In times of crisis, investors invariably seek shelter in the
almighty dollar. The perceived resilience of the U.S.
has given the impression that we are simply too large a ship to
sink. And although we are well past the scary times of 18 months
ago, the global economy still feels dicey, and the dollar, which
rallied sharply as the global economy crumbled, still remains
fairly strong against the euro and the Chinese yuan.
Yet as the global economy sputters back to life during the next
year or two, the dollar is likely to resume its downward drift that
had begun back in 2007 and 2008. If it weakens in a slow and steady
fashion, it could help pave the way for a long-awaited export boom
that finally reverses stubborn trade deficits and spurs a
badly-needed employment surge in our nation's heartland.
Why the long-term bearishness on the dollar? Here are three reasons
1. For starters, our budget deficits for fiscal 2010 and 2011 are
at record levels (on a non-inflation-adjusted basis). The amount of
debt held by the public (that is, excluding intergovernmental
debt), which stood at 35% of
in 2001, now exceeds 50% and looks headed toward the 60% mark by
2011. At some point, our creditors will either demand higher
interest rates on our bonds or simply stop buying them altogether.
Either way, reduced demand would lead to higher rates and a
2. In addition, pressure continues to build as unemployment rates
remain stubbornly high. So the political pressure will build to
move away from a "strong dollar" policy, which has been the stated
goal of virtually every presidential administration. Nobody wants
to see a sharp plunge in the dollar, but an orderly
is crucial to our nation's long-term competiveness.
3. Lastly, pressure on the dollar will come simply from relative
growth rates. Countries such as China, India and Brazil are poised
to grow at robust rates over the long term on the heels of fast
rising middle classes in those countries. Global investors will
likely chase higher returns in those markets, exiting their
over-weighted positions in dollar-denominated assets.
So what are the implications?
If I am correct that the dollar could strengthen more in the near
term and materially weaken over the long term, then investors can
look to several investable themes.
First, multinational consumer goods companies such as
Procter & Gamble (
will materially benefit from increased export
as those profits are repatriated into dollars. And a weaker dollar
will give real relief to domestic manufacturers that have been
undercut on price by foreign rivals. For example, steel makers have
long lamented that foreign rivals must be dumping processed steel
on our shores at a loss. A weaker dollar would make such a dumping
move even more costly for foreign firms and would directly
translate into higher
for domestic players.
In addition, the U.S. stock market would get a boost from an
increase in the perceived value of many major companies as foreign
firms look to start seizing on the weak dollar to go on a spending
spree. Cross-border M&A activity always spikes in times of
dollar weakness as well. Rising volumes of deal-making would surely
benefit merger advisory firm
Greenhill & Co. (
U.S. tourism firms would also get a solid boost as domestic
consumers are increasingly priced out of foreign vacations, and
foreign consumers eye bargains on our shores. Firms like
Six Flags Entertainment (
, along with hotel chains such as
Marriot International (
Starwood Hotels (
would see a nice spike in customers.
Action to Take -->
Keep an eye on the dollar in coming months. If signs emerge that it
is about to resume its downward move that began before the 2008
economic crisis, then investors will start to flock to names that
are perceived plays on the weaker dollar. The names above are nice
cheat sheet to work with.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.