VOL. 128 | NO. 204 | Friday, October 18, 2013
The Worldly Investor
By David S. Waddell
President Obama recently made it official that Janet Yellen will succeed Ben Bernanke as the head of the Federal Reserve. Janet has spent much of her career as a dedicated and vocal advocate for the unemployed. With participation rates low, and the unemployment rate high, the markets anticipate that Janet will continue, if not augment, Ben Bernanke’s expansionary monetary policies. A renewed enthusiasm for monetary stimulus has had observable market impact.
First, Janet Yellen’s loose-money bias amounts to a weak dollar bias. Since the 2nd quarter, the deferral of the taper and the appointment of Janet Yellen, have contributed to a 6 percent decline in the DXY U.S. Dollar Index. I do not fear a collapse, but this marks a reversal of strong dollar wagers in the marketplace.
Recall that a weakening currency makes imports more expensive and exports cheaper. Oil accounts for the lion’s share of our trade deficit. A weaker dollar implies higher prices for oil, which historically implied a higher trade deficit. Things have changed. Today, the U.S. produces more oil domestically than ever before, and our reliance on foreign supply has plummeted. Over the last seven years, even in the face of persistently high oil prices, our trade deficit has halved as our domestic oil production has surged.
China represents our second-largest trading partner, behind oil exporters. Since the Chinese dollar is pegged to the U.S. dollar, import pricing from China will remain steady. In short, a weak dollar policy for America sounds unpatriotic, but economically it has fewer costs than in our oil import dependent past and obvious benefits for our exporters.
Second, Janet Yellen’s loose-money bias amounts to an asset-inflation bias. For housing or stock investors, this is a boon. Perma-low interest rates and rising liquidity promote higher stock and housing prices. Theoretically, through the “wealth effect,” rising national net-worth should lead to additional investment and hiring activity. By this logic, if Janet Yellen wants a lower unemployment rate, she wants a higher stock market.
As a liberal economist, if she ran Congress, she might prefer infrastructure spending and “shovel ready” projects that address unemployment directly. However, the Fed has no ability to legislate job creation, only to promote an environment of financial prosperity. This is the Fed’s version of trickle-down economics. This policy disproportionately benefits appreciation-seeking investors over yield-seeking savers.
How will we translate this into investment strategy? A Yellen Fed will be stock market-friendly and weak-dollar policy disproportionately benefits intentional investments. Let’s test the theory. Since the beginning of September, the MSCI USA stock market index has increased 3.7 percent, while the All Country World ex-USA stock market index has increased 7 percent. The international markets have also proven more resilient during our recent debt debate. Portfolios with sizable international holdings hold the advantage. Many factors go into crafting an effective investment strategy, but U.S. monetary policy holds significant weight in the calculation, and Yellen’s appointment is decidedly bullish for global investors.
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.