I spent the last month in the United States of America and I am absolutely convinced the US economy is continuing to recover strongly.
America is buzzing, it’s got its Mojo back. Unemployment is falling, Restaurants are full, airports are choked, flights are oversold, hotels are fully booked, house prices are up and Wall St is at an all-time high. Shale gas and the tech boom Mark II have revolutionised the place. Even those grandstanding clowns in Washington have agreed on a budget deal until September.
This will be the major investment story of 2014 (and beyond) and the ramifications are across all asset classes.
The US dollar story
The very simply point is, if I am right and the US economy is back as the world’s growth engine, then the US dollar will be back as the world’s reserve currency.
The Federal Reserve (Fed) will keep winding down bond purchases as the data confirms what I write above, ending what is effectively a US dollar rights issue, and the investing world will pile back into the world’s reserve currency –
the US Dollar.
The Fed has already announced a tapering of bond purchases by $US10 billion a month to $US75 billion per month, but at the end of January I expect another $US10 billion reduction to $US65 billion per month. By mid this year I expect a “QE-less” USA, with cash rates importantly remaining at 0%. It’s worth noting US cash rate futures are 0% right out to 2015 in line with the Fed’s guidance.
I am setting my entire investment strategy around a resurgent US dollar. That served me well in 2013 as the US economy improved, but 2014 will be the year when that view becomes consensus, and we get the multiplier effect on prices.
US long bond yields will continue to rise as the US economy gains momentum, while concurrently the Fed ends QE purchases of bonds. Rising US long bond yields will also add to demand for US dollars once US long bond yields reach attractive levels (4.00%).
Of course, rising yields mean falling capital values in long bonds and I expect to see a further “great rotation” from US bonds to US equities, further propelling Wall St as the year progresses.
Stay ahead of the pack
Just remember, economic data and equity earnings lag the “real world” by three to six months. I strongly believe you can be ahead of data and earnings via simple observation in your day-to-day life. I call it “Peter Lynch Theory”, the author of “One up on Wall St”. Even in today’s world of instant “information” and social media, I believe you can still position yourself ahead of the investing pack by simple observation.
On that basis, what I observed in America was very bullish. For example, every single flight I took saw multiple people “brought off” because the flight had been oversold. I always believe the airline industry is reflective of the broader US economy. I note Delta Airlines shares hit a record high after reporting quarterly earnings this week.
Hotels were also fully booked, while restaurants, theatres and sporting games were also very hard to get into. Again, I think that is reflective of a stronger US economy.
Instead of wars in Iraq and Afghanistan and “debt ceilings” leading nightly news bulletins, Wall St and the economic recovery led them. There was also story after story about America’s oil independence, which is a massive structural change we have written on before.
My point is that “good news” dominated US news bulletins and this is a huge change from the headlines of the last five years. This is an important point in an economy that is 70% driven by US consumer spending, which requires consumer confidence.
The game plan
In terms of investment strategy for Australians, what does this all mean?
Clearly, if I am right, the Australian dollar will continue to fall versus the US dollar. The currency has already fallen by 17% versus the US dollar but I expect further similar falls in 2014.
In terms of the Aussie dollar, the numerator is weakening and the denominator is strengthening. However, the AUD/USD cross is still massively over-owned by central banks and global carry traders. This will unwind in 2014 and the AUD/USD cross rate will head below 80 US cents in my view. I reckon we will see it trade 75 US cents at some stage.
So my point is, even just shifting some cash to the USA could “make” you 15% plus this year by simply avoiding Aussie dollar depreciation. If you pick the right US equities, you should get the double-whammy as occurred last year.
Outside of direct investment in the USA (disruptive technology, cashless society etc.) all my highest conviction ideas in Australian equities are direct beneficiaries of the falling Aussie dollar. My top three remain Crown (CWN), Fortescue (FMG) and Platinum (PTM), but make no mistake, if we see AUD/USD at 75 US cents, it will be great for the entire Australian economy.
The 5-year chart of the AUD/USD just looks awful. Remember, this period was entirely dominated by the Fed’s QE policies. Now that is ending, you can see the rug being pulled from the Aussie dollar.
What I have been telling my clients all through 2013 and again now, is to get some capital into US equities, but use a proven fund manager or hedge fund manager to oversee the investment. None of us are US stock experts and I am prepared to pay fees for experts to do that for me.
I see up to -15% further downside in the AUD/USD cross rate this year and that will all be driven by US dollar strength, on confirmation of the US economic recovery and QE ending.
All Australians are too exposed to the still overvalued Australian dollar. We are all under-exposed to US dollars. I strongly encourage you to either directly or indirectly reduce your exposure to Australian dollars and increase your exposure to US dollars.
The continued recovery of the US economy and the associated resurgence of the US dollar will be the big story of 2014. I continue to position all portfolios for that scenario.
Just ask yourself: is an 88 US cents Australian dollar a “high” or “low” Australian dollar versus long-term history? When you have answered that question further, adjust your portfolios towards the USA and US dollar.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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