The 97-pound weakling

Who isn't familiar with the iconic and long-running ad campaigns for the bodybuilding techniques of Charles Atlas, featuring the "97-pound weakling" being bullied on the beach?

Becoming "fed up" with having sand kicked in his face, the former bag of bones bulks up and returns to the beach to put down the bully, restore order to the beach, and earn the respect and admiration of all the onlookers.

Lately, the US dollar has been playing the role of the "97-pound weakling," having sand kicked in its face daily by just about every other currency on the planet. Just as in the comic strips, this situation is a recipe for disorder and disharmony, and something needs to be done about it.

The problems with the current "bag of bones" dollar are numerous, as economist David Malpass pointed out last week in an excellent guest opinion piece in the Wall Street Journal. Having a disproportionately scrawny dollar floods other regions with capital that would not otherwise flow that way, feeding speculation and asset bubbles, starving more worthy business ventures of capital, and generally encouraging malinvestment that leads to disastrous boom-and-bust patterns and retards real progress that could otherwise take place.

Furthermore, when currencies fluctuate wildly from being strong to being weak, or vice versa, businesses must allocate more and more resources towards hedging currency risk. Businesses today actually staff entire departments devoted to this function, which really adds no economic value whatsoever into the economy. Those people and their talents, and the business resources they use in pursuit of this goal, could be directed towards creating other value, if currencies were stabilized.

While the recognition of these problems might lead some to call for a strong dollar that can dominate all the other currencies (somewhat like the end of the comic strips, in which "Mac" comes back and knocks out the bullies), what investors should really hope for is not necessarily a disproportionately strong dollar but rather a stable dollar.

Some businesses (both foreign and domestic) benefit from a stronger dollar, while others benefit from a weaker dollar. But investors should not be looking for companies (or other investments) that only make money because they receive a handicap one way or another from this or that government policy! Instead of tilting the playing field one way or the other, government policy should aim to provide equilibrium, and let the best business win.

We'd like to see the dollar put on some muscle and stop getting sand kicked in its face, but only so that order is restored to the beach, not in order to reverse the situation that is going on right now and simply create a new bully on the beach.

The lesson for investors is to search for companies that are able to make money by adding value, and not to be led astray by chasing after investments that are primarily successful because of the swings in the relative value of currency.

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1 comment:

  1. I was just thinking along the same wavelength last night. I took a small position in a stronger dollar last week although currencies are not my thing.

    You pinpointed the real problem which is the silly rush to buy companies with positive currency exposure and sell those with currency exchange rate "headwinds."

    It's simple math to compute an actual growth rate so who really cares.

    I wish companies would just have a currency neutral policy which is to say the would have long-standing hedges in place to match revenues to expense levels by currency type so that margins and earnings are pretty constant even though the non-adjusted growth rate will move around.