A while ago, my Foolish colleague Tim Hanson urged you to "read this article, because the dollar is doomed." I agree with him ... but only in part.
Toll the doomsday bell
After taking a close look at the "massive and growing deficit" in federal spending, the "significant trade deficits" we continue to produce, and our inclination to be "oh-so-willing to print money out of thin air to ... prop up the likes of AIG and Bank of America," Tim argued that there's just no way the U.S. dollar of today will retain its value in years to come. And none other than the famous Warren Buffett agrees: "Unchecked greenback emissions will certainly cause the purchasing power of [America's] currency to melt."
Tim argues that the "Foolish" way to prepare for Dollar Doomsday is by buying shares of companies that earn a large proportion of their revenues beyond U.S. borders. Coca-Cola (NYSE: KO) and McDonald's (NYSE: MCD) are just a couple of the blue-chip multinational names that stand to reap the benefits of a falling dollar. By collecting revenues in relatively more valuable yen, euros, and renminbi, such globetrotters stand to magnify their dollar-denominated profits upon translating their foreign-earned revenues into greenbacks here in the U.S. of A.
And like I said, I don't disagree with any this. I just happen to think there's a better way to approach the Dollar Doomsday scenario.
Olly Olly Oxen Free!
Back here in the USA, you see, there's a new game in town. After years of watching U.S. corporations line up and march their jobs off to foreign lands -- "outsourcing" work from America to cheaper labor markets abroad -- we're now seeing a remarkable reversal of this trend. Whereas it used to be that a strong dollar hamstrung the price competitiveness of U.S.-manufactured goods and encouraged U.S. companies to "offshore" work to cheaper locales, today's dollar devaluation is ringing the dinner bell, calling those investments home once more.
In March, The Wall Street Journal hailed a new trend in dollar devaluation, called variously "insourcing" or "onshoring." Whatever you choose to call it, there's "a growing movement among manufacturers to bring more operations back home."
The reasons are legion, including the rising cost of foreign labor, the always high cost of shipping goods from one market to another, the complexity of managing inventories when warehouses and customers are located oceans apart, and nagging issues of quality control when your worker bees are located far from the attentive eye of corporate management. And as the Journal diplomatically points out, in an oblique reference to China: "Political unrest and theft of intellectual property pose additional risks."
So what's the solution?
Caterpillar (NYSE: CAT) recently announced the relocation of some of its heavy-equipment manufacturing from Japan to Chicago, reaping multiple benefits in the process. A move "onshore" will allow Cat to avail itself of low-dollar-cost U.S. labor, exploit excess manufacturing capacity here at home, and at the same time, free up capacity in Japan to serve markets closer to it. Nor is Cat alone in seeing the logic of this move. General Electric (NYSE: GE) announced a shift of its own last year, moving certain manufacturing operations from China to Louisville, and taking advantage of a Great Recession-inspired 35% drop in labor costs in Kentucky.
Which makes a lot of sense. In recent years, we've seen the cost advantages of offshoring business evaporate. Software firms, heavily reliant on Indian outsourcing, are seeing price advantages vaporized by rising labor costs there. The call-center employee in Bangalore who calmly explains to you why you should not in fact place your coffee cup on your computer's "retractable coffee cup holder" is now seeing his wages rise 15% to 30% annually.
Foreign-based companies may be looking on with envy at the cheaper dollar-denominated prices of labor and raw material. Japan's Toyota (NYSE: TM), Honda, and Nissan are the most obvious examples, as they seek to compete with a revitalized Ford (NYSE: F) that stands to benefit further from a declining dollar. Lately we've also seen companies like Airbus try to get a piece of the action. Airbus still hopes to win the Pentagon's KC-X Tanker project away from Boeing (NYSE: BA) and shoehorn the contract into a plane-building presence Stateside.
So what's it all mean to investors?
As I said up above, I don't disagree with Tim's argument that you can play the dollar devaluation game by investing in U.S.-listed multinationals that do lots of business abroad. But that's just the start of the good news. As Caterpillar, GE, and so many other companies have discovered, you can double or triple the benefits of those global, exchange rate-advantaged revenue streams by moving your investment dollars back to the U.S.
And what works for corporate America can work for us mere individual investors as well. Buy a few shares of Caterpillar or GE and you own a small piece of all the cost advantages that the company is grabbing up:
- Dollar-denominated costs.
- Competitively priced U.S. labor.
- And yes, magnified dollar-denominated profits derived from strong foreign currency revenues.
At Motley Fool Stock Advisor, we've just identified a steelmaker perfectly positioned to take advantage of American industry moving the homeward-bound. Fool co-founder David Gardner calls it "the best-run steelmaker in the country and one of the best-run industrials, period" with a Morningstar-rated "A for stewardship ... shareholder-friendly policies and stellar corporate governance."
Click here to sign up for a free trial, and we'll tell you all about it.
Fool contributor Rich Smith does not own shares of any company named above. Ford is a Stock Advisor recommendation. Coke is both an Inside Value and Income Investor pick. The Motley Fool's disclosure policy is the gift that keeps on giving.
