Do you hedge against the possible devaluing of the US dollar?

[big-papa]

No I don't, at least not specifically as a currency hedge. But I deliberately have some international holdings to help diversify my portfolio overall. Most hedging I've looked at either involves owning assets I don't fundamentally believe in or which I believe will ultimately result in reduced returns in non-catastrophic scenarios or both.

 

[Koolau]

One of the supposed advantages of owning PMs is their ability to keep their value in spite of currency fluctuations. I'm not certain PMs have completely born out this theory over the past history of the dollar. I haven't checked. Still, if enough folks believe the theory, it just could be true when the time comes.

Besides foreign stocks/bonds, I can't think of much beyond PMs to hedge the dollar. I'd love to hear of something else as my main 'fear' since FIRE is dollar inflation. Even though I don't want to buy anything, I could see run-away inflation as a FIRE killer. YMMV

 

[samm]

.. if the dollar collapses and/or loses its reserve currency status. Does anyone else worry about this? If so, what are you doing about it?

Yes, I worry a little. No, I do not hedge.

The Federal reserve intends to increase trend inflation to at least 2% which will cut purchasing power by 50% over 30 years (longer than I have left).

The $USD was 62% of global currency reserves in Q1 2020. The $USD cannot lose its status unless another currency gains it.

The Euro is 20% of global reserves, but has more problems than the USA, especially its long-term demographic collapse.

The Chinese RMB is only 2% of global reserves. The RMB will NOT replace the $USD in next 20-30 years because the currency is not freely convertible and because the regime is not trusted by international banks (Marxism is not too friendly to capitalism .

Slowing US GDP growth is DEFLATIONARY not INFLATIONARY. The economic effects of Covid19 (and Covid 2020, and eventually Covid 2021) are deflationary.

The $USD moves in rising/falling cycles, so a near term decline must be viewed in the context of the 1973-2020 period.

 

[Out-to-Lunch]

But every time Congress passes another stimulus/checks-to-the-American people/unemployment enhancement package, I see a further bloating of our national debt.....

You forgot to mention "corporate tax cut."

 

[samm]

Here is the official reserves data & chart from the IMF.

Peter Schiff is ALWAYS on the news saying the $USD will collapse. He is the go to guy for alarmism, which the media wants.

He has been saying this for 20-30 years with NO EVIDENCE at all.

 

[samm]

...So will it happen? ... The Euro is a mess because southern Europe is a mess. The ruble is off the table as a candidate because Russia has cemented its place as an enemy of the West. No one trusts China, ... and so on. The dollar is thus the least bad choice. The most probable outcome is a basket of currencies like the IMF's SDRs: https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR ...

+1

The IMF SDR can only replace the $USD IF the USA will agree to that...which it will not. Even then, the $USD is by far the largest currency in the 5 currency SDR index (called "basket").

The 5 SDR currencies are: USD, Euro, Yen, British pounds,, Chinese Renminbi.

https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR

 

[OldShooter]

Classical risk management looks at three dimensions of a risk: impact, probability, and cost to mitigate. If impact is high and cost to mitigate is low, then probability (most of the discussion here) really doesn't matter much.

Our equity portfolio (post #5) in VTWAX was chosen because we believe that sector bets are unwise, and a strong home country bias is essentially a sector bet. The fact that our portfolio also hedges us against a decline in the dollar is mitigation that costs us nothing additional.

Our fixed income portfolio in TIPS is a hedge against any kind of US inflation, not just inflation caused by a possible hit on the dollar. Our cost to mitigate all inflation risk is the difference between what we might earn on something other than TIPS and what we actually earn on our TIPS. As I have said here before, I view that difference just like I view our home fire insurance premium, with is mitigating the risk of a house fire. Money well spent. YMMV.

So I think there is a strong possibility of a dollar decline in the next decade or two, but am uninterested in arguing about its actual probability.

 

[OldShooter]

+1

The IMF SDR can only replace the $USD IF the USA will agree to that...which it will not. Even then, the $USD is by far the largest currency in the 5 currency SDR index (called "basket").

The 5 SDR currencies are: USD, Euro, Yen, British pounds,, Chinese Renminbi.

https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR

To be clear, I used the SDR as an example of a basket, not as a harbinger. My guess (probability unknown) is that it will be OPEC that begins the departure by establishing a basket oil price.

 

[samm]

My guess (probability unknown) is that it will be OPEC that begins the departure by establishing a basket oil price.

Oil is priced in $USD per US-Saudi agreement. Saudi Riyal is fixed to $USD.

It is total nonsense to think that Saudis would change this relationship and lose the US defense arrangement that is part of the deal.

 

[OldShooter]

Oil is priced in $USD per US-Saudi agreement. Saudi Riyal is fixed to $USD.

It is total nonsense to think that Saudis would change this relationship and lose the US defense arrangement that is part of the deal.

