The Albatross Hanging Around America’s Neck

This Probably Wasn’t the Bird You Were Thinking About Today…

Ah! well a-day! what evil looks
Had I from old and young!
Instead of the cross, the Albatross
About my neck was hung.
-Samuel Taylor Coleridge
“The Rime of the Ancient Mariner”

All this week, politicians have made a lame show of pardoning a turkey in the runup to Thanksgiving. A shame no politician wants to deal with that albatross.

I am, as you might suspect, speaking of the debt that hangs about the neck of Uncle Sam like Coleridge’s literary bird.

T’was a time in our good land when politicians had some sense of fiscal responsibility. They saw debt for the siren it is and largely steered clear of the hidden and rocky shoals upon which she beckons.

That was before Reagan invaded the White House, packing an administration that saw debt as the path of progress. That progress, of course, was built on stealing from the future to pay for votes today, but who cares about the future when you’re dead and the only soul you have to appease is the devil with whom you made the bargain?

Decades on, the politicians Americans have hired in the wake of the Reagan Revolution have abdicated their fiscal duties and instead run this joint with the fiscal finesse of a drug addict guarding an armored car on an ATM run.

Nothing we can do about that now on a country level.

We are where we are, and that’s that.

But there is something we do on an individual level.

Abandon ship!

Ok, maybe that’s melodramatic.

Still, the point remains.

We’re in a moment where much of the world is increasingly angsty about all the debt America has managed to amass in the aftermath of Reagan’s D.C. revolution—whereby debt became so accepted.

When Ronnie the Revolutionary took over in 1980, the U.S. had about $900 billion in debt. That represented about 31% of America’s GDP, or only around 31% of the size of her entire economy.

Forty-odd years later, debt is now pushing $34 trillion, or 125% of GDP.

Back in 1980, GDP was $2.7 trillion. Today, it’s $27 trillion.

So the economy grew by a factor of 10.

Debt grew by a factor of 33…

And real median household income has grown by a factor of 1.4.

Viva la revolution!

Want to know why Americans are mad any why the shrinking middle class is in revolt? Reread those numbers.

None of this is sustainable, of course.

Debt is a fickle mistress. It gives you everything you want, when you want, and then takes away everything you have when you can least afford to lose it.

And so, the reckoning grows ever more likely and ever larger in its impact.

But, like I said, there’s something we can do about this personally.

Move some of your investable cash into foreign assets. You don’t have to rush to Ireland and open a euro-denominated bank account (although you can do that, as I’ve written about in International Living).

All you really need to do is own some foreign stocks in your investment account—even those that trade in New York.

Though they’re priced in U.S. dollars, that’s just to appease American currency sensibilities. Their real price is denominated in whatever their home currency happens to be.

Own shares of Toyota, for instance, and what you really own is a yen-based stock. Own Nestle and what you really own is a stock priced in Swiss francs, since Switzerland is Nestle’s home market.

The reason this foreign currency exposure matters is because the dollar is heading into long-term weakness. And a fiscal crisis here at home will only deepen the decline.

By owning foreign assets, however, every drop in the value of the dollar is a rise in the value of the currency underlying the foreign stock you own. That’s because currencies trade in pairs and function just like two kids on teeter-totter: If one goes down, the other must go up by definition.

So when the dollar falls in value, it’s falling in value against other currencies, which necessarily implies that the other currencies are rising in value against the dollar.

Thus, if the Swiss franc were to rise, say, 10% against the dollar, the price of Nestle’s stock is worth more dollar terms because the underlying currency buys more dollars.

A simple “for instance”: You buy 1,000 shares of Swiss Cheese Amalgamated when $1 buys 1 franc. That transactions costs you $1,000 and you now own an asset worth 1,000 francs.

But then the dollar weakens, and the franc strengthens by 10%. Now, 1 franc costs $1.10. You sell your 1,000 shares and you still have the same 1,000 francs. But each franc now buys you $1.10 when you repatriate the cash. You’ve turned $1,000 into $1,100 even though the underlying stock did absolutely nothing. Your gain is purely because the dollar dropped in value.

Now, apply dividends to that.

As you continue to collect dividends over time from foreign companies, the dollar value of those dividends increases as the buck declines against a company’s home currency.

It’s win-win all around.

Which is why I say that we do have the possibility of protecting ourselves from the dollar debacle to come: Hold some of your wealth in high-quality, blue-chip, dividend paying stocks of foreign companies. I just gave one of those to readers of my Global Intelligence Letter in their November issue.

What I can tell you is that those companies are all over the New York Stock Exchange.

And you should definitely be hunting them now, while you can, because an unpardoned albatross is hunting Uncle Sam.