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.