Dollar Depreciation and the Higher Cost of Living
Companies:Advance Auto Parts Inc.AutoZone Inc.Family Dollar Stores Inc. Related Quotes
Symbol Price Change
AAP 59.51 +0.24
AZO 233.00 +0.17
FDO 46.10 -0.04
KMX 29.24 -0.44
KR 21.51 -0.08
{"s" : "aap,azo,fdo,kmx,kr","k" : "a00,a50,b00,b60,c10,g00,h00,l10,p20,t10,v00","o" : "","j" : ""} Josh Lipton, On Tuesday October 12, 2010, 11:30 am EDT
Stock investors are breathing easier with the expectation that the Federal Reserve will prop up our fragile economy with more help but, as consumers, they might be less enthusiastic about what dollar depreciation means for the cost of living.
Fed Head Ben Bernanke and his allies at the FOMC appear intent on voting for another bond purchase program at the November 2-3 FOMC meeting, a maneuver known as "quantitative easing" (QE). The point of the program is to keep long term interest rates low, encouraging borrowing and spending by companies and consumers.
How much will the FOMC purchase? In his speech on October 1, Federal Reserve Bank of New York President Bill Dudley said, "…some simple calculations based on recent experience suggest that $500 billion of purchases would provide about as much stimulus as a reduction in the federal funds rate of between half a point and three quarters of a point." (Hat tip: Yardeni Research)
But the potential impact of QE2 on the economy remains debatable. John Mauldin, president of Millennium Wave Advisors, looked at how much of an effect $2 trillion in QE could give us. His answer: not much.
See also, "Dollar Up, Gold Down?"
The investment pro, citing research from former Fed governor Larry Meyer, reported that a $2 trillion asset purchase program would: 1) lower Treasury yields by 50bp; 2) increase GDP growth by 0.3pp in 2011 and 0.4pp in 2012; and 3) lower the unemployment rate by 0.3pp by the end of 2011 and 0.5pp by the end of 2012.
"That is not much bang for the buck, so to speak, but it would be pointing a gun with a very big bang at the valuation of the dollar," says Mauldin.
Indeed, the prospect of more money printing has pressured the greenback, with the PowerShares DB US Dollar Index Bullish Fund (UUP), which tracks the value of the buck, down 6% in just the past four weeks.
In turn, dollar-denominated commodities have surged. Since August 27, when Bernanke first suggested that the Fed might consider another round of QE at his Jackson Hole speech, the price of gold has jumped 9%; the price of copper is up 12%; the price of crude oil has increased by $7.49; and soft commodities like wheat, cotton and corn have all shot higher.
Strategists like Gluskin Sheff's David Rosenberg have questioned what this currency debasement will now mean for your friends and neighbors. Rosenberg recently argued that, with oil back over $80 per barrel and US gasoline prices at the pump heading back above $3 per gallon, we will come to think of this dollar depreciation as a source of restraint for the consumer.
See also, "Hard to Hate the Dollar."
Put another way: For each penny increase in the cost of gas, US consumers pay an extra billion dollars a year, according to Dean Baker, co-director of the Center for Economic and Policy Research.
The higher cost of oil, gas, and food acts as another tax, says Michael Pento of Euro Pacific Capital, at a time when consumers already feel pressured by a lousy labor market and languishing home prices. Of course, says the economist, the pressure of rising prices isn't applied evenly: those sitting lower on the socioeconomic ladder feel the brunt of the pain.
"If you are a person of means, you probably own a lot of foreign equities and precious metals," Pento says. "If you own the right stuff then you're probably doing Ok. But, if we're talking about people on the lower part of the socioeconomic scale, they're getting crushed."
As for investment implications, this added pressure on the consumer is one reason Pento says he sidesteps retailers. "The cost of consumer staples is going up and income is flat," says Pento. "So consumers have less money for discretionary spending. I don't want exposure to retailers in this environment."
The SPDR S&P Retail ETF (XRT), which includes holdings like Family Dollar (FDO), Advance Auto Parts (AAP), AutoZone (AZO), CarMax (KMX), and Kroger (KR), is up 22% year-to-date.
Peter Boockvar, equity strategist at Miller Tabak, emphasizes that investors should protect their portfolios with a strategy benefiting from a weaker buck: exposure to commodities, commodity-producing nations and U.S. companies generating much of their revenues overseas.
"With the path the Fed has taken," Boockvar says, "US investors must play self defense."
Nothing contained in this article is intended as a solicitation for business of any kind or for investment in the firm. |
