Here’s What to Do If Trump Kills The Dollar

Dear Sure Money Investor,

The world awoke to a new political and economic regime on January 20 as Donald J. Trump took the reins of power from Barack Obama and announced a populist, America-first agenda.  Mr. Trump enters the White House with a 37% approval rating while Mr. Obama never saw lower than a 38% approval rating (and entered with a 70% rating).  Perhaps this is why investors are taking a measured view of their new president after pushing stocks sharply higher in the weeks following the election. The US stock market plateaued last week, with the Dow Jones Industrial Average falling 58.48 points or 0.3% to close short of the 20,000 mark at 19,827.25.  The S&P 500 dropped 0.1% to 2,271.31 and the Nasdaq Composite Index lost 0.2% to end the week at 5,555.33.  Ten year Treasury yields rose slightly to 2.47%.  The initial repricing of financial assets triggered by Mr. Trump’s election may be over.

The most significant market move occurred in the US dollar last week, which dropped sharply after then President-elect Trump told The Wall Street Journal that the dollar is “too strong.”  After these comments, the US Dollar Index (DXY) fell sharply to 100.81, giving up a significant portion of its post-election gains.

This first assault on the dollar might be just the beginning.

In the coming months, President Trump could very well reverse the dollar’s rally completely – and he may do it on purpose.

If that happens, here’s what to do.

Trump’s Iconoclastic Approach Could Stimulate U.S. Growth

Mr. Trump’s denigration of the dollar forces us to question whether the dollar will continue to rally as many assumed.  On a fundamental basis, the case for a strong dollar is compelling.  Europe and Japan desperately need to cheapen their currencies in order to better compete in the global economy.  And Brexit significantly weakened the British pound, which traded below $1.20 last week before rallying back to end the week at $1.2375.  But fundamentals can be – excuse the term – trumped by policies designed to weaken the dollar to stimulate trade and help American workers.

A strong dollar is inconsistent with Mr. Trump’s desire to stimulate U.S. growth and help American workers, so it is entirely possible that Mr. Trump will not only keep talking the dollar down but take substantive policy steps to weaken it.  There is no reason to think that his comment to the Journal will be his last on the currency that Treasury Secretary John Connally told the world in 1971 was “our currency, but your problem.”

A strong dollar is a meaningful headwind for corporate earnings since US companies earn a significant amount of money overseas.  If the dollar doesn’t strengthen much further, this could provide an unexpected boost to corporate earnings and benefit stock prices.  A weaker dollar also relieves pressure on emerging market borrowers who went on a dollar borrowing spree after the financial crisis.

While it is too soon to be sure, Mr. Trump may have thrown a wrench into many of the strong dollar trades put on the books after the election.  Mr. Trump already broke the mold for American politicians and it appears that he may do so by again being the first president to openly trash his own currency.

If Mr. Trump does manage to reverse the dollar rally, one way to profit would be to buy a big foreign exporter that will benefit from a weaker dollar. The top ten major U.S. export companies, ranked by asset value, are:

  • Exxon Mobil ($336.8 billion)
  • Apple ($293.3 billion)
  • Chevron ($266.1 billion)
  • Ford Motor Company ($224.9 billion)
  • General Motors ($194.5 billion)
  • Pfizer ($167.5 billion)
  • Johnson & Johnson ($133.4 billion)
  • Procter & Gamble ($129.1 billion)
  • Cisco Systems ($112.6 billion)
  • Intel ($105.5 billion)

Of these, Johnson & Johnson (NYSE: JNJ) would be my pick. I’ll keep you posted as we move further into the untamed wilds of the Trump administration.

Trump’s Designs on The Dollar Are Just The Beginning

There are reports that Mr. Trump plans other radical changes in economic policy.  If true, this should not surprise anyone.  Mr. Trump campaigned on a platform of upsetting the status quo, and nowhere is the status quo more embedded than the federal budget, which is a roadmap of political corruption and pork barrel spending.

Last week, The Hill reported that Mr. Trump plans to propose a federal budget that cuts $10.5 trillion of spending over the next 10 years.  Savings will come from sharp cuts in the departments of Commerce, Energy, Transportation, Justice and State.  Plans are also being drawn up to privatize The Corporation for Public Broadcasting and to eliminate the National Endowment for the Arts and National Endowment for the Humanities.  This plan will undoubtedly unleash a firestorm of criticism from all of the parties whose ox would be gored by the cuts, but the U.S. government wastes unspeakable amounts of money every year and needs to be cut drastically.  Some of these cuts no doubt will be used to rebuild the depleted U.S. military, but unless the country gets spending under control, it is going to borrow itself into oblivion.  Hopefully the private sector can assume responsibility for funding cultural activities and other important that suffer budget cuts, but it appears that a businessman’s sharp pencil is coming to the federal budget (something that is long overdue).

There is now between $50 and $60 trillion of public and private sector debt in the United States.  That means that every 100 basis point (1%) increase in interest rates raises interest expense by $500-600 billion.  When Mr. Trump said during the campaign that if rates were to increase to 5 or 6% (he was speaking of the Treasury curve I believe), “we wouldn’t have a country,” he knew exactly what he was talking about.  There is no way interest rates can rise much higher from current levels without creating a severe recession or a financial crisis. This is why I don’t think we will see the 10-year Treasury yield reach more than 3.25% before it slows growth and hits a wall.  Rising rates pose a direct threat to the economic future of the United States.  Cutting spending is essential to restoring budget discipline, particularly in entitlement programs.

