International has been a real disappointment

[Totoro]

Quote:

Originally Posted by Gone4Good And if you take a longer view, the secular trend for the dollar is lower.

It should be if monetary policies of the Fed and Eurozone stay on course. If I recall correctly the Fed wants to average between 2% and 3% inflation while the ECB wants to be "close to, but below 2%".

Assuming both stick to that and actually deliver, the dollar will have to drop, no?

All things considered equal (which they aren't )

[Lsbcal]

Quote:

Originally Posted by Gone4Good And if you take a longer view, the secular trend for the dollar is lower. The most recent dollar rally isn't nearly as strong as the one in the early 80's or late 90's. And each successive low after those rallies bottomed out lower than the one before. With the U.S. continuing to run structural trade deficits, there's good reason to think that long-term downward trend for the Dollar will continue as well.

Multiple choice test here, pick one :
1) There is a clear trend line down if we do a linear regression fit.
2) The US dollar is just a bit under where it was in the 1970's. Just returning to it's natural place in the universe of currencies.
3) This past data in this chart doesn't tell us where we are going in the future.
4) None of the above.

Regarding international, FWIW I tend to go with a momentum approach so have some in small cap international and none in international large cap.

[Gone4Good]

Quote:

Originally Posted by Totoro It should be if monetary policies of the Fed and Eurozone stay on course. If I recall correctly the Fed wants to average between 2% and 3% inflation while the ECB wants to be "close to, but below 2%".

The Fed has an explicit target of 2% while the ECB's language is, as you say, for inflation below, but close to, 2%. I'd say they're essentially the same.

The big difference right now is that the ECB is massively undershooting it's inflation target whereas the Fed looks like it could finally get inflation of 2%. That means higher rates in the U.S. and lower rates in Euroland. And that should be good for the $ vs. the Euro.

Of course all of this is pretty well factored in to existing exchange rates, which is why we just saw the dollar fall on Yellen's comments suggesting the Fed won't raise rates in April.

[Gone4Good]

Quote:

Originally Posted by Lsbcal Multiple choice test here, pick one : 1) There is a clear trend line down if we do a linear regression fit. 2) The US dollar is just a bit under where it was in the 1970's. Just returning to it's natural place in the universe of currencies. 3) This past data in this chart doesn't tell us where we are going in the future. 4) None of the above.

I'll choose #1, and here's why:

Economic theory says that when you run a trade deficit one of two things happens. Either your currency falls relative to your trading partners. Or your trading partners stabilize the exchange rate by buying your currency with the cash they've earned through trade.

In practice, both of those things have happened. Trading partners like China have bought massive amounts of USD reserves to prevent their currency from rising. But they still haven't bought enough to completely stabilize the exchange rate. And other trading partners like Europe don't do this at all. So, on balance, you expect out currency to fall.

Now the U.S. has run a trade deficit pretty much consistently since the Bretton Wood's international monetary system fell apart in the early 70's. Which pretty much explains the long-term downward trend since then.

And because the U.S. continues to run trade deficits, we can expect the dollar to continue a downward trend until something changes.

[MichaelB]

Quote:

Originally Posted by Lsbcal Multiple choice test here, pick one : 1) There is a clear trend line down if we do a linear regression fit. 2) The US dollar is just a bit under where it was in the 1970's. Just returning to it's natural place in the universe of currencies. 3) This past data in this chart doesn't tell us where we are going in the future. 4) None of the above.

I choose #5. Economists and their theories can help explain (sort-of) why exchange rates (of strong currencies) are where they are, but aren't good at all for predicting where they will be at any time in the future.

[Gone4Good]

Quote:

Originally Posted by MichaelB I choose #5. Economists and their theories can help explain (sort-of) why exchange rates (of strong currencies) are where they are, but aren't good at all for predicting where they will be at any time in the future.

Agree. That USD chart covers a multi-generational time span. I wouldn't use anything I said to suggest that one can time currency trades.

But because I'm investing for a period as long as 60 years, I feel pretty good in saying that I have a better chance of seeing new U.S. dollar lows on that chart than seeing new highs.

