The dollar is losing value fast … diversifying your wealth into other assets today is important … a bear market in cash is a bull market in other assets … a growing macro risk
And just like that, we’re back to record territory in the S&P 500.
Yesterday, the index closed at an all-time high for the first time since the Covid-19 pandemic hit the U.S. All the S&P’s coronavirus losses have now been recouped.
It’s an important milestone in the wake of “the Covid bear” — the shortest bear market in history, at just 1.1 months.
As I write Wednesday morning, the S&P is flat but holding its new high.
Switching gears, let’s look at a factor that’s been helping drive these stock market gains. At the same time, this factor might have been eroding your overall wealth without you even knowing …
***Your savings are going down the drain right now if you’re putting cash in the bank
Below is a chart of the U.S. Dollar Index.
It’s a measure of the value of the U.S. dollar relative to the value of a basket of six major global currencies — the Euro, Swiss Franc, Japanese Yen, Canadian dollar, British pound, and Swedish Krona.
Below, you can see this index losing 11% since March.
The dollar hasn’t been this low since May 2018, as you can see below.
Now, a couple things …
I don’t want to over-sensationalize this. As you’ll see in a moment, even with current losses, the dollar is still well-within its five-year trading range.
On the other hand, the speed of the current decline is unsettling. Beyond that, the macro forces at work today are a far greater risk to the dollar — and by extension, your cash savings — than anything we’ve seen in the last five years.
Today, let’s take an objective look at the dollar. But as a quick takeaway ahead of time, diversifying at least some portion of your wealth outside the dollar would be a wise step to help safeguard your overall finances today.
***A big-picture look at the dollar
As we highlighted above, the dollar is losing value at a brisk clip.
But let’s get some broader context on the dollar’s current value. For help, I’ll turn to our income expert, Neil George, editor of Profitable Investing.
From Neil’s Journal earlier this month:
Now, a word on the dollar.
A lot has been said in the media about a severe drop in the U.S. dollar as evidence of trouble.
The dollar has dropped back from its peak on March 23, but it’s really just a few ticks below its five-year average.
Let’s pull back to see what Neil is talking about.
Below is a five-year chart of the U.S. Dollar Index. I’ve added an approximate mid-point line.
If we expand our time-frame to 20 years, we get even more context on today’s level …
As you can see from these charts, the dollar’s current value doesn’t represent some long-term, epic low that we’ve never before experienced.
That’s the good news ….
***The troubling side of the dollar’s growing weakness
As we look at the dollar, the reality is it’s losing value … and fast.
On one hand, this isn’t all bad.
For example, a weaker dollar entices other countries to buy more of our good and services since they can get them cheaper. Theoretically, this would help our overall economy and GDP.
On the other hand, a weaker dollar means you personally can’t buy as much stuff.
Either way, we need to evaluate the forces driving the dollar’s downward move (and its velocity), by answering the questions “how powerful are these forces?” and “is there anything on the horizon likely to reverse these forces?”
To help with this, we’ll turn to our trend-investing expert, Matt McCall, editor of Investment Opportunities.
From Matt’s Saturday issue of MoneyWire:
Governments debasing currencies is nothing new. Every new dollar that is printed devalues existing dollars. Same with all currencies. It’s called “inflating” the money supply.
Please don’t overlook the importance of this.
Inflation is one of the greatest dangers facing those of us saving for retirement. It can massively impair the future buying power of the money you save today.
And we’re seeing this more than usual right now as governments around the world respond to the pandemic’s economic impacts with historic stimulus.
It may be needed, but it’s also unprecedented.
The U.S. government has spent an incredible $3 trillion in economic relief related to COVID-19. It’s gone to small businesses and individuals, and it’s expanded unemployment insurance.
Congress members are currently debating whether to add as much as another $1 trillion for a second round of stimulus. And it won’t stop there.
So, we have what’s been called “a bazooka of liquidity” created from thin air by the Fed, fired at the coronavirus. And from the looks of it, they’re reloading that bazooka.
Translation, the forces pushing down the dollar are massive and show little sign of reversing in a meaningful way soon.
***But this is all still a bit vague. How does this affect you — your saved dollars?
Below is a chart from the Federal Reserve Bank of St. Louis. It shows the purchasing power of the consumer dollar.
The chart gives you a big-picture sense of how much “stuff” your dollar can buy today relative to the past.
Today, we’re at the lowest value on record (since 1913).
Here are the last five years for context.
This chart could alternatively be called “this is your cash savings slowly making you poorer.”
***Another way to look at this
Someone could read all this and say, “I see what you’re saying, Jeff, but I don’t really feel poorer. Is this really a big deal?”
Well, yes, “feel it” or not, this is a big deal because your cash savings are losing their purchasing power, which means you’re growing poorer.
But if the concept of loss isn’t motivating you, then we could look at it from the angle of “missed opportunity.” Specifically, it’s the opportunity cost of not benefiting from the gains of assets beyond the dollar.
To better understand this tradeoff, let’s turn to our CEO, Brian Hunt.
From his essay, There are Always Two Sides to a Price:
Most people view a price as having just one side. A stock’s price is $42, a home’s price is $350,000, a car’s price is $27,000. For most people, the thinking stops there.
Yet, there’s a very different, very powerful way to view prices beyond them having just one side …
Rather than seeing a price as having just one side, an enlightened individual sees a price as having two sides …
On one side of a price, you have the asset, product, or service being measured.
On the other side, you have your “measuring unit” …
This is the currency you’re measuring the other side with, like dollars, euros, Swiss francs, Bitcoin, Japanese yen, or “hard money,” gold …
Most people panic during stock crashes and bear markets, but someone who knows there are always two sides to a price thinks and acts differently.
This is because he knows a bear market in stocks is also a bull market in cash.
Now, the principle Brian is referencing is currently at play — yet in reverse.
Today, we’re in a bear market in cash.
And since there are always two sides to a price, a bear market in cash helps drive a bull market in the other asset being measured by cash.
To illustrate, a bull market in stocks …
A bull market in gold …
A bull market in corporate bonds …
A bull market in bitcoin …
Whether you want to view the above charts as offensive “gains” or defensive “dollar debasement protection” is up to you. But the takeaway is the same …
Diversifying your wealth into assets outside the dollar is protecting and growing your finances, whereas continuing to store-up cash is making you poorer.
(To be clear, I’m not attributing all the above gains to a weakening dollar. I’m merely saying the dollar’s drop is playing a role in the strength of these alternative assets.)
***One macroeconomic note before we wrap up
If there’s not enough reason to diversify outside of the dollar based purely on the rampant dollar-printing happening today, here’s something new …
From Axios just yesterday:
New data from the Bank of Russia show the country now receives more euros than dollars for its exports to China, with the share of goods purchased in euros rising from 0.3% at the start of 2014 (and just 1.3% in the second quarter of 2018) to nearly 51% at the end of Q1 this year.
Why it matters: The euro is the dollar’s strongest competitor, making up the second largest percentage of global currency reserves …
Also yesterday, the Financial Times reported how China and Russia have partnered to reduce their dependence on the dollar.
The more non-dollar trading deals we see like this, the less global demand there will be for dollar …
The less global demand we see for the dollar, the lower its value will go …
The lower the dollar’s value goes, the poorer you’ll get if your wealth is stored in those dollars.
Now, from a technical perspective, the dollar could see a bounce soon given the size and speed of its recent selloff.
But the bigger, macro forces at work point toward continued weakness. And that means the wise thing would be to diversify some portion of your wealth outside the dollar today.
Have a good evening,
Jeff Remsburg