As you like. The concept has been discussed for years. Neither you nor I know the probability of it happening. But as I said above, I don't care.

 

[TechLead]

Lot of things changed in last 4 years which motivates ton of countries to move away from dollar. Its future as a reserved currency is not as solid as it once was.

Nothing lasts forever.

https://framingbitcoin.com/wp-content/uploads/2020/04/Global-reserve-currency-history-500-years.jpg

 

[samm]

Lot of things changed in last 4 years which motivates ton of countries to move away from dollar. Its future as a reserved currency is not as solid as it once was.

Can you elaborate on your many assertions?

I am interested to learn more about this topic from the "FX experts" here.

 

[LitGal]

You forgot to mention "corporate tax cut."

Yup. That, too!!

 

[copyright1997reloaded]

Yes.
Mitigation Strategies
1. Have some PM's
2. Have some inflation-adjusted instruments (e.g. TIPS)
3. Have equities which get a significant portion of their revenue/income outside of USA. If $ declines, they become more competitive in those foreign lands and their profits represent greater $.
4. Have some international funds/holdings

p.s. if we stop being the reserve currency, all bets are off and we might see much higher inflation and as they say in the old country "The chickens came home to roost". Doing the above will help somewhat but it will still be a bad situation.

 

[TechLead]

Can you elaborate on your many assertions?

I am interested to learn more about this topic from the "FX experts" here.

No I can't. Moderators would delete it.

 

[TechLead]

Here is the official reserves data & chart from the IMF.

Peter Schiff is ALWAYS on the news saying the $USD will collapse. He is the go to guy for alarmism, which the media wants.

He has been saying this for 20-30 years with NO EVIDENCE at all.

Besides Peter Schiff there are *lot* of other people who are saying it lately.
That include Goldman Sachs and Ray Dalio (Founder of largest US Hedge Fund).

Dollar is attacked from all sides. By our policies to weaponize it and also by the fact that Fed has
no tools left to deal with our economy. The only tool it now has is *Printer*. You can call it Quantitative
Easing. (They have no other choice)

It also attacked by things like Bitcoin. Bitcoins are limited to 21 Million. In few days we will print another
3-4 Trillion Dollars. What would you rather have? Bitcoin that nobody can devalue or USD?

 

[OldShooter]

... I am interested to learn more about this topic from the "FX experts" here.

Well, I am no expert but in @TechLead's absence I can give you a few pointers to guide your own research:

Compared to Forex, the US stock market is a calm and predictable place.

Start with spot rates: Currencies are basically commodities in this view. If a lot of Euro-holders want to buy dollar-denominated products or assets, the value of the dollar will rise. Lately the spot dollar is down like 9% from March; people with dollars are bidding against each other to buy other currencies, driving the spot dollar rate down. IIRRC the Euro was $1.12 when we were traveling in central Europe last year. Now a Euro costs $1.18. That is a big move.

Next: PPP. Purchasing power parity. This is a different way of valuing currencies based on what they can buy. For example if I can buy a bushel of a grain for $5 in the US and that same bushel costs 10 rubles in Russia, then we would say that a dollar is worth two rubles. PPP rates can vary quite a bit from spot rates.

Next: The Big Mac Index. 35 years ago this was a tongue-in-cheek PPP exercise by The Economist magazine but is now taken somewhat seriously. Instead of looking at bushels of grain, they look at the price of a Big Mac in 30+ countries and calculate a PPP on that basis. Example If a Big Mac costs $5 in the US and 50 ringgit in Malaysia, then a ringitt is worth ten cents. (These are totally bogus numbers). There is a great discussion of "burgernomics" here: https://www.economist.com/news/2020/07/15/the-big-mac-index

But forex is not just about buying and selling. Politics has a huge impact on values. Some countries peg their currencies to the dollar or the Euro and others actually use someone else's currency as their own, like Ecuador. Poor countries' debts are often based on dollars because buyers do not trust the debtor country's currency. Currency values affect trade, too, so often we will see "currency manipulator" governments trying to drive their currency values down in order to boost exports by making their exports cheaper. China has been the subject of heated criticism as a manipulator, though less so in recent years.

So, you can go off and start studying this stuff. Maybe take a year or two, figure it out, and come back to explain it to us.

 

[Kathe555]

I keep a little in gold. Always have. But its not a huge part of my portfolio. I figure I can always melt it down someday and turn it into a bunch of earings.

 

[Scubamax]

Growing up with inflation in the 1970's and early 1980's I have been conditioned to expect inflation in my financial planning, and every year without it is a bonus of sorts. My best hedge currently is some rental land (farm) and REIT stocks, and an equity heavy portfolio, which probably needs some more international exposure. Commodity driven stocks are also a good bet against this risk.

 

[OldShooter]

Interesting Reuters article today on this subject: https://www.reuters.com/article/us-...atus-as-worlds-reserve-currency-idUSKCN2511ID Bottom line, of course, remains: "Nobody knows."

