The recent rise in the value of the U.S. dollar has altered the investment landscape like an earthquake displacing ground levels – lifting the values of some markets high and lowering other markets in the process.
This imbalance is presenting us with a once-in-a-decade investment opportunity, especially to American investors who earn their pay in U.S. dollars. The strong USD is awarding them a substantial discount on a wide variety of investment purchases.
How much of a discount? Over the past seven months as graphed below, the dollar index (DXY) has increased in value some 15 points from 80 to 95 for an appreciation of 18.75%.
Source: BigCharts.com
If you walked by a department store with an “18.75% Off” sign hanging in the window, you’d probably go in to have a look around. So let’s do that now by considering three investment areas where the strong USD is offering us a tremendous advantage.
Commodities
Mention commodities to investors who have been investing for more than a few years and you will likely get some sour looks, as commodity prices have plunged off cliffs since reaching their peaks not long ago.
For instance, since gold reached its peak of $1,925 an ounce in early September of 2011, it has lost some $650 to $1,275 currently for a loss of over 33%. Since silver reached its peak of $49.52 in May of 2011, it has fallen some $32.32 to $17.20 for a plunge of over 65%. Copper has likewise fallen over 46% from its peak of $4.6255 in February of 2011 to $2.4945 now. And of course everyone is still talking about crude oil’s implosion from its high of $147.27 in July of 2008 to just $48.24 recently for a combustion of over 67%.
While no one knows if the bottoms in these commodities have been hit yet, we do know at least two things:
• At some point over the next 3 to 5 years the global economy will be back on track, and the consumption of oil for energy and copper for construction will be much more robust; the demand for gold and silver, though, is still questionable.
• We also know that when foreign economies eventually rebound, their currencies will too, resulting in a downward rebalancing of the USD relative to them.
These two expectations are telling us that investments in copper and oil now will ultimately benefit from two forces lifting their values up in the future: an eventual rise in demand and a fall in the USD. Although we don’t know when such a reversal will happen, we can definitely say that investors with a long term view will certainly be rewarded with extra value once the rebalancing takes place.
Foreign Currencies
Another investment opportunity made much more attractive by the current strength of the USD is foreign money. The strategy here is extremely simple, involving just a straight exchange between the USD and a foreign currency that has been recently suppressed.
In today’s global economic turmoil, we have plenty of examples to choose from, especially among heavy commodity exporters that had seen their currencies rise during the commodity peaks noted above, only to plunge as oil and other resources have fallen since.
The Canadian dollar, for one, after reaching a high of $1.09041 U.S. per 1 CAD in November of 2007, has lost more than 28% to $0.78434 USD per CAD now. The Australian dollar as well, after reaching a high of $1.10321 U.S. per 1 AUD in July of 2011, has fallen more than 29% to $0.77916 USD per AUD now. And the Brazilian real, after reaching its peak of $0.65182 U.S. per 1 BRL in July of 2011, has lost more than 42% to $0.37282 USD per BRL today.
Of course there are plenty of other currency wash-outs to choose from, including the euro which has fallen nearly 29% from $1.59752 USD in April 2008 to $1.13431 USD per 1 EUR today, and the Japanese yen which has fallen more than 64% from $0.0132 USD in October 2011 to $0.00850 USD per 1 JPY now.
Here, too, just as in commodities, the bottoms have likely not yet been found. But if we consider the causes of these currency evaporations we could reasonably expect some rebounding in the future. For instance, where the CAD, AUD and BRL have fallen due to commodity slumps, the EUR and JPY have fallen as a directly result of central bank stimulus. At some point, both forces will be reversed, with commodities ultimately rising, and central bank monetary easing eventually turning into monetary tightening.
Again, we don’t know when these reversals will take place, but long term investors are already eyeing these 28% to 64% discounts as great investment opportunities that should pay-off before the end of this decade.
Foreign Equities
Yet a third prime investment opportunity presented by the recent strength in the U.S. dollar is perhaps the one with the greatest potential of all – stocks of foreign companies, especially those with strong exports to America. The strength of the USD is making imports from foreign manufacturers cheaper for Americans to buy, and more lucrative for the foreign companies who sell them.
These can be exporters of anything, really, from resources to manufactured goods to intellectual services. But because of the recent slowdown in industrial production globally, we might want to avoid resource exporters a little while longer, at least until the future outlook for production picks up.
In the meantime, we have some great opportunities in foreign pharmaceutical companies, many of which were U.S. companies to begin with, but have moved their headquarters overseas for tax savings. These include Medtronic plc (NYSE: MDT), Mallinckrodt Pharmaceuticals (NYSE: MNK), and Actavis plc (NYSE: ACT), among many others.
Foreign auto manufacturers are also viable opportunities, including European auto maker BMW and Japanese producer Toyota (NYSE: TM) who both stand to benefit from increased profits simply on the weakness of their respective currencies, the euro and the yen.
Therein lies the attraction of foreign exporters, since the debasement of their local currencies and the strength of the USD result in increased income from the currency conversions alone.
Capitalize on Your Newly Found Buying Power
Although it might not feel like it, the increased strength of the USD has granted us an enormous boost to our buying power. We just don’t really notice it very much since we are mostly buying goods and services within our own country. But we certainly notice our increased purchasing strength when we buy items overseas or items imported from overseas.
Currently we are still sitting at the top end of a teeter-totter that has lifted the USD up to the sky while plunging all other currencies low to the ground. Allowing some of that purchasing power to roll downhill into any number of investments from commodities to foreign currencies to foreign companies would be an investment in the teeter-totter itself, a play on the imbalance that has upset currency markets worldwide.
At some point, that teeter-totter will move in the other direction. And those who had the presence of mind to sell USD when it was high and buy almost everything else when it was low will enjoy an added bonus when the balance is restored in a few years’ time.
Joseph Cafariello
