"no, because that wouldn't fit in with the prevailing sell-the-USD orthodoxy. for chrissakes, even Bill Gates is short the dollar now."
I've seen it mentioned. Initially Don Coxe was thought it would boost the dollar. I think even Marc Faber has been calling for a rally in the dollar. Don Coxe however in his latest call seems to have amended his thoughts about the dollar repatriation:
Message 20996114
"Now that’s a real surprise. Now, gosh knows, those of you who’ve been listening to this call for the last few years know that that’s been my advice for Americans, to move their money abroad. But, the Rule of Page One is such that if all of a sudden this becomes a concept and then we have Davos out there, where according to the headlines, everybody is talking about the drooping or plunging Dollar.
That same Rule of Page One says that maybe the Dollar bear market – which is one of the reasons why the small investors, the mutual fund investors are moving their money abroad – maybe that Dollar bear market is due for a big pause.
Now this has been a very, very good month for the Dollar. We’re at one thirty and a third on the Euro, well that’s down over five cents from the high on the Euro. That’s a big, big move and to have it in three weeks.
So, that leads to the question, is there a solid reason behind this? And I did a conference call yesterday with a Canadian client with a lot of help from Doug Porter who is Senior Economist with Nesbitt Burns for those of you on the call who don’t know his work and he’s been on this story, for which I express gratitude, and we spent three quarters of an hour talking about the implication of this investment act which is going to be bringing back, somewhere, depending on your guess, three hundred to three hundred fifty billion dollars of profits American multinationals have abroad.
Up until now, the situation has been if they brought the money in they’d pay full corporate tax. But they’ve got a short holiday which will mean they only pay five and a quarter percent tax. And the purposes for this are to get money to invest in the United States to create jobs here at home.
And so, the real purpose of course was that they had to find some way of dealing with the Europeans that won a WTO suit on the technique that they had for getting around the tax disadvantage of American companies by creating these overseas sales companies. That was found to be an unfair subsidy under WTO and the Europeans were imposing a terrible penalty on the US for that. So that was the real purpose for it, but as usual, when you put together a bill in Congress, you get all sorts of goodies, included in it.
Now, since this is very important for the question of our Dollar bear market thesis and in a way then for the overall stock market, I think it happens that today there’s a very good article in the Wall Street Journal about it, which I’ll direct your attention to, which discusses some of the things that we talked about on the conference call yesterday, but what I’d like to do is quickly tell those of you who are saying “Well, the sheer scale of this is such that we’re bound to have the Dollar rallying strongly on a sustained basis”, the doubts that I expressed then, I still have.
First of all, that the companies with the most free cash abroad are the big pharmaceutical companies and they have that money in Puerto Rico, because that ‘s a virtually tax-exempt area and that’s recognized by the US government. So that’s why you have huge operations of all the drug companies in Puerto Rico. And they tend to generate lots of cash because of their margins and that money is kept in Puerto Rico. If they repatriate it to the US they have to pay corporate tax.
So, Johnson and Johnson has already set up a big tax reserve for all of the money they’re bringing in, about eleven billion dollars I believe. And when you start multiplying this for the other drug companies, we’re talking about a lot of money. And it’s easy to come up with a list that gets us past the two hundred billion mark, which, look that’s more than one third of the current account deficit for the year.
So that’s a big argument in favor of the Dollar. If that money right now is in other currencies and is being converted into Dollars. And that’s the big question that nobody knows. I’m convinced that in the case of the pharmaceutical companies, that money’s been sitting in Eurodollar deposits. So the fact that it’s going to be moved in to the US, changes US monetary aggregates, but it doesn’t change the supply of Dollars in the world and therefore it’s currency neutral.
For companies operating around the world, the multinationals, these currency deposits they have would be reflective of their local demands. If you’re a multinational company with operations in Belgium or Germany, why you’re not going to have American cash except for the inventory you’re going to move of commodities, but to meet your day to day needs you’re going to have it denominated in Euros. And if you’re in Asia you’ve got local currency needs.
So I find it very hard to believe that anything where you’ve had a huge accumulation of profits will not have gone into Eurodollars already if they’re planning on holding it there, but that the day to day money will be in the local currency. So I think you’re going to take a haircut from these amounts for that.
The other thing that arose in the discussions is what we could potentially see is US companies that don’t have a lot of cash but do have a lot of profits in a country, they’re going to have to borrow to generate the cash to ship to the headquarters in the United States to claim benefit of this. And then the question will be, since those assets are on their balance sheet now in foreign currencies, when they convert those into Dollars as a result of borrowing, that does produce upward pressure on the Dollar.
So, we get it down to then, the subset of foreign multinationals who want to repatriate money rather than leaving it abroad because of growth abroad and the money, if it’s in cash now, how much of it is needed to provide for local operations in which case it’s likely to be in foreign currencies. And how much of this cash accumulated over a long period of time and is tied to commodities in which case it’s already in Dollars?
So, I guess as a result of that I’m not prepared to recommend any change in the Dollar strategy. I think we’re still in a position where the Dollar bear market is with us and that’s clearly having an effect now on the stock market. And not just because of Americans but I suspect that because of foreigners.
But, because of the Rule of Page One, given the Davos thing and the unanimity apparently that was being expressed there, I’m inclined to think that the current Dollar rally could go a little further which means that the pullback that we’ve seen in gold could be extended. But I’m not changing my view that you should have significant exposure betting against the Dollar." |
