Tuesday 15 April 2014

€ vs $

maxinfo, maxblue, deutsche bank

This article was started in the beginning of December 2013 due to two events that happened:

1. I received a letter in October 2013 from my stock broker telling me that the dollar would definitely become much stronger very soon and now was the time to act on that! The entire thing can be found here as maxinfo for DB customer.
2. A relative of mine (back in November 2013) was talking about how strong the dollar would become very soon.

If it would have been only one event happening then I doubt that it would have triggered me to respond to it but since it was two then some thoughts is always needed and especially what is that statement based on that the dollar will become stronger? Or maybe it is easier to start to ask why is the dollar so cheap today?

For whatever other reasons I have not managed to finish this article until now and as always it is only my opinion that is in here which everyone is free to object against.

The title I decided to give it is a bit of a challenge because is it really euro versus dollar? I actually think that it is and it is also my opinion that in this financial crisis the euro has gained ground on the dollar because still today dollar is the world currency without any doubt but the power has weakened.

Despite of all the problems that EU is going thru we have still managed to keep the euro strong which has cost us jobs in the short run but I hope other advantages in the long haul and especially if the euro would take over as world currency then we will have the advantages US has today of other countries and institutions still buying their bonds at low interest rates.

Often there are complaints from the US about how crazy the austerity approach is in Europe and that EU should simply spend our way out of the crisis. This sounds great but there are several things forgotten there. EU is not one country and each European country had different reasons for why they ended up in a financial crisis. It is not possible that 60% of a countries population is working as government employees. When that is the case then you need to make cuts and go for austerity. If a country has built 30% more apartments and houses then what the population needs then there will be a property crash and several of the people working in the construction field will lose their jobs. If the banks in your country have been promising people higher interest rates than what they could generate themselves then there will be a crash and the banks will go insolvent with lost jobs that follow. If you as a politician by gaining votes allow people to retire and get retirement money at the age of 40 years old then sorry but you need to change that!

Each country simply had their own problems and spending more money was not always the answer for solving that and in my opinion EU have balanced very well on the edge of austerity and spending which is also part of the reason for why the euro has remained strong.

Why is the dollar so cheap today?

The funny thing in the US is that they themselves have not spend their way out of the crisis which in my opinion is also the reason for why the recovery has been taken them such a long time. Yes, the FED as much on their balance sheets and it is growing for each day but the money pumped out has not really reached the population since they have not gone the classical Keynes approach and for instance pumped that money into infrastructure etc. if they would have then jobs would most likely have been created and the US would have come out stronger with a healthy infrastructure which is the alpha and omega for any developed country. The Keynes approach would on the other hand also have lead to inflation and decreased value of the dollar.

The approach that they now took of pumping out money to the banks has meant that they received no inflation, the economy has stayed floating and they can more easily bring the money back on the balance sheet again. This should not have given a weakened dollar but more a status quo and over time a nice soft recovery of the economy with little risks. To get the economy really flying again they would then still be able to step over the Keynes approach and start pushing the infrastructure and construction with much lower inflation increase and a much lower decreased valuation of the US dollar.

What the FED probably did not account for was that for their giant enterprises in the US it became more financially profitable to not bring home their earnings and instead to borrow money cheap at home in the US that they then use to pay dividends and other obligations. Since they do not bring home their money the value of the dollar is currently bad and has been for some time with the additional effect that they are not interested in bringing it back home since they want the USD to strengthen more first so that they can have an additional exchange rate profit.

So its a bit the hen and the egg conundrum which actually is very simple to answer since it is obvious that the hen was first.

So my guess is that FED fears an even weaker dollar and the weaker it gets the more dangerous it will be for the US to start the Keynes approach and the less interested the companies will be to bring back the money. Also the weaker the dollar gets the more ground the euro will gain on it. Neither will be good for the US economy and to be frank for the world in general.

What would probably be needed would be a regulation in the US to force the companies to bring back their earnings in that way the FED could try to parry that with increased spending but personally I do not see that the value of the dollar will increase until the US companies start to bring home their earnings.

Which leads me to the start of maxinfo letter that was sent to me in which Dr. Ulrich Stephan tried to explain to me that the dollar would become much stronger very soon because the growth in the US will be so high and especially compared to the euro. I do not know what very soon means but back then the 1 EUR = 1.35 USD and today (seven months later) 1 euro = 1.38 USD. I know that my "short run" stretches much further than seven months but I doubt that is the case for financial experts talking about short runs so I considered it back then a bad advice and still today I remain with that claim.

Am I wrong in my thoughts about the USD and why it is so weak?

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