Devaluation of Money versus Inflation- What’s the Difference?
I was having coffee with several clients a week ago and one of my clients said he had heard that the Chinese were attempting to persuade the IMF to label the Yuan as a reserve currency. Once this happened, my friend said, the U.S. dollar would be devaluated by 40% almost immediately, and anyone with ‘regular’ investments and savings would see the purchasing power of their money gone by that much. What could he do, he asked, to preserve his money when this happened? Devaluation is not something new or altogether bad. In the 1930s nine world economies devalued their currencies, including the United States. This revived their economies hit with a global depression and stabilized currency rates. At the breakfast meeting my friend was saying that he heard that if he had $100,000 in the local bank and one day he would wake up only to find his $100,000 being able to buy only $60,000 of goods and services; or worse, the bank would only hand him $60,000 of his $100,000. What my client is afraid of is a massive devaluation of the dollar overnight and losing all his savings. While that is not likely we are seeing countries make their ‘currency’ cheap versus their neighbors for the benefit of their exports. A cheap yen makes selling a Japanese car easier than a Mustang made in Detroit. A country, through its central bank, can do this by issuing more of their currency and buying that of their neighbors. (Remember this is called ‘Beggar Thy Neighbor’ from the 1930s devaluations). The average citizen of the country that is having their currency devalued is the one that feels the pain if they want to buy products from another country that has a stronger currency. The producer of a product with a country that has a strong currency loses money when the cost of their product in dollars is sold in another country with ‘cheaper’ currency. Nations prefer inflation to deflation; and countries try to have a ‘modest’ amount of inflation per year. A central bank can create an inflationary environment by raising interest rates and also by increasing the amount of money into circulation. Either too much of either can cause citizens and a country enormous pain. Currently the U.S. dollar is strong against those countries that are trying to dig themselves out of a global recession. The following illustrates how a company from a country with a strong currency suffers. (chart WSJ 1/27/2015)
You do not want to own cash in a severe deflationary environment. The argument for what to do with a depreciating dollar due to inflation makes a case for financial experts to recommend that investors buy commodity investments such as precious metals, oil, invest in emerging markets, buy Treasury Inflation Protected Securities; and short the fixed income such as the 20-year Treasury. (As interest rates rise principal decreases and the short investment through an ETF covers that strategy). Call me if you want more information.
Reserve Currency Definition. A foreign currency used by central banks and other major financial institutions as a means to pay debts and buy goods. The IMF defines that currency to be freely useable. The U.S. is recognized as the king of currencies and represents 60% of all global currency reserves. Other currencies are the euro and the yen. Oil internationally is traded in dollars. Another reason why oil is priced so low as the dollar is stronger versus other currencies.
UNSTEADY RECOVERY
A weak economy suffers whenever something happens that could be shrugged off in an economy moving at moderate speed. One at snail’s pace slows whenever a bump happens in the road. Bad weather, the west coast port strike, political strife, overseas disruptions; all contribute to a first quarter that has had difficulty moving forward. This gives pause to the Federal Reserve to raise rates this June, even possibly September. The other problem is that in a slow growing economy and you are unable to grow at 3%-4%; the Fed doesn’t have room to cut rates in response to a downturn if one actually occurs.-James Stock, Harvard University economics professor, WSJ 5/18/2015
Investors either are nervous or blasé about the performance of their investments. There are clients who examine their statements and shrug off small losses and others who want to know the how, when and why those losses occurred and what can be done to stem any future tide. The Bull Market celebrated its 6th birthday last March and is showing its age. Still Monday the Dow surprised us with a new high as did the S&P 500 Index. The Naz and Small Cap Index were also big gainers. Bob Doll at Nuveen Asset Management urges investors to be patient in an Barrons.com article published May 18th. Doll writes that earnings will drive the market higher but the current outlook for earnings is troubled. He goes on to say that he is not pessimistic and believes earnings will rebound and the economy recover. He is still in the Bull Market camp.
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Budget, Please! Those about to retire should sit down and do a budget. I’ve preached this for years. Know where you are and you’ll do better than if you don’t know. Most retirees think they’ll not spend as much money when they retire because they’ll be in a lower marginal tax bracket. Some think they’ll spend the same. The real savings will come from (1) Not paying a payroll tax (2) No retirement plan or HSA contributions (3) The odd dollars spent on work-related expenses: dry cleaning, lunches, and the strange evaporation of five dollars a day as soon as you walk out the door. Do a budget before you retire and you’ll feel better knowing.
Ya Gotta Wonder… Jack Bogle appeared on CNBC Tuesday and said there’s a lot to worry about…meaning the market. Then he gave confusing testimony. He explained that this was a hard time to invest since the options were limited. Stocks were high, and they can’t stay that way forever. I assume he meant that they could go down, and then he said he has lived with,’I think four 50% declines’, were his exact words. (I looked for 50% dips over the past 100 years and couldn’t find them.) Bond yields were extremely low, Jack said, and it’s wise not to buy long-term bonds. The 86 year old then went and said that thought stocks were ‘fairly reasonably valued” if you take their earnings yield into account. So I gotta ask… If you listened he gave two opinions. That’s confusing. The guys an icon, I get it, but here was a typical stock sales pitch calling it either way. Either you are or you’re not. No one from CNBC asked a question. Jack gets a pass from Talking Heads simply because he’s Jack. Power Lunch CNBC 5/19/2015
40% of All Unemployed Have Simply Given Up. CNBC 5/20/2015
Stocks Fell Slightly Wednesday. The markets briefly spiked up on news that a June rate hike was ‘unlikely’ Wednesday but then settled back and closed down. Transports fell off their highs. IBD reported that the Fed is worried about volatility once rate hike starts. THURSDAY mixed markets closed even as investors digested no likely rate hike in June.
Markets Closed Monday For Memorial Day- Remember what the day is for, to remember those who died while serving in the country’s armed forces. It was originally called Decoration Day and originated after the Civil War to honor both Union and Confederate soldiers who had fallen in the war. In 1966 President Johnson signed a proclamation naming Waterloo, New York, as the birthplace of Memorial Day. Wikipedia.org
Questions call Paul @ 586 295 0430 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.
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