But cutting $1 trillion a year from government spending is not a free lunch.  It will reduce economic growth and cost jobs unless it is countered with pro-growth tax cuts and regulatory cuts.  Spending cuts must be part of a comprehensive and radical program to reset the federal budget and tax regime, but they are likely to give markets the jitters.  We didn’t hear much about cutting the budget during the election from either presidential candidate so this is not something for which markets are prepared.  Investor should expect higher market volatility when these cuts are announced.  Budget cuts will impact many individual companies differently, another reason that Mr. Trump’s presidency offers active managers a chance to redeem themselves after eight years of passive investing ascendancy.  We are entering a stock picker’s market.

I’ve discussed some of the sectors that will likely be impacted by Trump’s policy changes here. We’ll be looking in-depth at specific companies within each of these sectors as time goes on, but to start with, you should consider a long position or two in the defense industry – for instance, Raytheon Company (NYSE: RTN).

The first 100 days of the Trump presidency are going to set a new course for the American economy.  Markets dislike change.  Despite the fact that stocks celebrated Mr. Trump’s victory, they are unlikely to keep rising in a straight line as he rewrites the rules of government after rewriting the rules of politics.



24 Responses to “Here’s What to Do If Trump Kills The Dollar”

  1. Making America great and free of the enslavers, requires a strong dollar. Michael, sorry, in this case I hope your change that failed, you might understand why.

    Now since that is out of the way. Anyone that thinks a bunch of billionaires in DC want to trash the dollar is, well. Strong dollar = big gains!

  2. Doing a quick Google search leaves a pretty large hole in this Trillion dollar a year government budget cut narrative. It seems simple math escapes the masses. These departments entire budgets only amount to about 200 billion dollars a year. So how do you get to a trillion? The entire budget of the US is call it 4 Trillion. So somehow Trump is going to lop of 25% of the federal budget without creating anarchy? There needs to be a serious vetting of the numbers here, cause they don’t look to add up. But why would he start telling the truth now???

  3. You are spot on. Federal spending has to be cut dramatically. We could certainly use a whole lot less National Patk employees standing around. Also cut TSA by 99% would be good. They don’t do anything except make travel unpleasant for all us law abiding citizens. Cutting BLM cops and staff by 50% would be a good start. Then move to the EPA. Did you know EPA has their own police force? Yes, guns, badges,flack vests and all. Forest Service actually does have a purpose but could use a lot of paper and red tape reductions. I do disagree on one point. I don’t think cutting federal workers will cause cost us any more. It would actually be cheaper to pay most of them to stay home.

  4. I expect Trump to use public-private partnerships to create the promised US Infrastructure updates; that will provide a safe and reasonable return on private capital (e.g. toll roads) that will create a long of jobs. Investing in the potential US corporate partners now is likely a good move.

  5. Willem van der Geest

    Dear Michael – another excellent piece. Just one caution on identifying US companies that may see their exports increase on account of a tapering or even decline of the dollar vis-a-vis other major currencies, including Euro, Pound Sterling, Yen and Yuan (RMB). The first three currencies are structurally weak, given the poor state of their economies, compounded by massive stimulus for the Euro and the Japanese Yen. Therefore while Presidential talking the down of the dollar seems to have happened this week, we should not overestimate the scope for this. Second, in quite a few emerging markets the depreciation of their currencies is likely to continue, even relative to a weak dollar – look at South Africa or Brazil. Third, the budget policies would inspire confidence and keep Treasury yields within check – say at 3.25 % as you suggest – but the demand for the dollar at that kind of a rate would remain pretty strong, keeping an upward pressure on the dollar.
    As for winners in the export markets with a steady dollar, those companies exporting to the faster growing markets (East Asia, South East Asia, maybe parts of Africa and Latin America) are likely to do best. I think Procter and Gamble and Cisco would also be good picks.

    Best, Willem

  6. SS has it right. The budget numbers are pure hogwash. You wouldn’t save anywhere close to a trillion a year if you eliminated all those departments and virtually every other non-defense, entitlement, or interest expense line item.

    Jimbo is also correct. Depleted military? Are you kidding? That’s just red meat campaign rhetoric. Did you mean to say “bloated military budget” needed to sustain the endless and senseless foreign wars that Bush and Obama/Hillary Clinton got us into? The military needs more money like a moose needs a hatrack. Defending THIS country could be done very competently at a fraction of the current price.

    I say CUT EVERYTHING and cripple the beast that is the Federal government. THAT’S how you make American great again.

  7. I seem to remember Donald Trump stating that the best action to lower the national debt was to do what Trump has done many times in his business career.

  8. From what I’ve have seen we are starting this trip through time in a heavy storm with water coming into the boat. Sense oboma too charge and took 18 months to get oboma care passed by buying the last two votes. America has steadily dropped in power. There was no try to improve the American economy. America was put on hold wile oboma played golf. Now Trump is working to bring America above the watwer the socialist are bashing him. Will He along with the True Americans force our nation to prosper or sink into third status?

  9. […] The US Dollar Index (DXY) ended January at 99.55, down sharply from its post-election high of 103.82.  It lost half of its post-election gains after President Trump told The Wall Street Journal a couple of weeks ago that the dollar was “too strong,” raising questions whether the new administration will try to weaken the currency in order to aid American exports.  Clearly a strong dollar, like higher interest rates, creates a headwind to the higher growth that the Trump administration promises.  Unlike previous presidents, Mr. Trump has no compunction about trashing his own currency, something that is going to take markets some getting used to.  While I continue to believe that investors should maintain short Euro and Yen positions against the US Dollar (for instance, buying puts on the iShares MSCI Europe Financials ETF [NASDAQ:EUFN]), I would proceed cautiously because Mr. Trump could tweet a monkey wrench into this trade at any time.  (If he does indeed succeed in weakening the dollar, my stock recommendations are here.) […]

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