Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST, Friday, November 30, 2007: The
falling dollar. It affects us all. Europe is beyond expensive. A ride on the
London subway is $8. Imports are pricey and increasingly unavailable. Don't
even talk to me about printing my dictionary. Paper prices are up three times
since August. Paper is now hard to get. North America exports trees to China,
imports paper from China. But China gets more selling it now to Europe. The
falling dollar is affecting us all in strange and not so wonderful ways. Once
you could buy one Euro for less than a dollar. Now it's $1.48.
you and I move more of our funds outside the U.S.? The simple answer is YES.
The real answer is "don't move money in a panic." Move it as you find
great investment ideas. I'm thrilled with my Canadian real estate. I'm thrilled
with my Australian miners. My Vanguard overseas funds have done the best. I
have been lazy about looking further.
have seen dollar plunges before. This one is different and somewhat more disturbing,
in part because of this administration's spendthrift spending. This weekend's
Economist has a piece on The
Losing faith in the greenback
How long will
the dollar remain the world's premier currency?
value of all paper currencies is zero. That is a fond saying of Bill Bonner,
goldbug and publisher of the Daily Reckoning, a contrarian financial newsletter.
So why should the dollar be any different? Mahmoud Ahmadinejad, Iran's president,
seems to think the long run is now: two weeks ago he decried the dollar as
a worthless piece of paper. And Jim Rogers, a famously shrewd
investor, asks why anyone would buy dollars.
has been infected by the sense of crisis that bedevils its economy and financial
markets. Speculative selling of the dollar is close to an all-time high, reckons
Stephen Jen at Morgan Stanley. Many believeand some evidently hopethat
the greenback might be on its way out as an international currency. Worrying
parallels are seen between the dollar's recent fall and the decline of sterling
as a reserve currency half a century ago.
value against the basket of leading currencies tracked by America's Federal
Reserve has recently been at an all-time low. Against a broader range of currencies,
the dollar has lost a quarter of its value in the past five years. Its decline
has been especially marked against the euro. At one point in 2002 the euro
was worth 86 cents; today it buys $1.48.
rise and fall and test records is hardly unusual. What lends the dollar's
decline an air of crisis is that the world's bloated currency reserves are
crammed with depreciating dollar assets. Foreign-exchange stockpiles have
almost tripled to $5.7 trillion since the beginning of the decade. China alone
has $1.4 trillion of reserves. Japan's $1 trillion or so make it the second-largest
In this period
of swelling reserves, the dollar has retained its pre-eminence. It still accounts
for nearly 65% of identifiable currency-stockpiles, according to the latest
IMF data. This is broadly in line with its historical share (see chart). Factor
in the dollars hoarded by China and Middle Eastern oil exporters (not included
in the IMF breakdown) and the dollar's share may be higher still.
place as a reserve currency always seems to be questioned when it falls. Weakness
in 1977-79, 1985-88 and 1993-95 was each time met with predictions that governments
were about to switch their reserves into another currency. A burst of high
inflation, which undermined the dollar in the late 1970s, made that slide
as serious as today's scare is. Between 1978 and 1980 the Treasury sold $6.4
billion of Carter bonds, mostly denominated in Deutschmarks, to
raise funds to defend the dollar. In January 1980 the gold price reached a
record $835 (around $2,250 in today's prices) as investors sought an alternative
store of value. And when the dollar fell to ¥81 in 1995, manyincluding
this newspapersaw it as the beginning of the end of its reserve-currency
The dollar has
weathered these storms. But now it faces a nasty squall that combines both
cyclical and structural blasts. Its decline in the past five years has imposed
a huge capital loss on foreign-exchange reserves. If this becomes too painful,
central banks may be tempted to cut their losses and dump their dollars, causing
a slump in the currency's value. The lure of selling is made all the greater
by the knowledge that other central banks are overloaded with dollars too.
Those that get out first have more chance of saving their capital.
for overseas funding is another reason to fret. For years it has spent more
than it earns, running up large, persistent current-account deficits. Last
year the shortfall in America was a whopping 6% of GDP. Bridging that gap
requires foreigners to buy dollar assetsbonds, stocks or property. But
the more overseas debt that America runs up, the greater the risk that it
will partly default on its obligations, either through currency weakness or
are not new but they are made worse by an economy that is turning sour. Losses
on subprime mortgages have intensified the housing downturn in America and
poisoned its credit markets. The threat of recession has prompted two interest-rate
cuts, and more reductions are likely. Faltering growth and falling interest
rates make for a weak currency, particularly when growth prospects elsewhere
seem rosier. And the downgrades to credit-related securities once deemed top-notch
have hurt the reputation of America's capital markets.
