Avoiding The Death Of The Dollar – The Warren Buffett Way

For those of you who have been reading my articles here for 20+ years, you will know I’m not a doomster. Yes, I’ve called the tops, but I’ve also called the bottoms. It must be said, I did call the recent top this time round – but absolutely not the bottom. Still, you can’t win them all, and frankly I can barely believe this historic rally.

However, this article is initially going to make me sound like all those doomsters constantly saying “Buy gold, it’s the end of the dollar,” etc etc. So let me start by saying: the end of the world is not nigh. BUT….

Let’s start at the beginning. U.S. GDP per capita is about $85,000. Frankly, numbers vary, but let’s use that one. This GDP figure is basically the global number-one slot – if you ignore funky small countries like Luxembourg and Ireland. Hold that thought.

Now fly to Japan and go take a walk around. Japan is a rich country – and a big one at that. It feels just as wealthy, though much more orderly, than the U.S. GDP per capita there is $34,000.

So U.S. GDP per capita is 2.4 times that of Japan. Grossly speaking, the U.S .is 2.4 times “richer” than Japan.

Nope, that can’t be even nearly right. But them’s the numbers.

So, what explains that?

OK – government spending is included in GDP, and that’s total rubbish, of course, if you don’t think the government creates wealth by spending your tax dollars. However, even when you strip out that little fun fact and look at private sector GDP, it doesn’t really fix the problem.

Sure, you can write a lot of waffle about population aging, economic stagnation, and all that stuff, but when you’re walking around in Japan, your eyes tell you Japan is “rich” and on par with the U.S. Go take a walk in Sweden, and you don’t get the impression that the U.S. is 50% richer. Is the average American 50% richer than a Canadian? I haven’t been there recently, but it seems unlikely.

So there are two possible explanations – if we discount data error:

1. The U.S. is doing amazingly on the economic front. Pound sand, rest of the world.

2. The dollar is way too high, and the dollar-denominated GDP per head figure is distorted.

These GDP numbers are, of course, calculated in dollars. Countries make stuff in their own currencies, the U.S. does its thing in dollars – and if the yen tanks, then Japanese GDP per capita tanks in dollar terms too.

So, because of an overly strong dollar, the U.S. exports dollar bills while the world sends their cheap stuff into the U.S. Exporting currencies stay rich in their own money, and the U.S. looks rich in its currency – all the while bleeding out through a trade deficit.

That checks out with what we observe. Surely that’s not sustainable?

So the dollar needs to fall.

But wait – the U.S. needs to borrow money from the world and therefore needs high interest rates to pull dollars back in to buy U.S. bonds. The system requires the world to swap one U.S. confetti for another. The ultimate swap is U.S. bonds for imports. Paper for stuff – not a bad deal!

However, the consequences are: no stuff gets made at home; the economic engine becomes financial engineering and “hege-onomics.” I just made up that word, but you get it – it means making sure you’re the global boss so you can maintain the reserve currency status and keep the “confetti for stuff” money-printing, debt-fueled loop running.

Make no mistake – this has worked, still works, and can keep working. But in the end, you can’t maintain a 2.5x GDP gap with an equivalently advanced economy by financial engineering alone. The gap has to close. So let’s look at the USD/JPY chart:

I drew the line because that seems like a natural resting place. That would put Japan’s GDP at $50K per capita – closing the gap. That’s less outlandish, but still not what you see in Japan. Then you consider the longtime high of 80 yen to the dollar, and Japanese GDP in dollars gets closer to $70,000. You might shrug and say that’s about right – but it’s not until you get to 60 yen to the dollar that GDP per capita figures reach parity.

You could use the same logic for Europeans and Canadians. If the dollar were quite a bit weaker, then the GDP per capita numbers would look a lot more similar.

BUT…

If the dollar got that weak, no one would want to lend the U.S. piles of cash – and bang, there goes the ability to borrow from the world to fund fiscal deficits. However, bang, the trade deficit would also vanish – no need for tariffs; the weak dollar would do the job. But POOOOM, inflation would shoot up – bigly.

So now the mystery of high U.S. interest rates makes sense: keep the dollar strong to keep the confetti going and the runaway government spending funded.

Note: if you listen carefully, the fundamental problem the big guns keep pointing to is runaway fiscal deficits. That’s the driver of the whole thing. Government overspending is the core problem – everything else spins out from that.

So, let’s keep it simple: comparatively rich countries should have comparatively similar per capita GDP – unless currencies are out of whack. And global currencies are out of balance.

Now, this is not a doomster article – it’s about how we can make money from this.

OK – so buy gold. Hold on, wrong article… Let’s start again.

Buy Japanese ADRs of big caps listed on U.S. exchanges. That feels better – out of the doomster rut.

Buying Japanese ADRs is a contrarian play, but there are plenty of low P/E, dividend-paying Japanese titans listed in the U.S., and that’s not really that offbeat.

So the play is: if you’re denominated in dollars – like I am not – add some big-cap Japanese ADRs to your portfolio. Of course, there are all sorts of hedge-fund-like crazy plays you could put on, but to me, naked forex trading – or anything that smacks of it – is for the birds. A cheap, huge, great company in Japan is a solid investment. Don’t believe me? Ask Warren Buffett – he apparently owns about 10% of Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo.

So I arrive at the same destination as the Sage of Omaha – but perhaps via a different route.

In any event, believe me or not, there’s a nice portfolio laid out for us all by the greatest investor of modern times.

The old saying goes: the market can stay wrong longer than you can stay solvent – and that might be true for the dollar too. But adding great companies with a weak-dollar kicker that pay dividends is a good way to diversify your portfolio and add a hedge. It also reduces a very specific and worrying risk – so it’s a tempting path to take.

What’s not to like?