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Devalued dollar losing global invesment battle with growing euro

Devalued dollar losing global investment battle with growing euro

The U.S. dollar is under the greatest attack since it became the new American nation's official currency more than 200 years ago.

The greenback has become the victim of a two-pronged pincer motivated by geopolitical antagonism on the one hand, plus the growing belief that America's currency is no longer the prime investment it once was.

Even America's vaunted political stability no longer carries the premium that it once did, when most of the world was looking for a safe financial haven.

This turn of events is happening at a bad time because the U.S. Treasury has become increasingly dependent on the $1.5 trillion annually paid by America's population for the massive imports into its escalating consumer and industrial economy.

This influx of foreign-held currency increasingly has supported America's fixed-income instruments as well as stock and hard asset investments for more than a decade. But now the world's previous currency of choice, the dollar, is rapidly being replaced by the new pretender, Europe's euro.

Emerging as the pillar of European monetary strength in 1999, this successor to the German mark, the French franc and other less-powerful European currencies is replacing the dollar on much of the world scene.

Also biting pieces out of the dollar are the Japanese yen, supported by the globe's No. 1 export economy and the British pound, focused on London's fast-growing financial center, heavily supported by the Middle East's oil fortunes.

The strength of the euro vs. the dollar tells a good part of the evolving global economic story. Coming out of the chute in 1999 at $1.17 to the euro, it soon fell back to 80 cents to one euro, while gaining its footing due to early instability, as currency conversion transpired.

The European Union's currency now has reached $1.36 to the euro and is poised to go higher. Many observers feel the euro and the world's emerging nations are a better investment bet.

The dollar is the Rodney Dangerfield of currency - it's getting no respect.

The current shift to the euro started with Russia. As President Vladimir Putin put it, “Russian oil and natural gas is traded all over the world, so why are we selling it for dollars when we get less and less. For euros we get more and more.”

Most of Russia's natural gas goes to Europe and is now being priced in euros, not dollars. Iran has followed suit for obviously hostile reasons, with the United Arab Emirates following right behind. Even Saudi Arabia, America's dubious ally, has begun demanding euros for many of its oil contracts for the first time.

China, which is sitting on $1 trillion in currency reserves, has just set up a special fund to plow $50 billion into euros, global commodities and other non-dollar assets.

Banca d'Italia just slashed its dollar reserves from 84 to 64 percent.

Even some emerging countries are switching from the dollar to the euro. Indonesia has switched $1.9 billion out of the dollar, and Ecuador, which recently elected a socialist president, dumped $2.3 billion from its national reserves, converting to competing currencies.

If this meltdown continues, the average American also will suffer the ultimate effect of the dollar's devaluation.

Interest rates surely will climb to lure back lost foreign investments. And as the prices of the billions of dollars of imported goods rise, inflation will make itself increasingly felt. Even the increase of record exports will only be a limited offset to the rapidly shrinking value of the once mighty greenback.

Although some observers believe that the devalued dollar could slow down imports, Americans are too hooked on low-priced foreign products to dramatically close the trade deficit gap.

Nothing on the foreseeable horizon indicates that this trend will be reversed anytime soon. This could presage a stagnating economy that would combine an inflationary spiral with an economic recession.

Editor's Note: This article was previously published in the The Desert Sun in Palm Springs, Calif.

—Morris R. Beschloss graduated from the University of Illinois' College of Communications in 1952. He is a columnist for the Desert Sun and publishes two newsletters for the pipe, valve and fittings industry. He can be reached at flem6609@bellsouth.net or (760) 324-8166.

WOMEN MUST PLAN EXTRA CAREFULLY FOR RETIREMENT

 Jimmy Stewart
CIBM Contributor

If you're a woman, you have to be actively involved in your financial preparations for retirement —and that's true whether you're single or married. As a woman, you have at least two special considerations associated with your retirement planning:

  • You've got a longer life expectancy.
  • Women typically outlive men by about seven years, according to the U.S. National Center for Health Statistics - and more years of life mean more expenses.

  • You may have less money in your retirement plan.
  • Women drop out of the work force for an average of 12 years to care for young children or aging parents, according to the Older Women's League, a research and advocacy group. This time away from the workforce results in women accumulating much less money in their employer-sponsored retirement plans, such as 401(k)s.

    The prospect of a long, underfunded retirement is not a pleasant one. Fortunately, there's much you can do to avoid this fate. For starters, know what's going on in your financial situation. If you are married, share the responsibility of making investment decisions. What are your retirement goals? Are the two of you investing enough to eventually achieve these goals? And where is the money going? You must know the answers to these questions.

