Greenheads bite. They move slowly, land on your wrist or ankle, and bite morsels of flesh. You can whack them easily; their lumbering weight limits their speed.
Greenbacks move slowly too; they land on your international portfolio, and bite morsels out of your profits. You can’t whack them too easily; their lumbering weight makes them a necessity. Their influence on your portfolio and the US economy is obvious, but what does it mean?
Interest rate increases should prod the dollar’s value higher. Multinational company stocks should offer a haven when interest rates go up overseas when the currency is converted to dollars. As the Wall Street Journal points out (August 14, 2006), this has not worked for the past 14 years. Large cap (capital = stock price times the number of shares outstanding) stocks move in an opposite correlation to the dollar; the two asset classes trade in opposition to each other (when one is up, the other is down).
Now, according to Mike Thompson (Research Director, Thompson Financial), the two asset classes trade “in the same direction”. Thompson attributes this to the US economic shift toward a service economy from a product economy. Manufacturing economies send and obtain “goods wherever they are priced most favorably in terms of local currency.”
As a result, many money managers look for international companies that manufacture and distributed products within their own region or country. Not everyone agrees with this strategy since it ostensibly “gives up” on US multinationals.
If you want a strong dollar, cheer on Mr. Bernanke and his colleagues to push rates up further. This strategy may work for the dollar, but won’t do much for your variable rate mortgage.
Read some of my other articles found as Ethos Musings
