The last couple of weeks I’ve noticed some dramatic moves in some of the major non-US currencies against the US dollar. It got me reminiscing about a concept I talked about when speaking to clients about our World Currency Program at Trendstat Capital back in the day.
Net Worth:
Your net worth is a simple accounting calculation of your assets minus your liabilities. Most everyone around the world has their net worth denominated in the currency of the country they live in. Since over half of the visitors to my enjoytheride.world website are located in the US, they would likely have a net worth calculated in US dollars.
Net Wealth:
Your net wealth is a different animal than your net worth. Net wealth is what you can buy with your net worth at any point in time. In other words, as the value of your net wealth buys less and less services and stuff, it has declined.
The US dollar has been on the move versus other currencies.
The chart above shows the last year of the Dollar Index continuous futures contract. After having a great run up for much of 2022, it has been on the skids since last October. Since the US does import many things, this means that value of our dollars pays for less and less stuff, helping to reduce our net wealth.
Another measure of the dollar affecting your net wealth is is in the purchasing power of the dollar. The chart below is courtesy of St. Louis Fed’s FRED database.
As is readily apparent, the purchasing power of the US dollar has steadily declined since the end of the Great Depression in the1930’s. You need a lot more dollars to finance a normal middle-class lifestyle.
What can you do to help maintain your net wealth?
One simple strategy would be to make enough money each year to add to your net worth, so even though the purchasing power of your net worth is declining, you can hold you own in maintaining your net wealth.
Another idea would be to attack the risk of your net wealth declining by trading in that which potentially hurts your net wealth: other currencies versus your home currency. If you live in another country outside the US, substitute your own home currency or whatever your home currency is based on. The value of the US dollar goes up and down against other currencies, so it makes sense to trade in those currencies, hopefully for a profit to hedge our net wealth.
I now trend follow the Euro, Yen, Pound, Swiss Franc and Australian Dollar.
For example the Japanese yen has had some dramatic moves recently. Think of a simple example: You decide to buy a Japanese car and it happens to have been made in Japan. The manufacturer had to pay the workers in yen to build that car. You got to buy the car in US dollars. With the value of the yen declining so much versus the dollar as shown in the early months of chart above, a dollar buys more yen. As the manufacturer gets fewer yen from the sales in the US, but still has to pay the workers the same amount in yen, profits are squeezed.
The opposite is happening now and it’s not good for the net wealth of Americans. The yen is on a nice run up against the dollar since November, 2022. One US dollar will now buy less yen, so the cost of that Japanese auto goes up. This simple example is one of the important reasons that many foreign car makers have located assembly facilities in the US. It removes much of the risk of currency fluctuations.
What does trading currencies do for your net wealth?
The reason I’m very happy trading the currency futures listed above in my portfolio is that as a US resident, during period when a non-US currency is trending down and my net wealth, denominated in dollars is rising, everything is easy and I’m just trying to pick up some extra trading profits to have in my retirement.
However, since I am retired and live off my portfolios, I want to preserve my net wealth. When the non-US currency prices are on the rise, like they are now, I can go long and hedge my net wealth. If the dollar continues to decline, the profits I make from my long non-US currency position offsets the potential net wealth decrease.
Consider adding some currencies to your portfolio to increase your net worth, preserve your net wealth, and enjoy the ride!
I trade them up and down. Up helps me hedge my net wealth. Down on the non-US currencies is just trying to pick up more profits.
Great points Tom. Thank you. I think its easy for many to forget the impact forex has when they're busy with their day to day. I live in Dubai, my parents are in Poland, and my brother in the UK. Forex is a part of life for us :)