If You Think the Dollar Is Doomed, Read This

Warren Buffett has been called a sage, an oracle, and a genius. So when he says something as startling as the following, your ears should perk up: "In the future, I would predict that the U.S. dollar will decline. ... Force-feeding the rest of the world $2 billion a day is inconsistent with a stable dollar."

This is scary stuff. Except one thing: Buffett made that statement at the beginning of 2008, before (1) the U.S. dollar went on to have a pretty good year versus most other currencies, (2) the U.S. government announced the $800 billion bailout and $789 billion stimulus that will force-feed the world billions of additional dollars of U.S. debt, and (3) China's central government proposed replacing the U.S. dollar as the world's reserve currency.

And yes, that last bit happened just on Monday ... and it's the most disturbing of all.

Passing on the buck
Now, we're not policy wonks, Ph.D. economists, or long-winded talk-radio hosts, so we'll leave the politics aside and focus on the implications for your bank account instead. By adding to our massive federal deficit, the TARP and the American Recovery and Reinvestment Act of 2009 could have a devastating effect on the dollar ... a side effect that should scare the dickens out of you.

Similar to inflation, a declining dollar acts like a time bomb in your portfolio. When the dollar is weak, goods purchased from foreign countries -- like, you know, almost everything we buy -- become more expensive.

The good news is that we haven't seen this yet. After last year's volatility, investors around the globe got spooked and flocked en masse to the safety and stability of Uncle Sam. Thus, the dollar strengthened and American investors who owned dollars fared quite well relative to Americans who were invested abroad, despite the fact that many foreign markets had returns better than our own as measured in their local currencies. Take a look:

Country

2008 Return (in U.S. dollars)

2008 Return (in local currency)

United States

(38.6%)

(38.6%)

Chile

(43.6%)

(27.8%)

Canada

(49.1%)

(36.3%)

New Zealand

(52.4%)

(37.4%)

Australia

(54.5%)

(42.7%)

Brazil

(57.0%)

(43.7%)

Returns based on Dow Jones Global Indexes. Source: The Wall Street Journal.

A couple of conclusions
You got hit hard no matter where you invested last year, but you were hit particularly hard if you'd used your dollars to buy stakes in companies that earned Chilean pesos, Canadian dollars, or Brazilian reais.

Now, we know this may be abstract, but it's important. Even more important is the realization that while the dollar had a pretty good 2008, it won't always be this way. When the current calamity subsides, the same investors who bought the dollar this year for its "safety" will remember that:

  1. The United States has a massive and growing deficit.
  2. The United States continues to generate significant trade deficits.
  3. The United States has become oh-so-willing to print money out of thin air to meet its obligations.

When that happens, the tables will turn ... and investors who use their strong dollars today to buy stocks that earn Chilean pesos, Canadian dollars, and Brazilian reais will be rewarded as those currencies strengthen against the dollar in the future. Smart investors like the aforementioned Warren Buffett see this coming, and they're taking one step -- a simple step you can take yourself -- to protect themselves.

Get ready for action
In fact, Buffett has been doing this for years: simply purchasing shares of businesses that do business in other currencies. Current holdings sanofi-aventis (NYSE: SNY  ) , Coca-Cola (NYSE: KO  ) , and the now-divested position in PetroChina (NYSE: PTR  ) are a few examples.

As Buffett wrote in his 2005 letter to shareholders, "We ... purchas[e] equities whose prices are denominated in a variety of foreign currencies and that earn a large part of their profits internationally."

Combine this currency diversification with businesses offering superior returns on capital, and you've got a very compelling addition to your portfolio. The simplest ways you can do this are to look for companies that generate a substantial amount of their sales outside the United States, or to look for companies headquartered abroad:

Company

Percentage of Non-U.S. Revenue

Return on Capital

Headquarters

ABB

82.0%

22.6%

Switzerland

Microsoft (Nasdaq: MSFT  )

41.0%

41.6%

United States

America Movil (NYSE: AMX  )

100%

23.2%

Mexico

China Mobile (NYSE: CHL  )

100%

20.6%

China

Apple (Nasdaq: AAPL  )

43.0%

19.8%

United States

Data from Capital IQ, a division of Standard & Poor's.

