Two weeks ago, the Bull wrote about a declining U.S. dollar and some of its implications. He also promised to follow up with more investment impacts of this potential trend. However, last week, the Bull felt it was very important to remind investors of the need for diversification, especially in light of recent frothy trading in some well-known companies’ stocks. He hopes this reminder is being heeded. Now back to the dollar.
Some investment impacts of a weakening dollar are as follows:
- Domestic companies with heavy foreign competition benefit; think of our automobile manufacturers.
- Companies that earn significant revenue abroad get paid in appreciating currencies thus earning more; example, pharmaceutical and technology businesses.
- Big importers must pay more for the same products and may or may not be able to pass along the extra costs; many consumer products and their importers fall into this category.
- International supply chains may become disrupted by cost changes; think steel or copper, no longer the cheapest source may lead to domestic substitution, price increases or less profit.
- Less competition from abroad may allow U.S. producers to raise prices to make greater profits.
- Inflation tendencies may increase resulting in less consumer buying power; domestic producers benefit at their expense
- Precious metals and alternative currencies should do well; these would be considered better stores of value.
- Hard currencies from some of our trading partners benefit as investors and international companies park more of their liquidity there accentuating their strength and the dollar’s decline.
The Bull and his partners are keenly aware of these potential changes and are incorporating this line of thinking into our analysis of future opportunities and new risks. Stay steady, my friends.
The Lonely Bull