The Global Strength Test of the U.S. Dollar

There are only so many ways a company can dodge the Tax Man.  (Oops, strike that…  Dodging the Tax Man is not, of course, a legitimate enterprise.) But presenting a more favorable, less punitive tax return is always fair game. Using an international currency ploy, notedSan Francisco apparel maker Levi Strauss has found a way to do just that.

Instead of a six-percent increase in operations profit, the company chose to report a five-percent decline in profit for 2015 as a result of currency fluctuations.  If you think this is strictly bookkeeping legerdemain, consider this: that simple manipulation made over three hundred million dollars in sales disappear from the privately held jeans maker’s books.

Our strong dollar makes the United States a formidable – and resented – presence overseas. Goods produced here cost more in countries with a weaker currency. While Levi Strauss pays its suppliers in dollars, to operate successfully in foreign markets, the company sells its goods in local currencies. These currencies are most often weaker than the dollar. To try and compensate for the narrower profit opportunity, the company has raised prices in some countries, including Russia and Mexico.

Other companies have experienced the bite of foreign currencies. Oracle has shown a decline in third quarter profits because of the rising dollar; and Apple, which derives most of its revenue abroad, reported a fifteen percent decline in profit from 2014 to 2015.

A rising dollar, then, poses an economic quandary for the United States. Foreign companies that sell to us are showing an increase in profit – almost a three percent rise in the fourth quarter of 2015. In the same period, profits declined over eleven percent for the S&P 500, which derive most of their revenue abroad.

You could argue consumers in the United States benefit because we’re buying imported products with more valuable currency, whereas consumers abroad find our exports more expensive. The problem with this thinking is the United States has been running a trade deficit since 1976.  It is our trading partners abroad who reap the benefit of this economic arrangement. As the Levi Strauss profit/loss scenario makes clear, we’re still bolstering foreign economies with our stronger currency. If the profits of American companies are indeed compromised by currency differentials, then once again economic problems abroad ultimately become our problem.

Obviously, when our own personal finances are concerned, our dependency on the U.S. dollar is also very worrisome. Nest eggs tied tightly to the dollar and dollar-denominated assets (like your stock portfolio) could easily dissipate through a political mishandling of our balance of trade or eventual currency debasement.

Now is a good time to protect your portfolio by investing in gold – physical gold. The yellow metal is a hard asset that retains its value and buying power over the long term.  It’s less vulnerable to currency wars. Also, gold is negatively correlated to the dollar and to paper assets; it tends to rise when they decline. And governments can’t print more of it in a last-ditch effort to resuscitate the dwindling economy.