Macro Economic Trends and Risks
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August 18, 2008

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I was talking about the markets with a friend today. During that discussion she made the comment: "So you would go long the dollar?"

This is what I answered:

The only way I know how to answer that question is to look at it like I do any other investment decision. When I look at a company, I look at the management effectiveness ratios, namely I look to see what kind of return the company has gotten on invested capital, what kind of return it has gotten on retained earnings, and what kind of return it has gotten on it assets. I also look at things like the price I'm paying versus the book value of the company and what kind of debt load they are carrying and, of course, the debt-to-equity picture.

Then I look to see whether they are cash flow positive and, if they are, what the price is compared to that cash flow to see if I am paying too much or not. (In other words, am I being adequately compensated for assuming the market risk?)

Then I look at the business model, are they likely to perform over the next 12 months similarly to what they did the last 12? If so, then if their metrics are profitable and the business is stable to growing then after I buy I am likely to enjoy the experience.

So....carrying this approach over to the US economy and the dollar.....

The return on investments is negative (we are running current deficits), the total indebtedness is increasing (just raised the debt ceiling), and the long term liabilities are increasing rapidly (boomers have started to retire). Meanwhile revenue does not look like it will be increasing (no moves afoot in Congress to raise taxes), while current expenses seem to be increasing (more calls for stimulus packages to "ease our pain"). As a business model, a rising dollar implies our products will be more expensive overseas, so the next 12 months may not be as strong for exports as the last 12 months.

Yes, energy prices appear to be coming down so that might decrease some of the pressure on the consumer but housing prices (the largest measure of consumer net worth) are still falling precipitously which implies more banking crises and increasingly tougher credit standards (which create strong headwinds to growth).

Therefore, by this limited analysis of an admittedly far-more-complex-than-stated issue (but the only way I can look at it), I must conclude that as an investor I would not be long the dollar at this time.

Now, in the past, I did similar analysis on Taser and Krispy Kreme and concluded that they did not represent good investments for my money. Those stocks went on to double and triple from there. Was I wrong then? I didn't think so and don't regret (except for that small very greedy inner voice) not having put my money into them for they ultimately did show themselves to be what my analysis indicated......much ado about very little.

Am I wrong in this current analysis? I don't know, I might be. I understand that a government is not run like a business, nor is it intended to be. But this investor must bring to the table only what he feels comfortable with by way of thinking it through. I would like to see decreasing deficit balances and decreasing total indebtedness and decreasing future liabilities in order to even begin to imagine investing in the country that is experiencing declining economic factors.

If I'm correct in the analysis, when will Mr. Market turn around? I don't have a clue.

But silver under $13.00/ounce looks awfully tasty to me. I guess I'll have to see if I can buy some bullion somewhere! Putting my dollars into silver, which carries no debt and is no one else's liability, seems to be a bit more prudent use of the purchasing power than to put it into dollars.