Tuesday, July 8, 2008

Christmas in July: a falling US dollar is just a bowl of cherries

Australia is sweltering hot at Christmas. Everyone sits down with extended family when it is 40C (104 Fahrenheit) and indulges in an excessive roast lunch. Christmas is sweat and family dramas.

The saving grace of a mid-summer Christmas is cherries. The cherries are just coming on in December and are fantastic. You buy boxes at roadside stalls as you drive the long distances to your home town and eat half before you see your family.

A Winter Christmas

There is a new emerging Australian tradition – which is to have a winter Christmas celebration. Christmas in July is hams, puddings and wood fire. This new tradition is really strong amongst Australians who have spent some time in the Northern Hemisphere and pine for a white Christmas.

But Christmas in July is without cherries and that doesn’t feel quite right.

Until now.

On Saturday night my wife and I went to a delightful Christmas in July. This was a stylish affair with fairy-tale lights and good bubbly wine. And we took a bowl of cherries.

The cherries came from California. And they were $15 a kilo (say $7 a pound) at Paddy’s Market. Five years ago they were unaffordable. But then the US Dollar halved relative to the Australian dollar and now we have affordable cherries in the depths of winter.

Cherries and the US current account deficit

And as I indulge in another bowl of cherries I think the falling US dollar is wonderful. And so does some Central Valley farmer. Of course my (incremental) purchase of American cherries drives the price up for most Americans (poor you). And so in the smallest of ways there is a shift in the American economy from US domestic demand to exports.

Exports are the only part of the US economy doing well. Export driven businesses are shooting the lights out. (If you don’t believe me read the Federal Reserve’s Beige Book.) If there is a single really good global trend it is away from US domestic driven businesses and towards US export driven businesses. It is symmetrically against foreign businesses that compete with US exporters. (Think GE over Siemens, Boeing over Airbus.)

The Bronte Capital thesis on this is as follows:

  • The US current account deficit is huge
  • The subprime crisis has shown that you can’t endlessly and profitably lend to American consumers therefore the economy will need to shift to radically bring down the current account deficit.
  • This means you need to avoid US domestic sectors and fall in love with US export driven sectors.
  • Alas rising oil prices are driving up the current account deficit slightly faster than the changing terms of trade are driving it down which means we are only beginning on the export driven trend.

If you want a decade long trend its US exports.

You should be on it. And life will be a bowl of cherries.


Peter Eavis said...

Problems with your thesis:

1/ Over time, you want companies that do well because they're better than their competitors, not because they get a leg-up from a weak currency.

2/ So a company that gets a boost from a weak dollar for part of its revenue stream may also be generating revenue domestically that's effectively losing its value in relation to the currency you're spending to buy its shares.

John Hempton said...

Absolutely. But the USA has a few companies that meet this criteria.

The biggest US exporter is Boeing. They probably make better planes than Airbus. The A380 is probably overweight.

The only problem with Boeing is that long-haul flights use a lot of fuel. And that doesn't help.

I think the comparison of GE's infrastructure businesses with Siemens is highly instructive. Siemens is imploding on businesses that compete with GE. The GE technology in that area is a winner. (The performance of GE in medical is weaker.)

But the US is not a basket case. There are fabulous American businesses. They may not be the majority of America (which has become the most overlevered consumer society).

I love GE even though the finance business bugs me badly. Need to find a dozen more...


Peter Eavis said...

Don't doubt your stockpicking thesis in terms of GE vs. Siemens.

I concur that there are great businesses here.

I think this post would have been more persuasive if you'd added the name-specific US vs. the others comparisons.

It may just be me, but I am skeptical of any macro-first approach to stock picking. Maybe should think about it more.

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