USD Strength and the PP

[buddtholomew]

Not much attention is given to the performance of the PP with respect to USD strength - this appears to have a negative impact on the portfolio.

Not PP related, but interesting to see non hedged international ETF's performing poorly today as well. Hedged EU ETF's are performing substantially better.

[Kshartle]

Not much attention is given to the performance of the PP with respect to USD strength - this appears to have a negative impact on the portfolio.

Not PP related, but interesting to see non hedged international ETF's performing poorly today as well. Hedged EU ETF's are performing substantially better.

The announcement of 500BN Euro QE operations, I mean asset swaps, has sent the Euro plunging for some strange reason. That, and further rate cuts by the ECB.

[buddtholomew]

Not much attention is given to the performance of the PP with respect to USD strength - this appears to have a negative impact on the portfolio.

Not PP related, but interesting to see non hedged international ETF's performing poorly today as well. Hedged EU ETF's are performing substantially better.

The announcement of 500BN Euro QE operations, I mean asset swaps, has sent the Euro plunging for some strange reason. That, and further rate cuts by the ECB.

Looks like those EU investors in TLT have found a new home for their funds. US investors may be shocked to see that non-hedged EU ETF's aren't matching their indices very well.

[Kshartle]

Not much attention is given to the performance of the PP with respect to USD strength - this appears to have a negative impact on the portfolio.

Not PP related, but interesting to see non hedged international ETF's performing poorly today as well. Hedged EU ETF's are performing substantially better.

The announcement of 500BN Euro QE operations, I mean asset swaps, has sent the Euro plunging for some strange reason. That, and further rate cuts by the ECB.

Yes, I realize the impact on the USD/EUR relationship. My point is I don't believe sufficient attention is focused on a strengthening dollar and the impact to the portfolio.

Well here's the way I look at that, and I've made this argument before:

Everyone is focused on nominal dollar returns because they're easy to spot. Either you have more dollars or fewer. This increase or decrease doesn't tell you if you're actually gaining or losing purchasing power. The purchasing power of the dollar MUST be included.

Imagine real inflation running at 15% and the PP going up 10% for a real loss of 5%. Most people it seems would be ok with that and say "hey, this PP is really working".

Now imagine real inflation of NEGATIVE 15% and a nominal LOSS of 10% for a real gain of 5%. Most people it seems would cry their eyes out and say "hey, I think i'm going to ditch the PP".

If the PP is flat today and the Euro has dropped by 2% you are richer in Europe instantly (provided the general price level didn't go up by 2% today). Since Purchasing Power parity exists to a certain extent across the globe if you are richer anywere you are richer everywhere to some extent. You are richer at the expense of the Europeans. Today everyone is. 1/50th of the purchasing power of their paper has been transferred to everyone else.

Don't worry. At some point the dollar will catch up in the race to the bottom 

[barrett]

Budd,

It seems to me that if monied people and banks around the world foresaw a trend where the USD would be going up in a sustained way, it should be good for US stocks and treasuries (that goes for bills and bonds). If they were to buy and hold either bonds or stocks in that environment, they would make money on the exchange rate. It needs to be a trend or a perception of a trend because buying US equities or bonds today is roughly 1.6% more expensive than it was yesterday, at least for European investors. Make sense? (Whenever I write something like that, I really am asking if it makes sense because I could have my head up my backside.)

So that covers 3/4 of the PP.

Gold is harder for me to figure. The gold market today seems to be saying that the stronger dollar is bad, at least for US PPers. It's not been a bad gold day for Europeans because the metal is priced in USD.

[Kshartle]

Gold is harder for me to figure. The gold market today seems to be saying that the stronger dollar is bad, at least for US PPers. It's not been a bad gold day for Europeans because the metal is priced in USD.

You're making complete sense.

Gold is up 1% against the Euro today and the Dollar is up 1.6% against the Euro.

If you just say "strong dollar = bad gold" you miss what's happening.

Imagine an extreme example where the Euro fell 90% against the dollar and only fell 60% against gold on the same day.

The PP would show a nominal loss but obviously you could go to Europe and dominate and also buy European exports more cheaply.