    You'll also need to know what you could expect to receive if your husband dies before you. As a surviving spouse, you will likely inherit all your husband's assets, unless he has specifically named other people, such as grown children from an earlier marriage, as beneficiaries. Nonetheless, you can't just assume that all sources of income that your husband receives will automatically roll over to you. For example, if your husband were to die before you, you wouldn't get his Social Security payments in addition to your own, although you could choose to collect his payments instead of yours. But if you both earned close to the same income, you might not get much of an increase in Social Security benefits.

    In any case, whether you're married or single, here are some moves that can benefit you:

  • “Max out” on your 401(k).
  • If you can afford it, invest the maximum amount into your 401(k) and increase your contributions every time your salary goes up. Your 401(k) provides you with tax-deferred earnings and a variety of investment options.

  • Contribute to an IRA.
  • Even if you have a 401(k) or other employer-sponsored retirement plan, you might be eligible to contribute to a traditional or Roth IRA. A traditional IRA offers the potential for tax-deferred earnings, while a Roth IRA potentially grows tax-free, provided you don't take withdrawals until you're 591/2 and you've had your account at least five years. You can fund an IRA with virtually any investment you choose.

    Do whatever it takes to help ensure a comfortable retirement —and the sooner you start planning, the better.

    —Jimmy Stewart is an Edward Jones financial advisor in Urbana. He can be reached at 217-328-1719 or jimmystewart@edwardjones.com

    DON'T OVERLOOK THE VALUE OF DIVIDENDS

     Scott Tapley
    CIBM Contributor

    College-level finance courses (do high school finance courses even exist?) teach that investors should be indifferent between stocks that provide returns through dividends and those that deliver capital gains. That view was given more credence when U.S. tax laws were changed so that dividends and capital gains were taxed equally.

    According to the finance professors, companies with excellent growth prospects should (and do) retain their earnings to reinvest in growth projects, while companies in more mature industries with fewer growth opportunities should (and do) pay out a greater percentage of their profits as dividends.

    But in reality, what actually happens?

    A paper published by Robert Arnott, Research Affiliates, and Clifford Asness, AQR Capital Management, showed that companies that pay dividends have delivered faster earnings growth than companies that do not pay dividends—precisely the opposite of what is taught as modern finance theory. In fact, Arnott and Asness (A&A) found that companies with higher payout ratios (dividends divided by earnings) experienced faster earnings growth than those with lower payout ratios.

    What might explain the real world's departure from theory?

    Apparently, as a general rule, companies don't do as good a job shepherding excess cash as professors predict. Harvard Business School professor Michael Jensen postulates that some managers engage in inefficient “empire building” that places their self interest (the likelihood of a higher salary for leading a larger organization) above the interests of shareholders. A&A suggest the phenomenon could be attributable to a less nefarious cause—investments funded by internal cash generation do not come under capital market scrutiny (i.e., no public prospectus is produced for the purpose of raising outside capital); therefore, the weaker capital discipline is merely the result of less analysis.

    Over the past couple of decades, the percentage of profits paid out as dividends by U.S. corporations has dwindled as companies chose to return capital to shareholders through alternative methods such as share repurchases. A&A contend that today's low payout ratio portends slower earnings growth for U.S. companies, but rather than debate future growth potential, let's focus on the importance of dividends in your portfolio.

    During the 20th century, dividends accounted for nearly half of the total return realized by common stock investors in the U.S. So, individual investors are wise to consider the potential impact of dividends on their long-term investment returns. Even a seemingly small yield can have a large impact over time.

    Despite the recent changes in tax laws that have served to encourage higher dividend payouts, the dividend yield on the S&P 500 is still “only” about 1.8 percent—about the same yield as it was when the tax laws changed in 2003. But even such a seemingly meager dividend can make a significant impact when you add the impact of compounding.

    A couple of recent examples drive this point home. Dividends (assuming all dividends were reinvested) have accounted for half the return of the S&P 500 since January 2001, and that “little” 1.8 percent dividend has added 18 percent to the S&P's total return since March 2003.

    So, when you're shopping for long-term investments, don't overlook the value of dividends. Keep in mind that an extraordinarily out-sized dividend may be a reflection of an impending dividend reduction (check the financial statements to make sure the company's earnings, or at least cash flow, exceeds the dividend payout).

    If you find yourself looking at two companies in the same industry with similar growth prospects and equally solid finances, consider opting for the one that pays you a higher dividend. Research shows that the one paying more dividends is likely to perform better, and you'll get paid while you wait and see for yourself.

    Scott Tapley, CFA, is a vice president/financial analyst with the Main Street Wealth Management Group. He can be reached at 217-351-6539 or scott.tapley@mainstreettrust.com.

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