Transcript:
Easan Arulanantham:
How does a strong US dollar affect the stock market? And are there any industries that kind of performed better in this environment?
Tom Vaughan:
Yeah, I read a really good article breaking down the problem with the dollar. And the last time we had really significant problems with the dollars was in the 70s. For the same reason, when you raise interest rates dramatically, all of a sudden, your Treasuries are paying more, and the rest of the world wants to buy those treasuries. And they’re converting their currencies. And they’re buying dollars to do that. And so it drives the price of the dollar up. And that’s fine up to a point you want, you want strength in the dollar, but you don’t want too much strength in dollar. Because what happens is, companies that are in US companies that are selling internationally, all of a sudden, their products get way more expensive, their profits can drop in that environment, their revenues can drop in that environment, the S&P 500 has 40% of its sales coming from international sales. So those companies that have high exposure to that international sale, their products are getting more expensive, because the dollar is growing versus those other currencies, right. So if it really, really runs, it would be a pretty big problem, watch how much the market starts to react positively, if the dollar runs super strong, is actually backed off just recently off of its high. So things are looking better than they were even just a few weeks ago. As far as that goes, you know, if you’re traveling or the grain go to Europe, it’s cheaper, get this parity, you know, more or less between the euro and the dollar, which we haven’t seen in 20 years.
And so you know, if you’re buying things, so that’s where that’s that’s the other, that’s the advantage side, that’s where the companies could make more, if you’re buying things internationally, and selling them here, or producing them internationally and selling, if you’re selling to the US for like you mentioned earlier, like Walmart when we were talking about this earlier, so they go out there buying things internationally and bringing them in and selling so they’re it’s getting cheaper, yeah, to buy those things. And that’s good, that brings that in, they can either have a higher profit margin or reduce the cost to the customer. And country, like let’s say, a company in Europe that wants to sell something here, they’re going to be cheaper, because the Euro is now lower. And they you know, so depends if you’re coming the other direction, that’s the advantage. I haven’t seen a lot of great games, I mean, Walmart struggling with inventory issues, and overall inflation that’s causing because they have very thin margins. And so you know, it’s really easy with a higher wage cost increases, to really disrupt those margins. And we saw Walmart, Walmart’s, you know, report that came out this last quarter was off by, you know, quite a bit. And so, you know, it hasn’t helped them so far. And of course, you know, say European country trying to sell Europe struggling, so you’re gonna buy the European stocks, those stock markets are really still struggling. You got some giant hedge fund managers with very good track records, all shorting Europe right now, you know, they might be wrong, but there’s a reason they’re doing that. Because there’s an expectation that Europe is going to suffer more because of this Ukraine situation. And the reliance upon this Russian energy, which has gotten more expensive, you know, are potentially actually oil. So come back under $90 a barrel. Now, it’s kind of incredible. And, you know, but has potential to be an issue.
Easan Arulanantham:
And you have seen it with the earnings reports. Many companies are saying that, you know, we’re revising our guidance, because the strong US dollar is already in our exports, other countries. I think you mentioned earlier that 40% of revenue for S&P 500 companies comes outside of the US. Yeah. And so it’s Roth like solar edge that I talked about earlier, how it dropped 15, or 16%, was a lot of that was because they revised guidance, because 30 to 40% of their revenue goes is from Europe. And so selling products in Europe just became big, their margins go down.
Tom Vaughan:
They’re competing with another solar company that has a similar product, for example, that’s in Europe, their product just got more expensive, versus that European product. And even if they keep it at the same price as the European ones, they’re actually losing more money because, you know, they, they’re because of the exchange. So yeah, again, if $1 gets really strong, it could be real big problem. And as they keep raising rates that has more and more potential to create a stronger dollar, especially if we’re raising rates at a faster rate than other countries in the rest of the world. You know if you can just make up a number if you can get 8% Treasury here and 5% Everywhere else So, where are you going to get here? You’re gonna come here. This is one of the best places to have a treasury. This is the safe haven and is paying more and so people from around the world are buying treasuries, and they’re making the dollar values go up, right. So, very, very interesting timeframes are the consequence of this high inflation.