[Cortopassi]

I wish there was a way to track the ups and downs of the real value of cash in the PP. 

I am sitting here lamenting the drop in gold, but as you have stated similarly, if there was a way to capture the similar rise in the value of the dollar in my PP I would feel better.

Instead, I see my PP gain going down, when it really isn't going down as much as it seems.

Mike

[buddtholomew]

My expenses are paid in USD...whether I can purchase additional exports internationally at a lower cost is irrelevant to me.

In light of ECB actions, EU equities are now perceived more profitable than US treasuries. US rates are expected to rise and gold to fall in USD terms.

[Kshartle]

My expenses are paid in USD...whether I can purchase additional exports internationally at a lower cost is irrelevant to me.

It's relevent even if you don't know why. Other people around you can now buy more European stuff for less money. That lowers demand for competative US products and lowers their price (all else being equal). There are a bunch more effects that ripple through the economy that you won't be fully aware but impact you nontheless.

In reality more QE in Europe will result in more government spending which will hurt their economies in the long run and thus hurt the global economy and us too. 

[Kshartle]

I wish there was a way to track the ups and downs of the real value of cash in the PP. 

I am sitting here lamenting the drop in gold, but as you have stated similarly, if there was a way to capture the similar rise in the value of the dollar in my PP I would feel better.

Instead, I see my PP gain going down, when it really isn't going down as much as it seems.

Mike

Yeah, you'll capture it in ways that are not so obvious. In reality though I don't think the PP is gaining much post tax and post inflation. It's been a good run this year but that trend can change real quick. Longer term trend (3-5) years haven't seen much growth after taxes and inflation and i don't think they're likely too until the central banks stop printing and the free market reasserts itself. 

[dualstow]

A strong $ is bad for U.S. firms that do business overseas like my beloved Pepsico, right?
This makes me sad.

[Kshartle]

A strong $ is bad for U.S. firms that do business overseas like my beloved Pepsico, right?
This makes me sad.

It's good for firms that import raw materials and finished products to resell.

Since the US is a net importer with Europe our trade deficit with them should drop. We might sell less but we should see an even bigger drop in the prices paid for the same amount of imports.

Translation = We get more of their stuff in exchange for less of ours.

Stronger currency = higher standard of living. I realize that contradicts CNBC and the government and central bank who tell that a weak currency is the path to propserity. 

[mortalpawn]

I would argue that a stronger dollar is equivalent to "deflation", so yes Harry did think of this one.  As the dollar gains in strength, it buys more assets (whether bonds, gold or stocks), which means the price of these things will trend down.

We saw this in 1981 when Paul Volcker finally put an end to inflation using a strong dollar policy and insanely high interest rates (one of the few negative years for the PP).

Widespread, long term deflation is bad for the PP, as cash becomes your only safe asset.  However, holding 25% in cash you are still going to outperform most traditional investment portfolios.

On a positive note, the fed hates deflation (they want inflation) as deflation can lead to a situation where people hoard cash and defer spending, and also makes the federal debt more expensive (rising interest rates hurt all debt holders).  So if the dollar continues to rise expect the fed to take steps to intervene.

On that note, I thought today's big story was the expansion of "negative interest rates" by the ECB and european banks.  To me this is the logical extreme of Keynesian insanity - charging people interest to keep there money in the bank! 

Apparently zero interest rates and money printing are not enough, so we're now incentivizing people to withdraw their money from the bank.  I'm shocked everyone in the EU is not cleaning out their accounts and stuffing it under the mattress at this point.

[Kshartle]

Apparently zero interest rates and money printing are not enough, so we're now incentivizing people to withdraw their money from the bank.  I'm shocked everyone in the EU is not cleaning out their accounts and stuffing it under the mattress at this point.

Maybe they don't have very much savings 

[barrett]

My understanding is that, at least so far, the negative rates in The Eurozone only apply to funds that banks want to park with the ECB. Rates first went negative in June and the penalty for holding onto cash got a bit stiffer today.

Question for you folks out there... Does anyone know if the economy in Europe is as dependent on consumer spending as the US economy is? I always hear the figure that consumer spending in the US makes up about 2/3 of all economic activity (which, by the way, always makes me feel that I am not doing my part).