Late to the party I know, but I just saw this:

... all the stuff produced here (food) would remain the same price. ...

Not true. Most food is priced and traded on international markets. Soybeans and pork are popular examples but corn/maize and beef are there too. So the world price in dollars would definitely rise. Sugar may be an exception, since the sugar lobby already has us paying well over the world price.

 

[Sunset]

Interesting Reuters article today on this subject: https://www.reuters.com/article/us-...atus-as-worlds-reserve-currency-idUSKCN2511ID Bottom line, of course, remains: "Nobody knows."

Late to the party I know, but I just saw this:

Not true. Most food is priced and traded on international markets. Soybeans and pork are popular examples but corn/maize and beef are there too. So the world price in dollars would definitely rise. Sugar may be an exception, since the sugar lobby already has us paying well over the world price.

Certainly gold and oil are world priced, but food produced here maybe not.
I think it is subject to export controls which would strongly limit how much leaves the country, forcing food prices to remain pretty normal.
If this was not true, since we have a high dollar, why is not all food imported since it's 25 -80 percent cheaper from other countries ?

This is how Canada is, with a 25-30 percent drop in the CDN to USD, over the past 8-9 yrs, the price of food while always expensive didn't go up 30% for what they produce, as their production costs remained constant.

Maybe I'm totally wrong, and need to hoard food

 

[OldShooter]

Agricultural products are far and away the most distorted international markets due to subsidies, export controls, tariffs, etc. but underneath all that there are still world markets: https://fred.stlouisfed.org/categories/32217

AFIK the US has no export controls on agricultural products. USDA promotes exports, actually. https://www.usda.gov/topics/trade/exporting-goods Attempting to add export controls in order to reduce prices in the US would be a political circus, pitting the farmers against consumers. Considering that senators from agricultural areas have been very successful in subsidizing agriclulture it doesn't seem likely to me that they would abandon that in favor of forcing prices down. AFIK our only export controls are on weapons and nuclear technology. https://2009-2017.state.gov/strateg...7.state.gov/strategictrade/overview/index.htm

Re actual exporting/importing we produce more food than we can consume; a quarter of production is exported: https://www.fb.org/newsroom/fast-facts. Another reason that export controls on food won't work. We need that income.

If the dollar declines, food prices will go up. How far, how fast, is beyond anyone's crystal ball.

 

[Koolau]

Agricultural products are far and away the most distorted international markets due to subsidies, export controls, tariffs, etc. but underneath all that there are still world markets: https://fred.stlouisfed.org/categories/32217

Agreed. A prime example is converting corn to ethanol. Making no judgements (here) on whether that makes sense. Just sayin' that it distorts the markets. I'm originally from "corn country" and have heard corn prices on the radio since I could understand English (well until I moved away.)

I think the whole market system is so convoluted that it would be difficult to hedge all the possible bets. My fear is not a significant dollar devaluing, but an outright collapse - that is, the dollar no longer remaining the world's reserve currency. That would be devastating to the country. No idea what that would look like but it wouldn't be pretty. YMMV

 

[OldShooter]

... My fear is not a significant dollar devaluing, but an outright collapse - that is, the dollar no longer remaining the world's reserve currency. That would be devastating to the country. No idea what that would look like but it wouldn't be pretty. YMMV

Definitely not pretty. The mitigating factor (to an unknown degree) is the foreign direct investment and the foreign ownership of US debt both public and private. All those investors have a huge stake in making the downhill ride as short and gentle as possible.

 

[MichaelB]

I think the whole market system is so convoluted that it would be difficult to hedge all the possible bets. My fear is not a significant dollar devaluing, but an outright collapse - that is, the dollar no longer remaining the world's reserve currency. That would be devastating to the country. No idea what that would look like but it wouldn't be pretty. YMMV

This is a very low probability scenario. Only the Euro area, Japan and China have the scale to be a reserve currency. Japan and the EU most definitely do not want that. China does not meet the requirements and is not likely to change over the next decades. The IMF created Special Drawing Rights, which is a basket of currencies, but a half century later there is still little interest.

The “reserve currency” does not mean the biggest economy or money supply. The reserve currency means the sponsor is willing to provide liquidity to finance economic activity beyond its borders, allow a freely floating currency, and maintain completely open capital markets with free access to all. No other country is willing to do that.

This makes the US Central Bank the “go to guys” in times of stress, which is why the US$ strengthens whenever there is economic or financial crisis. It also means countries everywhere can export their excess savings and invest them in US capital markets, which pretty much ensures the US will incur deficits.

Even significant devaluation (vs major currencies) is unlikely. For the US$ to devalue another currency needs to gain an equal amount, and none of the other major currencies have allowed that to happen.

A more likely scenario is all the major currencies lose value as governments continue to spend and central banks monetize the debt. This would mean global inflation, and debt holders would suffer.