What US Dollar Moves Mean For You

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Last week, a bleak jobs report shattered expectations of a June rate hike and sent the dollar down 1.6%, highlighting the fragility of the Fed’s plan to normalize monetary policy. Headlines were quick to relate the fortunes of the yen and Japanese stocks, copper and oil, and Australian miners to the currency’s moves.

Because of the dollar’s global role as a reserve currency, its ups and downs link seemingly unconnected dynamics. Its movements affect everyone from Japanese investors and British intelligence analysts to Argentinian small business owners and American families. What are the forces to watch affecting the greenback—and, more importantly, what do the moves mean for you?


The dollar's movements affect everyone from Japanese investors and British intelligence analysts to Argentinian small business owners and American families.


There are numerous sources of upward pressure on the dollar. For one, the American currency is believed to be a safe haven, so in times of heightened geopolitical or economic uncertainty, global investors park money in US assets such as US Treasury bonds. With concerns mounting in many regions around the world, from the Middle East and Brazil to Europe and China, global capital may turn to the US for safety, increasing demand for dollars and driving the currency to appreciate.

On top of that, the Fed continues to signal it wants to raise rates this year, which would also cause the dollar to appreciate. Why’s that? Because higher interest rates attract international investors, just as savvy depositors move money to savings accounts with the highest yield.

Fed

Meanwhile, economic weakness in Europe and Japan means the Bank of Japan and the European Central Bank will likely maintain very accommodative monetary policies for the foreseeable future. This would mean keeping rates lower for longer, continuing unconventional policies such as quantitative easing, and depressing the euro and the yen relative to the dollar. The flip side of a weak euro and weak yen is a stronger dollar. These devaluations are by no means incidental; they’re an economic strategy. Cheaper currencies make a country’s exports more attractive, boosting growth in local currency terms. If central banks outside the United States continue to lean on currency devaluations to drive their economies, the dollar will rise unless the Fed fights back.

What does a stronger dollar mean for you? On the plus side, the stuff we import, such as manufactured goods and commodities, gets cheaper. As do overseas vacations. Take a trip to Argentina, and your dollars will buy almost 20% more than they did last year. The impact of a strong dollar is deflationary for Americans, because prices in dollar terms tend to fall.

Cheap goods are great for consumers, but the news is not so bright for US exporters. When the greenback appreciates, the cost of American goods sold overseas rises in local currency terms, hurting demand for US exports. A strong dollar shifts inflation to other countries by making their imports more expensive. Currency moves subtracted 4.5% from Pepsi’s global revenue at the start of this year, masking a far worse 26% decline in Latin America, and Coca-Cola expects exchange rates to take 2% or 3% from revenues in 2016.

Coke

For US exporters, there are some countervailing signs of hope that the dollar could weaken. Declining perceptions of US economic conditions drive down the greenback, as global investors sell their stakes in US companies, bringing the dollar down with them. With a dim jobs report, presidential election uncertainty, low productivity growth, and declining corporate profits, the outlook is bleak; indeed, economists are now predicting 2016 to be the slowest year for US growth since 2012. A downturn could force the Fed to push interest rates negative, which would drive down the dollar further.

A challenge to the dollar’s status as the dominant reserve currency would also put downward pressure on the greenback. Today, the dollar accounts for “90 percent of all foreign exchange transactions,” according to Reuters. If a currency like the Chinese yuan meaningfully ate into this share, it would surely lead to dollar weakness. But such a development might also make international trading less volatile, according to New York Fed President William Dudley.

What would a weaker dollar mean for you? Overseas vacations, imported manufactured goods, and commodities would rise in price. If you’re seeking authentic sushi, for instance, you’ll find it more expensive to visit Japan or dine on flown-in fish, since the dollar has declined more than 10% against the yen in the past year.

Greece

While this might seem like a drag, it could ultimately be better for the world economy. Rising commodity prices would help support the economies—and political systems—of countries relying on them to be high, supporting growth and stability. Developing countries would benefit as they could more easily handle dollar-denominated debt. And stronger emerging markets mean a stronger world economy. Global growth might accelerate.

The relative strength of the US dollar is not a black-and-white story for the US or the global economy as a whole. In fact, while a strong currency has its perks, a bigger-picture view suggests we may all be better off with a weaker dollar. Thanks to the world wide web of dollars, what happens on the other side of the globe has direct effects on your wallet. Whichever way it moves, the dollar’s fortunes are a reminder that in a complex, globally interconnected economy, it is crucial to look broadly to understand risks and spot opportunities.