[buddtholomew]

Should an investor continue to purchase international equities while the dollar continues to strengthen? Can I quantify this impact to assess whether it dominates investment returns over an environment where the USD relative to other currencies is more stable.

[Reub]

I'll tell you one thing. The stronger dollar and weaker Euro is going to make my upcoming trip to Italy much more palatable.

[dualstow]

I'll tell you one thing. The stronger dollar and weaker Euro is going to make my upcoming trip to Italy much more palatable.

Better watch out, Reub. They've got a lot of Africans there these days, and they're all loaded up with Ebola. /end facetiousness

[mortalpawn]

Dollar started dumping rapidly this afternoon after the Fed said it was "worried" about a strong dollar.  They can't allow deflation (a strong dollar) to continue as it would hurt major debtors like the US government and many debt ridden consumers, not to mention it could pop the bond and stock bubble.

Can you say QE4?

[Reub]

Dollar started dumping rapidly this afternoon after the Fed said it was "worried" about a strong dollar.  They can't allow deflation (a strong dollar) to continue as it would hurt major debtors like the US government and many debt ridden consumers, not to mention it could pop the bond and stock bubble.

Can you say QE4?

Jim Rickards has been predicting QE4 in some form for quite a while now. Isn't it interesting that Yellin's Fed minutes come out a few weeks before the mid-term elections and they are so positive for all asset classes! And wouldn't you know it, the employment and GDP numbers were also some of the best we've seen in some time. Won't coincidences ever cease?

[blackomen]

My "PP" implementation (if you can even call it a PP) is:

25% SPY and VTI
25% GLD
25% TLT
25% UUP (I intend to gradually phase UUP out to SHY as interest rates rise)

[buddtholomew]

My "PP" implementation (if you can even call it a PP) is:

25% SPY and VTI
25% GLD
25% TLT
25% UUP (I intend to gradually phase UUP out to SHY as interest rates rise)

Can you explain your thought process please?

[blackomen]

My "PP" implementation (if you can even call it a PP) is:

25% SPY and VTI
25% GLD
25% TLT
25% UUP (I intend to gradually phase UUP out to SHY as interest rates rise)

Can you explain your thought process please?

Instead of collecting negligible interest payments from SHY, I'd rather speculate on a strengthening dollar prior to interest rate hikes.  Plus, SHY will likely fall, even modestly, on an interest rate hike.  So SHY has little to gain and some to lose in this environment, and I backtested replacing it with UUP and found the performance acceptable, at least in a low interest rate environment.  Hell, it substantially reduced the drawdown in 2008 and dampened volatility in most years.  However, you'd be looking at about a 6% CAGR  instead of 9% long term if you replaced cash with the dollar index..  so this is only temporary (like I already said.)

Fyi, even with the recent surge in the dollar index, I'm only slightly above my costbase for UUP.

[I Shrugged]

There was a long email letter by John Mauldin today, making the case for a prolonged secular rise in the value of the dollar, based on what's being done in other economies and their currencies. He expects long bond yields to go even lower, gold goes nowhere or down, cash remains trash.  For stocks, he's expecting a crash which will then become the foundation of a long bull market.

If true, it's not a rosy near term scenario for the PP.  One thing HB thought was that the strong component could pull the whole PP along.  Can bonds do that, starting at the current level?  I doubt it.  Nevertheless, I don't have a better idea.

[Libertarian666]

There was a long email letter by John Mauldin today, making the case for a prolonged secular rise in the value of the dollar, based on what's being done in other economies and their currencies. He expects long bond yields to go even lower, gold goes nowhere or down, cash remains trash.  For stocks, he's expecting a crash which will then become the foundation of a long bull market.

If true, it's not a rosy near term scenario for the PP.  One thing HB thought was that the strong component could pull the whole PP along.  Can bonds do that, starting at the current level?  I doubt it.  Nevertheless, I don't have a better idea.

No one knows what is going to happen in any detail. Many people have very convincing stories about what will happen, but no one really knows.

Except me, of course.