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What I Care About This Week | 2022 May 2

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by Franklin J. Parker, CFA

The Summary

The Details

I have had several conversations over the past few weeks about whether the US dollar can maintain its global prominence. The concern is understandable—most of us have never lived in a world without US dollar hegemony—and with the recent weaponization of the dollar, and its questionable ongoing management, there are good reasons to be concerned.

The main thrust of my counterpoint can be seen in the chart below. Generally speaking, the more a country exports, the more foreign reserves it will tend to hold. This makes sense: when China sends goods to the US, Chinese companies receive dollars and US companies receive goods. Export-driven economies, then, will tend to have large amounts of foreign reserves on hand—because they are constantly receiving foreign currencies. Import-driven economies tend to have the opposite—they tend to have little in the way of foreign currencies because they are importing goods, not cash.

And this is the primary reason why the US dollar is the global reserve currency: for decades, the US has been the largest importer in the world (though this has recently shifted to China). This means that US dollars are flung all over the world, making it quite easy for Japan to buy goods from Korea with US dollars, because they both have them already. The Indian Rupee, by contrast, is localized mostly to India because India is an export-driven economy and it is relatively difficult for other countries to get ahold of.

Before another currency can be the global reserve currency, it has to be accessible by people around the globe. A global reserve currency, then, will most likely be backed by an import-driven economy.

I am, therefore, a bit more bullish on the US dollar than most seem to be. Other than the Euro, which is another import-driven currency, the dollar is the easiest currency for most people to get their hands on. Until and unless another country imports more than the US (and uses their own currency to purchase those imports), it is unlikely that the dollar’s dominance will wane.

Chart of the Week

Last week we also got earnings from the FAANG crowd. Amazon’s considerable loss was a surprise—analysts expected a profit of $8.35 per share and Amazon posted a loss of $7.56 per share. Netflix was another shocker: for the first time in over a decade, Netflix lost subscribers. The bright spots were Tesla, which saw its margins expand due to higher prices—deliveries where about equal to last quarter—and Apple, which saw profits much higher than expected. Apple, however, issued concerning guidance on inflation and supply chain problems.

It is also worth noting that these companies have been the innovators in the US economy for some time now, and in a world with rising interest rates, innovation is becoming more expensive. In fact, over the past year, technology stocks have tended to deliver lower returns as interest rates rose, and higher returns as rates dropped, as this week’s chart shows. That is a trend likely to continue, and this creates a headwind for the sector as a whole and for new companies looking to launch a disruptive product or service.

There is some hope that more expensive innovation will put the focus on quality instead of quantity. Investors should be cautious going forward: the days of “easy” returns are behind us. Upside will be hard-won going forward, and a focus on quality is more likely to be rewarded.

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