Sorry, you just lost 24%

by | Jan 14, 2003 | Archives

If you held U.S. dollars, you are losing fast! This is an exceedingly dangerous time for U.S. dollar investments. If you plan to buy any Japanese or European products, expect prices to rise. The U.S. dollar has fallen since 2001 from .88 dollar per Euro to 1.05 dollars per Euro. This is a drop of 19%. The yen has risen from 145 to 118 or 24%.

In simple terms, this means that in the difficult times when it is hard enough to earn even 5% on investments that a dollar buys much less in Europe and Japan. If we look at the bull and bear chart we can see that over the 14 year period beginning November 1968 (through November 1982) that the market ran through a sideways movement (as it is now). During this time, the total rise was only 79% total or a total of 5.64% per annum.

Here is a catch. During this time the dollar fell from 4 Swiss francs and German marks to about 1.5 and from 4000 yen to 120 yen! So in terms of European and Japanese currencies, U.S. dollar investments were slaughtered! Those dollars that were used to buy Mercedes and Toyotas and other imports dramatically lost their purchasing power. Remember that in the early 1970s both the Volkswagen and Toyota only cost a couple thousand bucks. The product has improved to be sure but much of the price increase is from the fall of the U.S. dollar.

There are a variety of reasons for the dollar's fall. The huge U.S. Federal debt has now passed 6 trillion dollars and a war with Iraq will make this worse. According to the Federal Reserve Bank of St. Louis there are two even worse fiscal problems, the new legislation for a Medicare drug prescription plan and extension of the expiring tax provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001.

Finally the huge U.S. trade deficit complicates the dollar's position even more.In the hey days of Wall Street, overseas importers took the dollars they received and invested them back in the greenback. Now with low interest rates and a wallowing U.S. economy and stock market, these businesses want to invest elsewhere. This means that dollars have to be converted to other currencies to pay for goods that the U.S. imports. The more conversion and the more demand for other currencies, the higher they will rise versus the dollar.

So even if you make 5% on your investments this year you may not even stand still. What to do now? Last time round, when the dollar fell in this way, the best thing to do was to shift into investments denominated in other European currencies and hard assets such as silver and gold. Is this the formula for today as well? Only time will tell, but I have certainly been diversifying my portfolio this way for the past year.

Until next message, safe investing!