poses other problems too. The oil-rich Gulf states are thinking of ditching
their currency pegs with the greenback. These links have obliged them to buy
dollars, so as to prevent their own currencies from rising. The dollar peg
has made it hard to curb inflation, especially in fast-growing oil economies,
whereas a less rigid exchange-rate regimesay, a peg with a basket of
currenciesmay allow a more flexible interest-rate policy. Such a regime
would also crimp the demand for dollars at a time when confidence in the currency
is fragile. All this may not bode well for the dollar's status as the world's
if this is an awkward time for the currency, it need not be a catastrophic
one. The fear that the dollar could be swiftly supplanted as top dog is based
on the idea that one currency will always have a near-monopoly: if everyone
holds dollars chiefly because everyone else does, you could imagine how a
falling share of global reserves might reach a point when central banks all
suddenly switch to a new currency standard.
favoured position in international trade owes something to this kind of network
effect. Global markets in commodities are priced and transacted almost exclusively
in dollars, because it is convenient for buyers and sellers. But whatever
Mr Ahmadinejad thinks, oil exporters would not get more income if commodities
were priced in euros or pounds. The competing pressures of supply and demand
set the oil price: the dollar is just an easy way of keeping score. The convention
of quoting in dollars is often employed when the currency of one or more trading
partners is not used. Once such a standard is set, there are costs to shifting
to a new one. But the benefits to America of issuing the world's favoured
transaction currency are easily exaggerated. Advances in financial technology
mean that a given volume of trade requires a much smaller dollar-float than
in the past.
The role for
the dollar as an international means of exchange is entirely different from
its role as a reserve currency. Reserves are held to buttress confidence in
a country's own currency, not as a float for global trading. As a backstop,
reserves need to be easily convertible (so they can be used as an emergency
source of liquidity) and a good store of value. The dollar, with its large
and liquid capital markets, meets the first criterion even if it has failed
the secondat least, recently.
a professor of economics at the University of California, Berkeley, argues
that there is no reason why a single currency should dominate reserves as
the dollar has. Before the era of the dollar standard, he points out, reserves
were in a handful of currencies. On the eve of the first world war, when Britain
was the greatest trading power, the pound's share in official currency reserves
was all but matched by the combined share of the French franc and German mark.
After the war a three-way split was maintained, with the dollar replacing
If the dollar's
dominance is to end, two or more currencies are likely to share the crown.
Those who take a grand sweep of history are backing China's yuan as a big
reserve currency of the future. The dollar's immediate rival, however, is
the euro. In several important respectsthe euro area's size, the depth
of its capital markets and its share of world tradeit has the attributes
of an ideal reserve currency (see table below). Unlike America, the euro area
has the added attraction of a broadly balanced current account.
The euro has
already made inroads into the dollar's territory. At its launch in 1999, its
constituent currenciesthe mark, franc, lira, etcaccounted for
less than a fifth of the world's official reserves. Its share has since increased
to around a quarter, even as total currency reserves have swollen. The euro
area is less dependent on oil imports than America is and it sells more to
oil exporters as well as to fast-growing economies such as China and Brazil.
The euro's attractions
may be somewhat superficially enhanced at the moment. It has risen sharply
in value, flattered by cyclical forces that have favoured it over the dollar.
But only a year ago Italy's sluggish economy and fiscal problems inspired
talk about a break up of the euro. Just five years ago the euro was considered
the near-term outlook may be favourable to the euro, its prospects in the
medium-term may not be so bright. The euro's appreciation is already causing
strains within the currency zone. In the coming decades the euro zone's workforce
is set to age faster than America's, which will hamper its economy and add
to its fiscal pressures. There is also the question of how much trust investors
will put in a currency with no central fiscal authority to stand behind it.
Since the title
of reserve currency can be split, the dollar's share in global currency reserves
is probably too bigwhatever happens to foreign-exchange rates. Many
of the countries that have built large stocks of dollar assets by pegging
their currencies to the greenback are now battling with inflation. Sticking
with the peg would mean importing the policies of recession-threatened America
and feeding inflation still more. Yet abandoning the peg only adds to the
pressure on the dollar.
is to be weaned off the dollar, with a peg made up of a basket of rich-world
currencies, including the greenback. This would give dollar-peggers more freedom
over their monetary policythey would no longer have to mimic the Fed
slavishlywhile allowing them gradually to slow their purchases of dollars.
Is a dollar
rout avoidable? An optimist would say that central banks, having spurned the
chance to diversify out of dollars when a euro could be bought for 86 cents,
are unlikely to want to switch now when the price is close to $1.50. Against
conventional benchmarks like purchasing-power parity, the euro looks dear
against the dollar. So it could be a bad time to swap from one horse to another.
