Caterpillar, the maker of big yellow earth-moving equipment, just announced another round of layoffs. This time 10,000 people will get the axe, which is no surprise since the company has posted falling earnings for four straight years.
It’s also no surprise considering more than half of Caterpillar’s revenue comes from overseas. While their U.S. business is a bright spot in their financials, the outlook for the rest of the business is dim.
The company has taken a big hit because it sells equipment used mostly in mining and construction. Key mining industries such as coal and copper slowed down as commodities fell over the past several years. Construction in countries like China has also eased.
The hit to both of Cat’s main markets was painful, but it didn’t stop there.
In addition to flagging sales, the company also lost on foreign exchange. As the dollar strengthened since 2011, Caterpillar – and every other U.S. company with foreign sales – brought home less revenue when it converted money earned overseas into U.S. dollars.
According to Yellen and Company, that pain isn’t going to stop anytime soon. If the Fed hikes interest rates, the U.S. dollar will only get stronger.
Since the Fed’s last Open Market Committee meeting, several of its governors, including Chair Yellen, have spoken publicly about the possibility of rates moving higher by the end of the year. After a brief slide following the meeting, the U.S. dollar stabilized. If rates move higher by the end of 2015, then the U.S. dollar should make further gains.
So far, the damage to those who earn revenue in foreign currency has been extensive, but there is an upside.
China’s recent devaluation of the yuan dropped the currency by a mere 2% against the U.S. dollar. Because it can trade in a 2% band around the pegged rate, the currency fell another 1.9%, for a total drop of just under 4%.
While the move itself wasn’t large, it sent shockwaves through the financial world as it revealed that China would allow market forces to move the currency… at least a little. Other currencies have fallen much further.
Since 2014, the New Zealand dollar has fallen over 25%. In just over two years, the Australian dollar has dropped by more than 30%.
Closer to home, since commodities started rolling over in 2011 both the Canadian dollar and the Mexican peso have been slammed, falling 28% and 31% respectively.
The currency moves mean red ink for many companies, and can lead to painful consequences for employees, like those of Caterpillar.
But for most U.S. citizens, the stronger dollar is a good thing.
Now, this is not a claim that items we import, like French wine and Japanese cars, will suddenly cost less. While importers could cut their prices in the U.S. and still maintain their revenue in their home currency, that’s not typically what happens. Instead, foreign companies keep their prices the same and simply book extra profits from the more favorable exchange rate.
This is why Japanese stocks have done so well over the last several years. Their domestic companies kept selling goods at existing prices, even though the yen was falling. So every U.S. dollar, or euro, or yuan, that was repatriated back to Japan bought more yen and padded profits.
Rather, my point is about what you can do with your dollars when you leave U.S. soil.
We recently held our Irrational Economic Summit in Vancouver. The weather was perfect, with a low in the 50s at night and the daily high around 70. In addition to a fabulous conference with great presenters and a lot of fresh information, Canada also treated us to its wonderful hospitality.
The best part – it was all on sale.
Since the exchange rate has fallen from parity to 0.75 Canadian dollars per U.S. dollar, it was like getting a 25% discount on every meal, newspaper, and hotel charge.
For anyone looking to travel outside of the U.S., now is a fabulous time!
As boomers go through their empty nester and early retirement years, it’s the perfect time for them to see more of the world. The kids are gone, they have means, and they still have their health.
Plus, the convergence of a commodity slump, a global economic slump, a U.S. economy that looks strong compared to others, and expected Fed policy should make the dollar even stronger. Right now, and for the next couple years, boomers have a world on sale!
So reach back to your childhood and find the places you’ve always wanted to see. Chances are, between now and 2017, they’re as cheap as they’re going to get.