Your next move
Putting aside policies and politics, you needn't be a George Soros-like currency trader to see that the dollar may be in for a rough patch. Instead of being caught off guard, you'd do well to think about positioning your portfolio now. Regarding buying equities with substantial sales in foreign currencies, Buffett wrote that "Charlie [Munger] and I prefer this method of acquiring non-dollar exposure."

If you're looking for additional international exposure, our Motley Fool Global Gains service is 100% dedicated to finding superior international investments. We deliver two stock picks each month, a list of our top five buys for new money, and comprehensive asset-allocation advice to help you fine-tune your foreign exposure. You can tour the entire service for 30 days -- on our dime -- by clicking here for a free trial.

In four years of writing columns together, this is the first time Tim Hanson and Brian Richards have used the phrase "scare the dickens out of you." Tim owns shares of America Movil and ABB. Brian owns shares of Microsoft, which is a Motley Fool Inside Value recommendation. Coke is also an Inside Value recommendation. Apple is a Stock Advisor pick. America Movil and ABB are Global Gains selections. The Fool has a very stable disclosure policy.


Read/Post Comments (23) | Recommend This Article (101)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 25, 2009, at 3:49 PM, Joelshann wrote:

    How about a comparison with the Norwegian Krone? It's easy to stack the US$ against other weak fiat currencies. Kind of like laying your dead horse next to a dozen other dead animals--with the claim that your's is the best of them.

    The fact is--they are all still dead.

  • Report this Comment On March 25, 2009, at 3:58 PM, JTShideler wrote:

    I think another decent hedge would be to look for stocks that deal in commodities, oil, gas, gold, as when the inflation kicks in at least they will be able to maintain value. That is unless you think the Global demand will just die all together in which case maybe you should just stockpile gold in your basement safe.

  • Report this Comment On March 25, 2009, at 3:59 PM, FinancialFellow wrote:

    I'm also pretty bearish on the long term prospects of the dollar. The U.S. spends way more than it has and borrows more than it can pay back. If the country were an individual we'd have an abysmal credit rating. I've lost all credibility in our country to make the tough decisions - control spending, reduce borrowing, and stop printing so much money.

    The average American is largely to blame, too. The average national savings rate is close to zero percent and we live over our means by charging everything and taking out home equity loans.

    Unfortunately, I feel like we're getting what we deserve. The country is on a decline and America as we know it is fading away.

    I have to give props for the article for discussing diversifcation of currencies by investing in companies that do a large amount of business internationally. Very good advice. I recently purchased stock in several such companies in an effort to reduce my exposure to the dollar. I wasn't happy with my online broker so I switched: http://financialfellow.com/2009/03/02/tradeking-offering-up-...

  • Report this Comment On March 25, 2009, at 4:04 PM, doubledownman wrote:

    United States has been and will ever be the enginee of growth around the world. No matter what happens -when dollar falls all other currencies will fall deeper.....there is no other strong currency other than Gold.......wake up and smell the roses!

  • Report this Comment On March 25, 2009, at 4:18 PM, Fliujniligui wrote:

    I have a big problem, I am Canadian and our stuff will probably appreciate in the future and kill foreign returns for us. I will probably consider buying TBT to ultrashort treasuries and counter the effect of our disturbing currency which always appreciate when stock performs well all around the world.

  • Report this Comment On March 25, 2009, at 6:10 PM, CitizenH wrote:

    How about 401(k)'s where I can't buy individual stocks? Should I just put part of the money in international funds to hedge against a potential decline of the dollar?

    Thanks

  • Report this Comment On March 25, 2009, at 6:20 PM, bmialone wrote:

    I'd like an answer to that question, too. What about our

    401(K)'s?

