Ode to the Falling Dollar

The average blue-state voter drives a Lexus or a Beemer, fancies a vacation to Paris or the Amalfi Coast, and splurges for Hermès ties, Thomas Pink shirts, Chanel perfumes, and Louis Vuitton luggage. The average red-state voter drives a Chevy or a Ford, takes trips to Disney World or the Indianapolis 500, and shops at Wal-Mart for Levi’s, Russell fleecewear, and American Tourister suitcases. That’s why it should be no surprise to anyone that the ever politically motivated Bush administration tacitly condones the dollar’s astonishing free fall against the euro and the yen. A strong dollar subsidizes the decadent tastes of the blues, and a weak dollar doesn’t affect the lifestyles of the reds.

For the better part of the year now, the dollar has plummeted almost daily against the world’s other major currencies. The decline has occurred despite constant reassurances from John Snow, the Treasury secretary, that we favor a strong greenback. Yet all currency traders know that Snow sticks with his “strong dollar” script only to avoid the wrath of our European and Asian partners. This sucker’s going down, and nobody in Washington’s going to lift a finger, because it’s a harmless tonic to fix imbalances that right now benefit only those who most likely didn’t vote for the president.

Although I have never believed President Bush’s economic team the equal of his predecessor’s—and even though I have a Lexus and a Beemer—I have to tell you that this time they may be on to something by letting the dollar decline. We have two huge problems in this country: We import way too much, and we don’t save enough to back all the U.S. government debt that the prodigal pols in Washington keep issuing. A weak dollar cures the former, as those who can’t be shamed into buying American might now be unable to afford the alternative. The latter? The foreigners are so hooked on our big and growing market that, while we have no spending discipline, the White House may believe they have no choice but to keep buying our debt no matter what. That might be a great bet: Our rates are more than competitive, and our country’s certainly growing much faster than Japan or Europe and has much better long–term prospects.

So, maybe it’s time to stop worrying and start loving the weak dollar. Even if you are a crimped blue-stater, worried about the long-term purchasing power of your dollar and forced to visit the Venice in Florida instead of the one in Italy, let me craft you an investment strategy that both hedges the weak greenback and stands to profit from the newfound export prowess of the U.S. Here are four methods to beat the greenback’s decline at its own game and gain from our government’s sub-rosa weak-dollar policy.

The dollar’s going down, and Washington won’t lift a finger—it’s a harmless tonic to fix imbalances that benefit only those who likely didn’t vote for the president.

First, while I have never recommended buying a gold stock in my life, gold’s now in a long-term bull market as rich foreigners figure out our real game plan and flee the world’s reserve currency for the yellow metal. My favorite: Newmont Mining, the biggest and the best, with the cheapest finding costs. I’d make it a core position for any portfolio given that I think gold could go to $600 an ounce over the next three years (late last week, it was at about $450). Gold’s a nice hedge against inflation, something that typically flares for all countries that have favored weaker currencies as the answer to their short-term problems. I’d buy Newmont up to $50 and hold it for the next four years.

Second, I would look north and get some Canadian real estate, Canadian dollars, and Canadian stocks. Can’t afford to travel abroad to kick the tires of the merchandise? Why not join me in buying EnCana, one of the biggest oil and gas repositories in North America, one that coins money at $30 a barrel. I can’t even begin to think how much it will make with oil at $48. EnCana is a spinoff from the old Canadian Pacific; it owns millions of acres of potential oil fields that it hasn’t even begun to explore, not to mention all the suddenly profitable tar sands that it can harvest as an alternative energy source. Canadian bonds aren’t a bad bet, either. Canadian government debt gets priced in loonies, a currency on the upswing because, ironically, the socially liberal Canadian government is much more fiscally conservative than our radical Republican regime.

U.S. companies that export goods made here and there—wherever that is—should rock, too. They get paid in strong currencies, which translate into many more dollars when they report earnings per share in U.S. numbers. My favorites: 3M, McDonald’s, and Procter & Gamble, three Dow stocks with overseas sales amounting to 58 percent, 65 percent, and 54 percent, respectively. Still other companies in multiyear dogfights with foreign producers—notably Caterpillar, John Deere, Ingersoll-Rand, and Boeing—will now have a distinct competitive advantage because their goods get sold at a discount to the foreigners because they are priced in dollars. I’d buy those, too.

Finally, my favorite bets are M&A targets, stocks that look cheap to foreign eyes now that the dollar has created big discounts year over year. Food, drug, and real-estate companies could become cheap targets, but the best place to fish is the banks. You may not know it, but the American banking environment is perhaps the most vibrant in the world, with the best growth and the least saturation. I would buy a basket of regional banks, including PNC, National City, and KeyCorp: They’re the most likely targets because they’re relatively easily swallowed and can produce terrific synergies with these foreign banks’ current American beachheads. Given that the euro has appreciated so dramatically versus a year ago, these banks look like gigantic bargains to the growth-starved Europeans. Thirty-five percent off: What foreign colossus could resist that? Oh, and while you are shopping for financials, consider Goldman Sachs. It will have a hand in many of these weak-dollar-related mergers, and, amazingly, it would no longer shock me if a European institution snapped up the old-line firm I once worked for simply because it’s just too gosh-darned cheap to pass on.

Short term, the dollar’s fallen so much that it wouldn’t surprise me if we got a bit of what we on Wall Street call a dead-cat bounce. Long term, though, I think the dollar can fall another 25 percent against the euro and the yen before it finds terra firma. So get in your last trip to Europe, before it becomes too expensive for all but the most profligate.

James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. At the time of this writing, he owned EnCana and PNC.

Ode to the Falling Dollar