CNBC: Bullish on Books

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(originally posted to CNBC.com March 2011; http://www.cnbc.com/id/42343583)

Spotting Bubbles Before They Burst

Published: Thursday, 31 Mar 2011 | 9:34 AM ET
By: Vikram Mansharamani, author of BOOMBUSTOLOGY: Spotting Financial Bubbles Before They Burst”
Boombustology

Financial booms and busts are, particularly from an a priori perspective, probabilistic events for which multidisciplinary analysis is essential. Addressing financial booms and busts through a single lens may in fact have negative impacts and lead to gross misunderstandings.

Adopting a singular perspective will lead to an emphasis on depth of data versus breadth of information. It leads to deeper and more thorough understanding of particular information, but it misses the point that information is not the essential element.

There are plenty of “dots” but the connections between them are lacking.

Conceiving of financial booms and busts as uncertain ambiguities necessitates the application of different lenses to develop a probabilistic interpretation of scenarios to better understand how they may evolve. Economists, political scientists, psychologists, and even hard scientists have much to learn from each other. What we need today are analysts who employ a multidisciplinary perspective to connect the dots.

With this in mind, I designed a course to teach such a methodology about three years ago. Since 2009, I have taught this course at Yale University to undergraduates studying economics, psychology, political science, art history, American studies, history, East Asian studies, English, physics, and even molecular biochemistry and biophysics. Last fall, my class comprised students from Singapore, Greece, China, India, and several other countries.

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The class is structured in three parts.

The first presents several theoretical lenses that have proven useful over time in the study of booms and busts.

These lenses include microeconomics, macroeconomics, psychology, politics, and biology. The second part then applies these lenses to historical booms and busts ranging from Tulipomania to the current crisis, and the final section asks students to develop a framework for identifying bubbles before they burst. The final class is focused on student presentations of current bubbles, with an emphasis on the believability of their story.

To help students focus on moving beyond the ivory tower, I invite a market commentator or working professional to serve as the “bubble judge” and to help me grade their presentations. Past judges have included David Swensen from the Yale Investments Office and Jim Grant from Grant’s Interest Rate Observer.

These presentations are a highlight of the course, and serve as wonderful insight into what those with fresh eyes and free of Wall Street propaganda think are likely bubbles. So, what looks bubbly to those trained to use multiple lenses?

1) China, or more specifically, Chinese property. A handful of students suggested that the real estate boom in China appeared unsustainable. The rise of organized “speculator groups” was noted alongside rapidly rising credit levels, lofty property valuations (relative to income), and a forthcoming explosion in inventory levels.

2) Gold. Described by several students as the “ultimate greater fool” asset, the bubbly nature was also evident in student analysis of financial innovation (ETFs, leveraged ETFs, etc.) that has helped increase amateur investor participation. Ubiquitous commercials about buying and selling gold provided further support for their case.

3) Credit. Highlighting that US Treasuries were trading at historically low yields, or that municipal bonds seemed to be trading on a “too big to fail” assumption, students noted that the universal belief that moral hazard and extrapolation of past trends were likely to create “return-free risk.”

4) Social Networking. A group of my students in 2009 highlighted that the lack of appropriate valuation anchors enabled an Internet-era like approach to pricing these assets. Parallels were drawn with other historical innovations (canals, railways, telegraph, radio, automobiles, etc.) and the fancy valuations received by “new era” companies.

5) Emerging Markets. The universal belief that emerging markets were the sole source of growth in the world today led various students to suggest that the scarcity of believable growth stories would drive emerging markets to unsustainable levels. Within this theme, negative real rates were considered a culprit and one that would eventually be addressed through restrictive policies. India was highlighted as particularly expensive and vulnerable to this inflation-driven tightening.

Numerous other ideas have arisen, many of which appear to have well-analyzed, believable logics to them, ranging from the rare earth mining industry (multi-billion dollar valuations with little financial support), alternative energies (change the world, new era beliefs), and even garlic (medicinal purposes rising, Chinese demand, etc.).

To date, the multi-disciplinary framework developed in the class has proven useful on numerous fronts. It has helped those adopting it to take a step back and acknowledge that the bark they have studied is a part of a tree, and that the tree is in a forest…and most importantly, it creates a healthy skepticism of the alluring and seductive “it’s different this time” rationalizations which can be so hazardous to one’s wealth.

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