  • Report this Comment On March 25, 2009, at 9:22 PM, ajooba wrote:

    For 401(k) question, check out (google for) Paul Merriman's fundadvice.com : ultimate buy n hold portfolio. Good diversification using index funds. Also see ifa.com for model portfolios. I guess any "lazy portfolio" - I have tinyurld this : http://tinyurl.com/uslazyport - Also visit bogleheads.org - great community on investing using index funds. I guess the recommendation is : decide your stock allocation and then within stock portion, got for 50/50 US/Intl split. Also see http://investingessentials.blogspot.com/ - hope it helps

  • Report this Comment On March 25, 2009, at 11:08 PM, TMFMmbop wrote:

    Yes, you can use international funds that hold foreign stocks to achieve the same end and there are many low-cost ETFs out there with exposure to specific countries and regions as well.

    Tim

  • Report this Comment On March 26, 2009, at 12:40 AM, yukonmike wrote:

    Inflation is inevitable. It's just not here yet.

    Too much money has evaporated globally, 70 trillion, so naturally our worst enemy, deflation, emerges which is what the fed is fighting its hardest to prevent. Helicopter Ben is doing exactly what he should, making sure that hundred dollar bills are dropping from the skys. The alternative is much worse as demand for goods and services has dried up across the board. We do not need people now delaying purchases because it will be cheaper for them to purchase those same things a month from now and thus continuing the death spiral that corporate profits are in. So for now deflation, 18 months minimum inflation.

    Don't react to something that isn't here yet. Position yourself for what is actually occuring today and be cognizant that inflation will be a problem we will all deal with inevitably.

    You wanna make money in deflation, look to the fixed income markets. Treasuries are run, how about Ginnie Mae bonds backed by the same treasury?

    When inflation hits commodities will be one of the best places to be. Just don't jump the gun today and react to something that is an issue for tomorrow.

  • Report this Comment On March 26, 2009, at 8:00 AM, pedigreebull wrote:

    I am new to this so pardon me if I am missing something here. The article encourages one to look at companies based outside US or has a large part of revenue stream from outside US.

    However, purchasing these stocks, one would still have to pay in US$ because they are denominated in US$. So if one continues to hold a large part of his investment in stocks denominated in US$ for say a couple of years, aren't we exposing ourselves to the same currency risks becuase the proceeds will still be in US$ which may at that point in time be worth less?

    Huge risks particularly if you are converting from a foreign currency to pay US$ for the stocks, and later on when you sell, you need to convert the US$ (worth less at that time) to the foreign currency.

    Less buck for your bang...

  • Report this Comment On March 26, 2009, at 8:45 AM, Art22jr wrote:

    You can't separate this from politics! A mutiple trillion dollar war, at the same time reducing taxes (therefore not paying for the war) are very significant reasons for the present need to "print money". Let's address the revenue side by raising taxes, put the Pentagon on a diet, and honestly look at social programs.In addition, the trade imbalance is historically due to oil imports.

  • Report this Comment On March 26, 2009, at 10:09 AM, TyroneGenade wrote:

    Counter intuitively, raising taxes decreases tax revenues. Both Bush and Reagan boostedt tax revenue by lowering taxes. Lowering taxes puts more money into YOUR pocket to buy goods. That exchange for your money for others goodds grows the economy which means that in the end you collect more revenue.

    Increasing taxes means more good money is sent to languise and die in government coffers, being sent on limos, red tape, aid to africa and other lost causes.

    Talk about the USA forever being the engine for world economic growth is falacious. The world economy has grown because the USA has been stupid enough to spend it money outside America. What will be obvious after this "crisis" (actually a catastrophe) is over, is the world realizing it can go on without you (ha ha!).

    As we speak China is shifting from an export to domestic consumption economy. Its currency is undervalued as it is. When the Fannie/Freddie Mae bomb smoke clears China will be the worlds BIGGEST economy not the USA. It will then need to raise the value of its currency to buy oil cheaper (which any day now will be sold in Euro or Yuan).

    On the upside, a sliding dollar combined with the destruction of USA labour unions will result in the USA becoming a power house of production again, but I think you have lost the top-dog slot forever. You will go on like Europe: a lingering phantom of former glory.

