It is absurd to believe that the inhabitants of the Eccles building in D.C.
promote a strong dollar policy. Printing $3.8 trillion dollars and keeping
interest rates at zero percent for going on the seventh year can hardly be
confused with a hard-currency regime. Merely pretending to cheer the dollar
higher appears to be the Fed's method of operation.
But since World War II every administration likes to pledge their support
for a "strong dollar policy". However, the truth is this policy has only truly
been practiced in the United States on very rare occasions. The courageous
Fed Head, Paul Volcker, raised interest rates to the dizzying level of 20%
in order to squeeze inflation out of the economy in the early 1980's. During
his tenure the intrinsic value of the dollar increased and the economy
thrived. This is because, contrary to what the Keynesians who currently run
our economy believe, a strong dollar is great for America; while a weaker dollar
is most efficient at destroying the purchasing power of savers.
A weak currency doesn't boost GDP or balance a trade deficit--a philosophy
that governments and central banks now embrace with alacrity. Take Japan, which
still has a 660 billion yen trade deficit two years after Shinzo Abe unleashed
his all-out assault on the yen, which is down a staggering 40% against the
dollar since January 2013. This, after a 50-year average trade surplus of 382
billion yen prior to his reign. And, in its 25th month of massive currency
depreciation, Japan still finds itself in an official recession.
However, despite these facts Keynesian logic favors a currency debasement
derby to the bottom. This is because they maintain that a weak currency stimulates
exports, boosts manufacturing and leads to lower rates of unemployment. So
with the dollar rising over 15% against the Euro and the Yen since July of
2014, it is no wonder we see a renewed fear of the stronger dollar, as it plays
into their number one fear of deflation. We got the first hint of this from
the U.S. Treasury Sec., as he explained that the current dollar strength is
more the result of yen and euro manipulations, and less about the intrinsic
dollar strength. Treasury Secretary Jack Lew said this in Davos Switzerland
last week:
"The strong dollar, as all my predecessors have joined me in saying, is a
good thing. It's good for America. If it's the result of a strong economy,
it's good for the U.S., it's good for the world. If there are policies that
are unfair, if there are interventions that are designed to gain an unfair
advantage, that's a different story."
We see multi-national companies playing right into this theme. These companies
are now using the strong dollar to replace last year's harsh winter as their
excuse for not making the numbers. The plethora of companies that missed earnings
this season are all blaming it on currency translation--leading to the new
buzz phrase of 2015...Constant Currency. Constant Currency is when last year's
earnings are re-translated to this year's rates to strip out the effects of
currency dynamics.
First, we have the construction and mining equipment giant Caterpillar (CAT),
who reported a lower profit that came in well below expectations. This was
due primarily to the recent drop in the price of oil and lower prices for copper,
coal and iron ore. But of course they had to mention "The strong dollar didn't
help either...it seems like when it rains it pours, and this is one of those
days." Then, of course, the Caterpillar CEO urged the Fed to hold off on any
rate hikes this year.
Procter & Gamble CFO Jon
Moeller told CNBC that the strong dollar was the major factor in the company's
disappointing earnings report last quarter. And we heard similar stories from
3M, Pfizer, United Tech and Amazon; just to name a few.
This appears to be a legitimate excuse, until you ask yourself--is the problem
that the strong dollar is hurting their earnings, or is it that they no longer
have a weakening dollar making it easier to beat the estimates. After all,
I didn't hear these same companies offer this excuse when the weakening dollar
was helping their profitability? Currency translations work both ways.
The truth is politicians and multinationals alike enjoy a weakening dollar
because they don't have to work as hard. A weak dollar allows politicians to
do what they do best--spend money without having to raise taxes. And a weak
currency allows multinationals to appear more profitable, as they enjoy gains
when stronger currencies are translated back to a weakening dollar. After all,
how many times did we hear the term Constant Currency during the 2002-2008
timeframe for example, when the dollar was plummeting in value?
Keynesians cling to the belief that a weak currency is the corner stone for
building a healthy economy. But I believe this fatuous notion is a ruse that
stems from the necessity to find a justifiable excuse to give central banks
carte blanche to monetize debt. For without an activist central bank aggressively
printing money to purchase sovereign debt, interest expenses would soon spiral
out of control--a falling currency is just an ancillary side effect of supplanting
the free market for government issued debt.
Therefore, it is my prediction that Yellen will not be able to raise rates
and will soon have to adopt a very bearish stance towards the dollar. After
all, a hawkish interest rate policy is untenable for a Fed that is now paralyzed
with the fear of deflation, especially while the rest of the world is frantically
printing money. Our central bank will not have the courage to allow the dollar's
rise to continue. And, it is inevitable that Yellen and her comrades at the
Fed will soon follow the lead of our Treasury Secretary in talking the dollar
down. That may be music to the ears of multi-national corporations and our
government; but will be the death knell for the middle class.
