In times of crisis, investors invariably seek shelter in the almighty dollar. The perceived resilience of the U.S. economy 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 why…
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 GDP 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 devalued currency.
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 devaluation 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 (NYSE: PG) and Coca-Cola (NYSE: KO) will materially benefit from increased export earnings 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 market share 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. (NYSE: GHL).
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 Disney (NYSE: DIS) and Six Flags Entertainment (NYSE: SIX), along with hotel chains such as Marriot International (NYSE: MAR) and Starwood Hotels (NYSE: HOT) 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.