This Trend Doesn't Scare Many Americans... But It Should

If the S&P 500 Index is any indication, stocks are doing well... The index was up double digits in 2020.

Gold had a record-breaking year, too. And if you own any bitcoin, you're not doing bad yourself.

It seems like just about every asset had a banner year in 2020. But there's one asset that's trading near three-year lows... And you probably own a lot of it.

I'm talking about the U.S. dollar, which has lost about 7% of its value since the beginning of 2020.

That's a huge decline for a currency. And the precipitous drop was partly responsible for the terrific rallies in gold and bitcoin. Now, that's great news for the 11% of Americans who own gold and the 7% who own bitcoin. But what about the rest?

The thing is, to most Americans, the dollar trading at multiyear lows doesn't even register. As long as our salaries are paid in dollars – and the goods we buy at Target, Walmart, and Costco are priced in dollars, too – nobody really cares what our currency is worth outside the country.

That's a big mistake. And it will likely result in unwanted financial surprises further down the road.

Let me explain...

The U.S. dollar has been the dominant global currency for more than 75 years. In fact, most of us were born into a dollar-based global financial system.

Many Americans see the dollar as the only form of currency they will ever have to deal with for the rest of their lives.

But if you've lived outside the U.S., chances are you frequently worry about the value of the dollar relative to your own country's currency...

As a businessman, you buy dollars in order to do business overseas. And as a traveler, you buy dollars every time you plan on leaving your country. Moreover, globally traded commodities and much of the world's debt are priced in dollars.

So the dollar's value in the world market has a lot of influence on how much people and governments end up paying for goods and debt in their own currencies.

During the Asian financial crisis of the late 1990s, Asian currencies lost as much as 80% of their value against the U.S. dollar. It drove up the price of everything that wasn't made locally and handicapped consumer spending for a decade.

And while ordinary Americans have never had to think about it, it could soon be time to worry about the dollar's perceived value for one simple reason...

America is losing its bargaining power.

To understand this, all you need to do is look at how much we buy from other countries.

At the start of the century, the U.S. accounted for 19.3% of the world's imports. In other words, we bought about one-fifth of every product sold by other countries. In fact, in 2000, the U.S. imported almost as many goods as the next three countries (Germany, Japan, and the U.K.) combined.

When your single biggest client comes to you asking for a better price, you don't play hardball.

As a result of this powerful bargaining position – and the rise of China as a manufacturing powerhouse – American consumers have benefited. We've enjoyed relatively stable prices for everything from baby diapers to power tools.

By 2018, the U.S. was still the world's largest buyer of imported goods. But its share of the pie had dropped to 13.1%.

Meanwhile, China – which was a nobody in 2000 – suddenly accounted for 10.7% of total world imports. It quadrupled its share of global imports over the span of 18 years.

Anyone who has done business in the past knows what these changes mean. There's a new big player in town... And it's proving to be real competition for the prevailing giant, the U.S.

With China now a willing and able buyer of the world's goods, it's going to be increasingly difficult for the U.S. to demand a better price as the value of the dollar falls.

Now, the Chinese yuan is on a tear. It's up 4.2% versus a basket of currencies, and it's stronger than the U.S. dollar by 6.1% since the start of last year.

The competition for goods will only intensify now that manufacturing is beginning to leave China for lower-cost countries like Vietnam, Cambodia, and India.

Look, I don't know how this will all play out exactly at your local discount store or supermarket. But what's clear is that you can no longer keep ignoring the potential damage a falling dollar could soon have on your day-to-day finances.

Does it mean you should be buying up Chinese yuan with both fists? Of course not. Nor does it mean you should rush to the stores and buy up several years' worth of supplies.

But having a diversified portfolio makes a lot of sense right now – one that incorporates stocks, real estate, gold, and (yes) even some bitcoin. It's the best hedge against the inevitable decline in the dollar's bargaining power.

Good investing,

Brian Tycangco

Further Reading

"The dollar is in a major decline," Steve writes. So how can you turn this situation to your advantage? The answer goes beyond investing in gold and precious metals. Find out which market benefits when the dollar falls in Steve's two-part series: here and here.

Physical gold is a great store of value in times of inflation – and gold is likely to soar as stimulus efforts continue. But sophisticated investors can position themselves for even bigger upside in a gold bull market... Learn more here.

Market Notes
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TripAdvisor (TRIP)… online travel booking
Gartner (IT)… research, consulting
Morningstar (MORN)… financial research and ratings
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Johnson & Johnson (JNJ)… health care giant
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