart.
Please click here for an annotated chart of the Dollar Index Bullish Fund UUP, -0.66% that represents the dollar index DXY, -0.71% Please note the following from the chart:
• The major support is far below where it is trading now. This means from a technical perspective, there is still a lot of room for the dollar to fall farther.
• Before the present fall, a pattern of lower lows was already established.
• After lower lows, the rally failed.
• Now there is another lower low after Treasury Secretary Mnuchin’s comment.
• Collectively all this paints a very bearish picture for the dollar. However in the short term the dollar is very oversold and a bounce up is typical.
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In the short term, a weaker dollar is good for stocks, as the earnings of the companies that are in S&P 500 SPX, +0.16% and Dow Jones Industrial Index DJIA, +0.56% go up. This is reflected in the moves in broad-based ETFs such as the SPDR S&P 500 ETF SPY, +0.13% and the PowerShares QQQ QQQ, +0.29%
Earnings of popular tech stocks will also go up because they derive a significant portion of revenue from abroad. Examples of companies benefiting are Apple AAPL, -0.90% Facebook FB, +0.88% Alphabet GOOG, +0.94% GOOGL, +1.07% Netflix NFLX, +3.20% Nvidia NVDA, +0.74% and AMD AMD, -0.51%
Read: Here’s what Trump’s weak-dollar policy means for the stock market
Gold and silver
Gold and silver are priced in dollars. For this reason they generally move inversely to the dollar’s moves. The SPDR Gold Shares ETF GLD, +0.44% and the iShares Silver Trust ETF SLV, +0.39% have moved up on the weaker dollar. Also moving up are ETFs for precious metal miners GDX, +0.89% junior gold miners GDXJ, +0.28% and leveraged gold miners NUGT, +2.00%
Just like gold, oil is also priced in dollars. When the dollar moves down, oil generally goes up. ETFs of interest are the U.S.Oil Fund USO, +0.00% and VelocityShares 3x Long Crude Oil ETNs UWT, +0.00%
Why this is bad for American investors
Here are the reasons why a lower dollar is bad for average American investors in the long term:
• The dollar has been the world’s reserve currency. This has allowed the U. S. to engage in both fiscal and monetary policies that have benefited American investors. A lower dollar endangers the reserve currency status.
• Would you buy stock in a company where the management is actively seeking ways to lower the price of the stock? A country is no different. The United States government is actively seeking to lower the value of the dollar. Would you want to hold the dollar?
• As other countries start questioning the value of holding the dollar, it will negatively impact the dollar’s status as a reserve currency.
• The United States is a highly indebted country. A large portion of the debt is financed by foreigners. Why would foreigners want to buy U.S. debt when the value of the dollar is falling?
• If the demand by foreigners for buying the U.S. debt wanes, interest rates will go up.
• The United States is a big importer. As the dollar weakens, the cost of the imports will go up. This will cause inflation.
• Rapidly rising inflation is bad for the stock market.
• To control rapidly rising inflation, the Federal Reserve will raise interest rates.
• Rapidly rising interest rates are bad for the stock market.
• Foreigners now buy a significant amount of U.S. stocks. With the dollar falling, foreigners will have less reason to buy U.S. stocks. This will be bad for the stock market.
What to do now
Investors ought to start thinking about assets that aren’t dependent on the U. S. economy and also about assets that benefit from a lower dollar in the long term. I’ll address this more in a future article.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.
Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.