To the extent that dollar-holders act like an informal cartel, then the biggest
dollar-holders will set an example. Japan seems unlikely to start selling
its huge dollar reservesif anything it might intervene to prevent the
dollar falling further against the yen. A crash might be averted if China
holds fast too, because it recognises how self-defeating dumping dollars would
be to such a large owner of American assets.
Yet a pessimist
would counter that a revaluation of emerging-market currencies against the
dollar could easily turn disorderly. Although economic logic may argue against
selling dollars at a cyclical low point, central banks have sometimes been
hopeless portfolio managers: witness their shift out of gold just as its price
hit a low. Yes, the dollar looks cheap, but currencies often overshoot. So
it would be foolish to say where its decline should stop.
anxiety and gloom, some straws in the wind suggest that the dollar's decline
may soon slow. In the past few weeks it has regained ground against a handful
of important currencies, including the pound and the Australian dollar. America's
trade balance is narrowing, despite the effects of expensive oil imports,
suggesting that a weaker currency is already working to correct imbalances.
As a rule, central
banks cannot intervene to determine exchange rates, but as Morgan Stanley's
Mr Jen suggests, some sort of official action has often preceded turning points
in the world's foreign-exchange markets. If he is right, then a change in
rhetoric or even co-ordinated intervention may be the signal the markets need
before they stop believing that the dollar is destined to fall further.
wish all CEOS were as good as this one: Richard
Reese is chairman and CEO of Iron Mountain (IRM) He joined Iron Mountain as
president in 1981 when the company was privately held and was doing $3 million
in annual revenue. Under his leadership, Iron Mountain has grown to more than
$2.8 billion in annual revenue. It is now the clear leader in records management
and information protection, and based on what I heard at a private lecture yesterday,
it will continue to be the clear leader in paper and digital records management
and protection, and it will grow sales and earnings at a rapd clip for
eons to come.
Richard Reese, 61, one of the smartest and more impressive CEOs I"ve
ever heard talk.
An amazing performance
for IRM's stock:
laptop should I buy? Since laptops replaced
desktops as the computer of choice, I get asked this question regularly. The
laptop decision revolves around these issues:
Size and weight? The smaller and lighter, the more cramped the keyboard
becomes. In a pinch you can use any keyboard. For serious work you need a full-size
keyboard. Before buying a laptop, you need to type on it -- unless you opt for
an external plug-in keyboard. You need to ask yourself "Will I be carrying
it every day, or just once or twice a week?" There are heavy machines and
light ones. I'd rather carry my son's 3 lb machine than my 6 lb one.
Pixels? I have two Toshiba Tecra M5s. One has a 1024 x 768 pixels in a 14.1"
screen and is real easy to read. The other has 1400 x 1050 pixels in a 14.1"
screen and is not always easy to read -- at least for me. My wife has no problem.
My son has an ThinkPad with 1024 x 768 on a 12" screen. The screen seems
clearer -- easier to read -- than mine, though it's smaller. I don't know why.
I thought they used the same technology. Again you need to sit in front of the
machine and play with it. Some laptops -- like Apple's 17" -- have huge
screens, with zillions of pixels. Can you read them? What do you feel comfortable
A pointing stick or not? It sits between the G, H, B and N keys. I won't
buy a laptop without a pointing stick. But lots of people use the much slower
touchpad or an external mouse and are happy. Some ThinkPads, and some Toshibas,
but no Apples, have pointing sticks.
A ThinkPad laptop featuring both a pointing stick (top left) and a touchpad
Windows or Mac? Apple laptops are easier and
more reliable. These days they can run Windows, so you can use all Windows software,
but running Windows on a Mac is a little kludgey.
Versatility.My Toshiba Tecras have a big slot
into which you can slide a second battery, a second hard drive or a DVD rewriteable.
Carrying these SelectBay bits and pieces provides me with huge versatility.
Docking station? Being able to mount your laptop in a docking station saves
plugging in and out as you move and occasionally gives some options, like adding
a DVI digital port for an external monitor. Some laptops can use them. Some
is SO stupid, but funny:
The local news station was interviewing an 80-year-old lady because she had
just gotten married -- for the fourth time.
asked her questions about her life, about what it felt like to be marrying again
at 80, and then about her new husband's occupation.
"He's a funeral
director," she answered.
the newsman thought.
He then asked
her if she wouldn't mind telling him a little about her first three husbands
and what they did for a living.
She paused for
a few moments, needing time to reflect on all those years. After a short time,
a smile came to her face and she answered proudly, explaining that she had first
married a banker when she was in her early 20's, then a circus ringmaster when
in her 40's, later on a preacher when in her 60's, and now in her 80's, a funeral
looked at her, quite astonished, and asked why she had married four men with
such diverse careers
She smiled and
explained, "I married one for the money, two for the show, three to get
ready, and four to go."
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
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