[Senator]

Quote:

Originally Posted by Gone4Good I'll choose #1, and here's why: Economic theory says that when you run a trade deficit one of two things happens. Either your currency falls relative to your trading partners. Or your trading partners stabilize the exchange rate by buying your currency with the cash they've earned through trade. In practice, both of those things have happened. Trading partners like China have bought massive amounts of USD reserves to prevent their currency from rising. But they still haven't bought enough to completely stabilize the exchange rate. And other trading partners like Europe don't do this at all. So, on balance, you expect out currency to fall. Now the U.S. has run a trade deficit pretty much consistently since the Bretton Wood's international monetary system fell apart in the early 70's. Which pretty much explains the long-term downward trend since then. And because the U.S. continues to run trade deficits, we can expect the dollar to continue a downward trend until something changes.

With China's trade surplus, they receive USD. They either buy treasuries, gold, oil, or hotels. They do not need to buy anymore USD, they have a surplus. They do not need to buy USD to trade with us. All other countries take their surplus USD.

The Dollar will get stronger, if and when they raise rates. It really is that simple. Nowhere else can you get the stability and a return that the USD has.

[Lsbcal]

That multiple choice quiz is perhaps interesting to ponder. I'm sure Gone4Good and others have better answers then I would come up with.

Now the real issue I think is what does one do with international stock investing. The currency component is only one variable.

So my strategy is to split the internationals: 40% to large cap (LCI), 60% to small cap (SCI). That is after allocating equities to 60/40, US/International. It seems the best returns are from SCI. LCI is appears to be better correlated with large cap US then SCI is with small cap US. I think SCI is really only about 15% of international equity so I'm very much over weighting SCI.

[Gone4Good]

Quote:

Originally Posted by Senator With China's trade surplus, they receive USD. They either buy treasuries, gold, oil, or hotels. They do not need to buy anymore USD, they have a surplus. They do not need to buy USD to trade with us. All other countries take their surplus USD.

China has two general choices with the USD they receive in trade. They can keep those USD out of circulation by buying US assets (treasuries, US hotels, etc). Or they can release those dollars on the market by exchanging them for other non-us assets (gold, oil, internal investments, etc.)

If they choose the former, they neutralize the trade imbalance's impact on the exchange rate. If they do the later, they effectively sell dollars to buy other stuff and that selling puts downward pressure on the currency.

Quote:

Originally Posted by Senator The Dollar will get stronger, if and when they raise rates. It really is that simple. Nowhere else can you get the stability and a return that the USD has.

I'm talking more secular trends than cyclical.

But I wouldn't be too sure Fed increases will cause a USD rally from where we are. The market currently has a bunch of Fed rate hikes already priced in. The Euro hit a low of about 1.06 to the USD in November right before the first Fed increase. The Euro's up about 6.6% since then even with the Fed raising rates in December.

[NW-Bound]

Yes, I have quite a bit of international equities, even EM, and have been suffering their low return relative to the S&P. But they have been leading for the last 30 days. Will see how long this trend last. I have been patient for the last 2 years, and am not giving up now.

Quote:

Originally Posted by Ed_The_Gypsy .... John Templeton and John Greaney have both opined that there is no reason to invest outside the USA. Maybe they are right...

I thought that the late Templeton was a pioneer in international investing, and he founded several globally diversified MFs.

[redduck]

Quote:

Originally Posted by Ed_The_Gypsy ...John Templeton and John Greaney have both opined that there is no reason to invest outside the USA. Maybe they are right.

Quote:

Originally Posted by NW-Bound I thought that the late Templeton was a pioneer in international investing, and he founded several globally diversified MFs.

I think Ed may be thinking of a different John Templeton (e.g. Jack Bogle?).

[gcgang]

I don't believe John Templeton ever said that. He would've said, why would you confine yourself to one market when you can buy similar companies much cheaper in another country. It's just common sense.

[Animorph]

Vanguard's Gold-Rated LifeStrategy Funds Get More Global

"Over the course of 2015, Vanguard increased its international exposure across the series. Non-US exposure now makes up 40% of the equity sleeve and 30% of the fixed-income sleeve in each of the funds. The allocation brings the funds closer to a neutral global market cap, but it means the funds will underperform their more U.S.-focused peers when international markets are out of favor. Still, the series has outperformed peers on a total and risk-adjusted return basis since inception. And the increase to international exposure should provide diversification benefits over the long run. With expense ratios ranging from 12 to 15 basis points, these funds are standout offerings, earning the series a Morningstar Analyst Rating of Gold."

