Chris Ryan: Making money, but what is money?
Here’s 2011’s great news: The rally continued through April and we (and the markets, generally) had one of the best months of the past five years.
And, as we head into May, every asset class that we track is in an up-trend, even Japanese equities after dipping in mid-March and April after their unfortunate tsunami. It’s pretty remarkable that all markets are heading higher at the same time, including U.S. and international bonds, U.S. and international stocks, commodities, and REITs. Now if employment and U.S. house prices would get on board, we’d really have something to cheer about. For those of you wondering the obvious question – what happens after a big up month – we’ve reviewed the past five years and there is no clear answer. Our strategy is to stay fully invested in up-trends for growth, and trim back for protection when needed. Today, we’re fully invested and enjoying it.
So we’re making money, that’s great. But what is money? For nearly all of our readers, we talk about money as “U.S. dollars”. It represents stored value or future purchasing power. More is better. We compare how much we have today to how much we had, say, 10 years ago. Or perhaps we calculate how much we’ll “need” 10 years from now.
But money is relative to what it will buy you today versus yesterday or tomorrow. No matter what your specific goals are, we’d all like our pile of money to buy as much “stuff” in the future as it buys today, hopefully more. Most people don’t routinely think about the effects of inflation or in terms of relative value to other currencies, commodities, or real estate. Instead, we all focus on our pile of money priced in U.S. dollars and, perhaps, wonder why it never feels like enough, especially over the past 10 years.
There’s a pretty good reason for that feeling. While Geithner and Bernanke (and Greenspan before him) all publicly say they support a strong U.S. dollar policy, their actions have been specifically designed to weaken the U.S. dollar. By lowering interest rates and printing trillions of new dollars, the demand for U.S. dollars goes down and so does its relative value in the world. That makes it easier for big US-based companies to sell to foreigners – our stuff looks cheaper to them – and that’s supposed to stimulate our U.S. economy. But there’s a flip-side to this. Everything looks more expensive to us U.S.-based consumers! The chart, below, shows the value of the U.S. Dollar Index over the past 10 years. It shows that it was 120 just 10 years ago and is 73 today. That’s a decline of 39 percent. So yes, our dollars don’t go very far when we’re buying foreign goods (or commodities like food and oil).
So what’s the take away? The key is to invest our “money” in non U.S. dollar assets, and we do that. Our portfolios have always been very globally diversified with nearly 50 percent invested in non-U.S. assets.
Part of the return from our international bonds, international stocks, commodities, and international REITs, comes from their currency appreciation relative to the U.S. dollar. And that’s proven to be a smart hedge.
We’re trying to grow your global purchasing power as well as your U.S. dollar-based bottom line. And for this dual mandate, we agree, more is better.
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