A Reader Question About The Dollar

A reader left the following question about how to manage equities around the current dollar situation.

So the guess is a decline in the dollar in the next months and years? Of course with the realization that currency speculators along with China's desire to make them pay and maybe profit from them along with other events means that it won't be straightforward. So let's say one is going with this guess and is also guessing that at some point this is going to impact the US stock market. Is it a reasonable risk to hold cash with the expectation that many foreign stock markets will echo the (hypothesized) US fall? Then buy into these markets.

The question looks at this issue from several angles. The first one is easy for me to address; yes I expect the dollar will start to get weaker and debt yields would move higher everything else being equal. To the second paragraph I expect that if I am right it would start to happen slowly over a period of months or maybe longer. I would not think that levels reached from a knee jerk reaction will stick.

Is it a reasonable risk to hold cash? This one is much tougher. The short answer is that I think an extreme cash position in not the best path. Right now the US equity market seems to be doing well. Who's to say that doesn't continue for another year? There are plenty of easily accessible, foreign equity markets doing even better.

I am not looking for some sort of crash but more of a US getting left behind scenario. If that turns out to be right we would see a lot of what's wrong with the Dow type of TV coverage. This would likely mean that foreign markets would not have to fall in sympathy (in fact the Australian market went up during the darkest years of the US tech bubble aftermath).

Of course this could turn in to a real calamity. If so back to one of my original portfolio construction tenets which is to have a couple counter strategy holdings like gold and/or an inverse index fund. Beyond that I have written many times about have a clear and simple exit strategy that you can be faithful to when things go badly, for me that is the SPX going under its 200 DMA. Regardless of the reason it happens I begin to get defensive when that happens. I don't think it would makes sense to try to guess that the market is going to go down and raise a lot of cash now. The line of thinking is that no matter what anyone thinks the market is fine right now. If, over the next 12 months, that market has a twice a decade up 25% run and I am 50% or more in cash I will have hurt my clients and should expect them to fire me.

Most people can handle down a little. If that happens and then I take defensive action because of a breach of the 200 DMA I am actually taking less risk for the client, at least that is how I look at it.

Bigger picture I believe in listening to the message of the market. While I see visibility for scary things the market does not seem to be communicating this yet. Hope that helps.