    On the optimistic side, if you can begin generating oil in surplus, you should be able to buy back some of the capital you sent to China. :-)

  • Report this Comment On March 26, 2009, at 10:44 AM, robertf36009 wrote:

    I'm still advocating drill here, drill now and control the price of oil. These united states could easily control commodity prices around the world if we choose to develope and expend our resources in a manner consistant with our self intrests rather than squandering them for good will. Of course the nay sayers will point out that this could alienate our world trading partners. Guess what? They already don't like us it's the dollar they like and only so long as it is sustainable. That won't be for long if current spending isn't curtailed. Financing debt with more debt is lunacy.

  • Report this Comment On March 26, 2009, at 6:16 PM, tonester2k wrote:

    I agree with the comments on China. It holds tons of our debt, has a "bazillion" workers (not to mention soldiers) and is poised to be the "king of the world". We need to drastically change our MO to save the dollar and this country's quality of life. We are sending all our wealth overseas - I doubt we could even fight a WWII type war at this point with the manufacturing sector so weak.

    Does anyone have any comments (or better knowledge than I) what would happen if the debt owed overseas was called? Can they do that like any banker can call up your mortgage? I would love to hear some comments on this!

    Thanks!

  • Report this Comment On March 26, 2009, at 8:17 PM, yukonmike wrote:

    If you're referring to the U.S. govt debt held by foreign governments, treasury and agency bonds are noncallable. The only way a foreign government can unload their holdings is on the open market just like you and me.

    If the foreign governments choose to unload it on the open market they risk devaluing their foreign currency reserves that are denominated in U.S. dollars.

    FYI, there is no way to save the dollar, it's devaluation is inevitable. Accept it, and be ready to position your investments to defend against inflation.

  • Report this Comment On March 27, 2009, at 7:22 PM, kahunafool wrote:

    yukonmike - we subscribe to the same brain cells. Could not have said it better. Folks get lost in the mini details and miss the big picture sometimes. Go fixed income now and be ready to pounce on commodites and the RIGHT high flyer equities down the road. You can either make inflation your friend or you enemy by what you choose today. Patience is advised.

  • Report this Comment On March 28, 2009, at 11:06 AM, yukonmike wrote:

    Kahunafool - new to the fool or just been lurking for a while? You'll see that unfortunately optimism is the predominating factor here, not that there's anything wrong with that with a ten year time horizon in mind. However I'd prefer to see my dough work in the meantime while the market languishes...

  • Report this Comment On March 28, 2009, at 1:58 PM, tonester2k wrote:

    Thanks for the replies, guys. I am learning the investment business as I go, having lost faith in "financial advisors" after my decisions were better than theirs by a long shot... thankfully before the "big drop".

    I am also pessimistic about the future of the buck and looking for equities that are more internationally accepted companies, among other things.

    I'd like to see more advice from the Fools in that direction at least.

  • Report this Comment On March 30, 2009, at 12:24 PM, yukonmike wrote:

    Yup, the majority of brokers are just straight salespeople, however don't give up hope that there are those that are worth it. Not many, but there are some.

    Research your stocks now, buy them much later once the market risk has dissapated. Stick to Ginnie Mae bonds for returns between now and then.

  • Report this Comment On March 31, 2009, at 4:34 PM, bigkansasfool wrote:

    Buffett has a poor history with his currency predictions and his bets against the US dollar. Buffett is a master of the balance sheet and micro economics, but never really mastered macro economics and a lot of his bad investments have been because he is a master of minutiae but does miss the mountain for the mole hill. Case in point, his investment in COP at the top of the oil market.

  • Report this Comment On April 10, 2009, at 2:49 AM, joandrose wrote:

    doubledownman - before the US dollar became the accepted world currency, the pound sterling ruled supreme internationally - and the day will come in the not too distant future when the US dollar will be replaced - just as sterling was. Probably a lot sooner than we think !

  • Report this Comment On April 12, 2009, at 12:56 PM, HitmanP wrote:

    I wonder why citizens get into trouble for this type of behaviour? I spend more than I make too, and get into trouble about 1 every 2 years. I wish I could borrow and/or print money when this happens to me.

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