Monday, August 11, 2008

Strong Dollar, Strong Equities: Chicken vs. Egg

I like Bespoke Investment Group. They do some original thinking and helped inspire me to create my own virtual investment firm. A good example is this description of how a strong dollar is associated with a bull market in U.S. equities.

Nice job guys, but let's take it a step further. What's the reason for the apparent correlation? Does it mean that investors who hold dollars with more buying power are more likely to demand equities, thus pushing up the value of the stock market? Not if they're foreign investors, because it would take more of a weaker currency to buy a dollar's worth of a U.S. equity share. And not necessarily so for a U.S. investor either, since their stronger dollars would make investments denominated in foreign currencies look more attractive (think about it, just as imported cars and bananas would be cheaper).

Maybe it has something to do with U.S.-based multinationals being able to lower their costs by seeking foreign sources for inputs like raw materials and labor. Costs go down, earnings and share prices go up. Who knows for sure, but the guys at Bespoke are becoming notorious for provoking me to think like this. Thanks, guys; maybe I'll call you the Notorious B.I.G. (meant in jest, of course). :-)