Broker Talk: The Dollar Is Destined for a Decline

The U.S. dollar may hold up in the short term, but experts say that it’s headed for decline – and investors should plan their investments accordingly.

Who’s Talking: Jeffrey Saut, Chief Investment Strategist at Raymond James.

The Gist: Saut still believes in his recent predictions about the future of the U.S. equity market: U.S. stocks will follow the pattern of the 2003 recovery, when the market “flopped and chopped” until the fall, but “never gave up much ground.” For that trend to hold, says Saut, the market will need to believe that a recovery is on its way. And that means believing that President Obama’s economic agenda—spending trillions of dollars to overcome the bear market recession—is going to work.

For the most part, Saut thinks that’s true. Obama’s plan, he explains, is to spend like crazy on the recovery while inadvertently devaluing the dollar against other world currencies long term. Once the dollar is cheaper, our massive government debts will be easier to finance. In the meantime, Obama is “talking” a strong dollar politically (at home and abroad) to keep up short-term confidence in the dollar’s strength during the recovery.

This is a similar tactic to the one used by Franklin D. Roosevelt during the Depression, explains Saut. Following the Gold Reserve Act of 1934, the U.S. dollar was devalued by 41%, which allowed the government to pay off debt more easily. The Dow was at 110 at the time of the devaluation and by March 1937 it had risen to 194.

Saut says the short-term strength of the dollar gives investors an opportunity to develop a long-term plan for preserving their wealth once the dollar gets weaker. In his opinion, there are two roads to choose from: Buy gold, or buy growth stocks whose growth will compensate for the “long-term dollar demise.” Saut recommends the latter. The Chinese, for example, are buying fewer U.S. Treasurys and more corporations, commodities, metals, mines, gold and crude oil. To follow the Chinese strategy, Saut recommends buying stocks like Harsco (HSC) and NII Holdings (NIHD) at cheaper prices if the market continues to decline over the summer.