[Lsbcal]

Quote:

Originally Posted by Animorph Vanguard's Gold-Rated LifeStrategy Funds Get More Global "Over the course of 2015, Vanguard increased its international exposure across the series. Non-US exposure now makes up 40% of the equity sleeve and 30% of the fixed-income sleeve in each of the funds. The allocation brings the funds closer to a neutral global market cap, but it means the funds will underperform their more U.S.-focused peers when international markets are out of favor. Still, the series has outperformed peers on a total and risk-adjusted return basis since inception. And the increase to international exposure should provide diversification benefits over the long run. With expense ratios ranging from 12 to 15 basis points, these funds are standout offerings, earning the series a Morningstar Analyst Rating of Gold."

I sometimes wonder how a big institution like VG makes these changes. Some observations from the past on their balanced all in one offerings:
1) VG used to be way low in international exposure recommendation. Something like 20% or under.
2) VG used to be all US bonds, now international bonds have crept in there.
3) VG used to have no TIPS, now there are TIPS. They missed the much better period for TIPS in the early 2000's.

[Gone4Good]

Quote:

Originally Posted by Lsbcal I sometimes wonder how a big institution like VG makes these changes. Some observations from the past on their balanced all in one offerings: 1) VG used to be way low in international exposure recommendation. Something like 20% or under. 2) VG used to be all US bonds, now international bonds have crept in there. 3) VG used to have no TIPS, now there are TIPS. They missed the much better period for TIPS in the early 2000's.

Some of this undoubtedly has to do with improvements in market liquidity around the world. Some of it probably has to do with pure market competition (if other firms have international funds, you have to as well). Some of it probably has to do with the waning influence of Bogle who didn't care for international. And also the growing realization that the U.S. isn't "the market." So if one wants to own the basket of assets known as "the market" you have to hold a much larger share of international assets than ever before.

And TIPS are relatively new securities. So it's not surprising that TIPs funds haven't been around forever.

[Lsbcal]

It just seems like Vanguard is kind of slow to move on some things like foreign and TIPS. Way back in the 1990's I recall there was research showing the 30% to 40% foreign was the sweet spot.

I'm not on board with the international bonds though. To me, bonds are for safety and the US is seen by market participants as the place to be in crisis. But now I just looked it up and the VG intermediate investment grade fund I have (VFIDX) has 17% international. Yikes. Well if equities start to show cracks, I move to the Intermediate Treasury fund so perhaps I'm OK with the foreign allocation.

[Markola]

We are long time fans of the LifeStrategy Funds and they are our core holding. I don't think they have TIPS, though some of the Target Date funds do.

[Totoro]

Quote:

Originally Posted by Lsbcal To me, bonds are for safety and the US is seen by market participants as the place to be in crisis. But now I just looked it up and the VG intermediate investment grade fund I have (VFIDX) has 17% international. Yikes. Well if equities start to show cracks, I move to the Intermediate Treasury fund so perhaps I'm OK with the foreign allocation.

Depends on which international countries are in the fund? Germany, Finland, Switzerland, Netherlands are all also considered 'safe haven' countries.

[MichaelB]

Quote:

Originally Posted by Lsbcal I sometimes wonder how a big institution like VG makes these changes. Some observations from the past on their balanced all in one offerings: 1) VG used to be way low in international exposure recommendation. Something like 20% or under. 2) VG used to be all US bonds, now international bonds have crept in there. 3) VG used to have no TIPS, now there are TIPS. They missed the much better period for TIPS in the early 2000's.

William Sharpe (Nobel Prize) wrote a paper a few years ago arguing that the lowest risk allocation was to have equities and fixed income in the same proportions as currently existed in the world. Vanguard has always been US centric, so this may be their embracing the Sharpe risk model and slowly reallocating so their portfolios match the global allocations.

[Lsbcal]

Quote:

Originally Posted by Totoro Depends on which international countries are in the fund? Germany, Finland, Switzerland, Netherlands are all also considered 'safe haven' countries.

Here is what M* shows for the Intermediate Investment Grade fund:


I can live with this, but didn't realize this until looking it up for this thread. Adds a little spice to the mix. Total Bond Market (VBMFX) has 9% international bonds.