For those of you who have been reading my articles here for 20+ years, you will know I’m not a doomster. Yes I’ve call the tops but I’ve also called the bottom. It must be said I did call the recent top this time round but absolutely not the bottom, but you can’t win them all and frankly I can barely believe this historic rally.
However, this article is initially going to make me sound like all those doomsters constantly saying buy gold, it’s the end of the dollar etc etc. So let me start by saying the end of the world is not nigh BUT….
Let me start at the beginning. US GDP per capita is $85000 a head. Frankly numbers vary but lets use that one. This GDP figure is basically the global number one slot if you ignore funky small countries like Luxembourg and Ireland. Hold that thought.
So fly to Japan and go take a walk around. Japan is a rich country and a big one at that. It feels as wealthy though much more sorted than the US. GDP per capita $34000.
So US GDP is 2.4 times more than Japan per head. Grossly the US is 2.4 times richer than Japan.
Nope that can’t be even nearly right. But them’s the numbers.
What explains that?
OK so government spending is in GDP numbers and of course that is total rubbish if you don’t think the government is creating wealth by spending your tax dollars. However, when you strip that little fun fact from the numbers to get private sector GDP it doesn’t really fix the problem. Yes, you can go write a lot of waffle about population aging, economic stagnation and all that stuff, but when you hit the pavement Japan, your eyes tell you Japan is ‘rich’ and on par to the US. Go take a walk in Sweden and you are not getting the impression that the US is 50% richer. Is the average American 50% richer than a Canadians? I haven’t been there recently, but it seems unlikely.
So there is two possible explanations if you discount data error.
The US is doing amazingly on the economic front. Pound sand the rest of you.
or
The dollar is way too high ad the dollar denominated GDP per head figure is distorted by that.
These dollar GDP numbers are of course predicate on the dollar. These countries make stuff in their currencies and the US does its thing in dollars, and if the yen tanks Japanese GDP per capita tanks in dollars too.
So because of an overly strong dollar, the US exports dollar bills and the world imports their cheap stuff into the US. The exporting currencies stay rich in their money and the US looks rich in its currency, all the while bleeding out through a trade deficit.
That checks out against the observed situation. Surely that’s not sustainable?
So the dollar needs to fall.
But wait, the US needs to borrow money from the world and needs high interest rates to pull its dollars back into the US to buy its bonds. The system requires the world to swap one US confetti for another. The ultimate swap is US bonds for imports. Paper for stuff, not a bad deal!
However, the consequence are, no stuff gets made at home, the economic engine is financial engineering and hege-onomics. I just made up that word, but you get it, it means making sure you’re the global boss, so you can have the reserve currency to sustain the ‘confetti for stuff’ money printing debt fuelled loop.
Make no mistake this has worked, still works, can keep on working, but in the end you cant maintain a 2.5x technical GDP gap with an equivalently advanced economy by financial engineering alone. The gap has to close. So lets look at the USD JPY chart.
I drew the line because that seems like a natural resting place. That would put Japan GDP at $50K per capita GDP closing the gap. That is less outlandish but still not what you optically see in Japan. Then you consider the longtime high of 80 yen to the dollar and the dollar GDP is getting closer to $70,000 which you might shrug off as about right, but it is not till you get to 60 yen to the dollar that the GDP per head numbers get to parity.
You could take the same logic to the Europeans and the Canadians. If the dollar was quite a bit weaker then the GDP per head numbers would be a lot closer together.
BUT…. If the dollar got that weak, no one would want to lend the US piles of cash and >bang< would go the ability to borrow from the world to fund fiscal deficit spending. However, >bang< would go the trade deficit too because you wouldn’t need tariffs to spike the guns of the importers the week dollar would do that all on its own but, >POOOOM< up would go inflation, bigly.
So now the mystery of high US interest rates makes sense. Keep the dollar strong to keep the confetti going around and keep the runaway government spending funded.
Note: If you listen carefully, the fundamental problem the big guns keep coming back to, is runaway fiscal deficits. This is the driver of the whole thing. Government runaway spending is the real core problem, everything spins out from that.
So lets continue to keep it simple. Comparatively rich countries should have comparatively similar per capita GDP, unless currencies are out of whack. Global currencies are out of balance.
Now this is not a doomster article, its about how we can make money from this.
OK, so buy Gold. ….hold on, this is the wrong article…. Lets start again.
Buy Japanese ADRs of big caps listed on US exchanges. If feel better out of the doomster rut.
So buying Japanese ADR’s is a contrarian play but there are a host of low p/e dividend paying Japanese titans listed in the US and that’s not really that offbeat.
So the play is, if you are denominated in dollars, like I am NOT, add some big cap Japanese ADRs to your portfolio. Now of course there are all sorts of hedge fund-like crazy plays you could put on, but to me, naked forex trading or anything that smacks of it is for the birds. A cheap, huge, great company in Japan, is a solid investment. Don’t believe me, ask Warren Buffett who apparently owns about 10% of Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo. So I arrive at the same destination as the Sage of Omaha but perhaps via a different route.
So in any event believe me or not, there is a nice portfolio laid out for us all by the greatest investor of modern times.
The old saying goes, the market can stay wrong longer than you can stay solvent and for sure that is possibly true for the dollar, but adding great companies with a ‘weak dollar’ kicker, that pay dividends, is a good way to get more diversification into a portfolio while adding a hedge while lowering a specific and worrying risk, is a tempting way to go.
What is not to like!