International investing-- a year later

[Gone4Good]

1) Your expenses are directly denominated in dollars, but many of the inputs into the things you buy are not priced in dollars, so you will feel the pass-through pricing pain. If you need an example, look at almost any manufactured product - chances are, it's produced outside the US so your effective price will rise as the dollar's value declines. 2) Most international equity funds are at least somewhat hedged against FX changes, so you are partially immunized from currency swings.

1) Inflation is everywhere a monetary phenomenon. I am not a believer of cost-push inflation. Besides, the response to high inflation is tighter monetary policy and higher interest rates . . . which supports the dollar. The dollar did not collapse in the 70's, for example. Therefore FX holdings are a dirty hedge against inflation, at best. It's possible to have high domestic inflation, slower global growth, and a strong dollar . . . which would be really, really, bad for a retiree with a predominately FX denominated portfolio.

2) Targeting equity funds that hedge FX exposure would be a good way to benefit from global diversification without over exposing oneself to FX risk. But such a strategy would preclude index funds and I'd be surprised to find many active managers hedging FX now - most will likely wait until 18 months after the USD hits a new high to jump on the strong dollar, FX hedging is good, bandwagon.

 

[Gone4Good]

Economic theory suggests that in the long term, exchange rate fluctuations are a wash.

Mostly, but not always, of course. But even so, higher volatility hurts you when you are constantly withdrawing from a portfolio as a retiree - the reverse of the dollar cost averaging benefit.

 

[kcowan]

Aren't 3,000 of Apples 17,000 employees located in the new R&D research facility in India which opened last year? And I believe you are incorrect in your assessment of the trade defict calculation. If you have a company in another country perform as a manufacturer for your design you must have a reasonable royalty rate to be charging for the manufacture, typically a company will have a myriad of corporations under one umbrella and sales between intercompanies must meet guidlines so as not to totally evade taxes in any country nor allow a company to pick where it makes the income. Of course companies spend millions working around that but.....

It is amazing to watch Apple reclaim the entertainment device market from the SEA manufacturers. I think most US manufacturers just wrote the segment off 20 years ago. And all the revenues and profits from iTunes stay right here. And without any help from the government.

If they reach $130, we will have gained the same ROI on their shares as we did from Hitachi a few years ago...10x!

 

[wabmester]

No. According to balance of payment data returns on US foreign direct investment exceed returns paid to foreign investors. We borrow money from overseas investors at a very low rate (typically treasury rates) and reinvest overseas in foreign businesses with much higher returns. The US has benefited from a very profitable carry trade for many, many, years.

That's an interesting spin on our current account deficit. Last I heard, we were borrowing all of that foreign capital to pay off our huge federal debt. Foreign central banks are loaning us money to pay for stuff we already bought, like the Iraq war.

Aren't Japanese investors (and their central bank) the ones who are making the most from the carry trade?

 

[Gone4Good]

That's an interesting spin on our current account deficit. Last I heard, we were borrowing all of that foreign capital to pay off our huge federal debt. Foreign central banks are loaning us money to pay for stuff we already bought, like the Iraq war.

It's not spin. If you look at the Foreign Direct Investment accounts and the Income & Payments on those accounts you will see the US earns a much higher rate of return on its FDI than foreign investors do in the US. That's in large part because entities like the Chinese government buy treasury bonds to peg their currency. But also because individuals around the world hold USDs instead of local currencies that may be at great risk from both economic and political instability. Those USD holdings are essentially interest free loans to the US.

 

[wabmester]

It's not spin. If you look at the Foreign Direct Investment accounts and the Income & Payments on those accounts you will see the US earns a much higher rate of return on its FDI than foreign investors do in the US. That's in large part because entities like the Chinese government buy treasury bonds to peg their currency. But also because individuals around the world hold USDs instead of local currencies that may be at great risk from both economic and political instability. Those USD holdings are essentially interest free loans to the US.

That may be true, but that's largely a function of the nature of the investors. Our central bank doesn't invest abroad. Japan, China, and others do need to prop up the dollar. It'd be interesting to see what happened if they stopped. Or if they started buying US companies instead of US treasury bonds with the cash we've been sending them....

 

[Nords]

Or if they started buying US companies instead of US treasury bonds with the cash we've been sending them....

I remember the last time the Japanese went on an American buying spree.

They paid top dollar in the 1980s and we bought most of it back in the 1990s at foreclosure & bankruptcy auctions.

 

[wabmester]

I remember the last time the Japanese went on an American buying spree.

They paid top dollar in the 1980s and we bought most of it back in the 1990s at foreclosure & bankruptcy auctions.

They paid top dollar, but they were buying with virtually free dollars that came from their domestic bubble. I'm sure it all came out in the wash.

I assume Lenovo is doing better with their purchase of the IBM PC division. And Singapore is seen as model from the equity returns on their central bank investments.

Edit: Hmm, maybe the IBM purchase wasn't a great example: link.

The IBM purchase might not have been worth the money

But, you get the idea. The investment returns are partly a function of central bank strategy, and partly resistrictions on what the US will allow them to buy. They wanted to buy profitable UNOCAL, for example, but we wouldn't let them.