March 13, 2015

Ease and Devalue

At the starting gate of the industrial revolution giants of capitalism were making farming machines powered by steam engines that could do the work of 100 people or stylish cars affordable enough for the newly named middle class consumer, and let’s not forget the telegraph, telephone, sewing machines, light bulbs, airplanes, cameras, radios and the list goes on. Each of these inventions  credited to an American went on to become products run by companies named after their inventors such as Bell, Singer, Goodyear, Eastman and Westinghouse among a few. Within 50 years the world’s aforementioned consumer bought up those products and in the course of financial expansion the stock market became an important tool for curious investors and speculators of more and lesser means to get involved.

So what’s my point? The stock market and the familiar Dow Jones and S&P Averages became the benchmarks for investors eager for information that gave them insight into the fortunes of the underlying companies. This was especially important as the growth in the industrial countries brought focus onto their local economies, their interest rates, and most of all, their currencies. The currencies became especially important because as American companies competed with Europe they realized the power of a lower local currency when buying their parts, paying their workers and generating larger profits. Simply put, the rallying cry of politicians became “ease and devalue” referring to the need to keep interest rates low and currency cheap. In fact it’s probably obvious to you in that is exactly the strategy that helped lift us out of financial crisis. But not anymore.

As the competition for information grew within the financial services industry investors leaped on every positive prediction to defend an investment. Problem was, and still is, when the analysts at those financial services companies expected companies to perform well and they didn’t, the mad rush to sell was usually met with chaos. Not that this was a bad thing however, an industry built on transactions welcomed selling with the same zeal as they did buying. And recently, as the US dollar has been rising in value versus the European Euro analysts are rushing to downgrade companies whose outlook depends on a weaker dollar and the result being sharp declines in the stock’s value and lots of transactions for the financial services industry.

This week the sharp price declines in semiconductor company Intel (INTL) and software company Microsoft (MSFT) stocks underscore how pointless it is to follow this type of analyst interpretation. First of all companies have struggled with fluctuations in currency value for over a century and many have failed in their strategies. However over the last fifty years multinational firms, which today include the likes of everyone from Boeing (BA) to Apple (AAPL) and Google (GOOGL) the strategy has been adjusted with companies in the US merging with companies in countries with higher currencies thereby using each domicile as a benefit to margin (helped by a weaker currency), free cash (helped by meeting the needs of foreign consumers) and flexibility (managing strategy geographically). These strategies, while not every politicians cup of tea, I believe more than ever serves to invalidate the importance of currency going forward for one primary reason, and that is technology.

All of the business models that use technology to drive product ecosystems are driving growth in sectors beyond traditional industrial exporters such as Health Care, Finance and even Energy, as companies not only expand their corporate bases abroad, but other countries including our own have  looked to build out their traditional export businesses domestically. Likewise we are representative of countries such as China, and India, who combined have grown their respective middle class consumers to an army over a billion strong.  And with investors able to find these companies throughout the world to hedge against the forces of currency fluctuation portfolio performance can remain stable even as overall volatility of the world’s markets is high.

And in the meantime enjoy the benefit of cheaper foreign products in this country as a change of pace and to further stimulate the consumer it’s worth noting that a stronger currency, buys more stuff when the currency is cheaper elsewhere, like Europe. And as an investor give up on trying to make sense of market advice, and rate the value of consistent strategy, that’s what I do.