Betting on a Weaker Greenback--and Winning
If you had met Donald P. Gould a few years ago, you’d probably have shrugged him off as a purveyor of gloom and doom. A naysayer. A pessimist who just happened to boast of degrees in both economics and finance. You’d probably have shaken your head and wondered how somebody who seemed so smart could doubt the strength of the greenback--read “U.S. Treasuries”--in the world of finance.
But today, Gould is looking more like a prophet than a pessimist. The value of the dollar is scraping bottom on world currency markets--just as he predicted. He’s being quoted prominently in publications ranging from the Los Angeles Times and the Washington Post to the Congressional Record.
Meanwhile, the returns of the three international money funds he founded and now manages for the Franklin/Templeton Group have climbed sharply. Indeed, where the average U.S. money fund is now paying just over 5.25%--the highest rates in a year--Gould’s funds are up by double digits, says Don Phillips, publisher of Morningstar Mutual Funds in Chicago.
Franklin/Templeton’s Global Currency fund posted a 12-month total return of 12.5%; its Hard Currency fund is up 22.88%; High-Income Currency is up 12.40%. A fourth fund that Gould manages, Franklin/Templeton’s German Government bond fund, boasted of a 26.23% total return over the 12 months ended March 31, Phillips notes.
How do those performances compare to those of his peers? In the international money fund arena, Gould has no peers, Phillips says.
Oddly enough, in an industry that could call “follow the leader” its rallying cry, Gould is singing an unpopular tune: He’s betting against the U.S. government.
He says the U.S. dollar won’t bring a dollar’s worth of global buying power in the future because our nation’s balance sheet is looking increasingly bleak. Consequently, he’s buying foreign currencies, which soar in value when the dollar takes it on the chin.
Even if you don’t agree with his take on the dollar, Gould says, investors would be wise to put some of their money into foreign currencies. It’s a matter of diversification, he says.
Most investors agree that its wise to diversify your assets among stocks, bonds and cash, he notes. That reduces your risk of losing everything if any one market goes south. But, despite the fact that Americans regularly buy a wide array of foreign manufactured goods, from televisions to cars, most investors don’t think to diversify their currency risks. To diversify your currency risk, you need to buy international stocks, bonds or money funds, he adds. That should help you maintain your buying power should the greenback continue to dip.
Gould’s international money funds buy short-term government issued securities with maturities of 120 days or less. There is very little chance of default--just as there is little chance of default on short-term U.S. Treasuries. There’s also little interest-rate risk--the same as with U.S. money funds. But what Gould’s funds have that other money funds don’t is currency risk.
If the value of the dollar rises, Gould’s investors will get hit. If it continues to fall, their investments will rise in value. Now that the dollar has hit a low ebb, some believe that’s what’s going to happen. After all, once the dollar hits bottom, won’t it bounce back?
No, says Gould. What investors have to realize is that there’s no real bottom when you’re talking about currency values. That’s because currency values are measured against one another rather than against some set benchmark.
“The dollar is not low in any absolute sense. It is low relative to the yen,” he says. “Because it is a relative measure, there is no bottom to it. The value is going to be determined based on how the two countries perform relative to each other.”
Gould likens the dollar-yen valuation to that of IBM against Microsoft. Several years ago, IBM was vastly more valuable than upstart Microsoft, but as Microsoft continued to grow--and IBM hit turbulence--the ratio of IBM’s value compared to Microsoft’s plunged. But that doesn’t mean that Big Blue is due to regain. “If Microsoft’s earnings continue to rise faster than IBM’s, the ratio can continue to decline indefinitely,” he says.
And although IBM appears to be making progress in turning its finances around, the factors that have battered the dollar persist, industry experts say.
The United States is running large annual budget deficits--which means the amount of debt securities (Treasuries) the government issues is ever-increasing, glutting the market with supply. Meanwhile, the nation’s savings rate is low--about 3% of income--so U.S. investors can’t step up to buy all the Treasuries our government issues. That means our government must continue to rely on foreigners to finance its debt.
The Federal Reserve could boost foreign interest in Treasuries--and thus bolster the value of the dollar--by hiking U.S. interest rates. However, interest-rate hikes create hardship at home. And Americans and U.S. politicians have been reluctant to commit to such short-term hardships--even if they create long-term benefits--because they can cost jobs and votes.
Worse still, the tax code punishes those who save and invest by taxing investment earnings. At the same time, Americans are given tax breaks for spending, whether on a mortgage or on business equipment, Gould notes.
“The way the tax law is written now, it discourages hard work and thrift--the things we want to encourage--and it encourages spending and going into debt,” Gould laments. “If we saw all those things change, I would be more optimistic about the future of the dollar. But do you want to bet all your money on these major changes, or do you want to hedge your bets?
“I tend to subscribe to the old weather man argument. You don’t really know what the weather is going to be like tomorrow. But if you have to guess, I’d say it’s more likely to be like today than to be completely different.”
