4G·

Reduce US share?

Partly due to the following article by @Epi (many thanks for that! 👍🏻) I am considering reducing my US share in my portfolio.

Specifically, I am considering, for example, selling my shares in $BLK (-1,26%) to sell:

These are close to the all-time high in dollars (which I generally don't think is a bad time to sell), but roughly about 10% lower in EUR. So selling would currently mean giving up about 10% of the return.

The share in my portfolio is 3.5%, I would currently realize a profit of 13% in EUR.

My investment horizon is 15 years+, my US share in the portfolio is approx. 80-85%.

How are you dealing with the current weakness of the dollar? Does it even make sense to react by buying/selling?

Are you currently selling positions in dollars because of the weakness of the dollar (and accepting the loss of return in EUR)?

Or is that precisely why you are not selling, even though you actually want to sell?

Or are you perhaps even building up positions in dollars in order to benefit from an appreciation of the dollar from 2027?

Epi

@Epi

2Mes·

Investing in times of a falling USD

What is it about?

As I wrote in my last post, the USDEUR exchange rate has broken its upward trend, which has been running since 2007, in the last few days.

Why is this a problem for investors?

A falling USD means capital outflows from the US market, which traditionally goes hand in hand with problems in the US and global economy and thus falling equity indices. In addition, a 30% depreciation of the USD means an additional 30% loss for investors in EUR. Ergo: Understanding the USD cycle is very important for your own investment strategy!

In the following article, I will 1. introduce you to the USD cycle, 2. explain which asset classes perform best in which phase of the cycle, 3. what to expect over the next few years from a cycle perspective and 4. how to profit from it.

The USD cycle

Here is the long-term chart of the USD index since the installation of the current international monetary system (Bretton Woods) in 1971:

A certain cyclicality of the USD is noticeable. It can be roughly summarized as follows:

High approx. 120 USD: 1971

Low approx. 80 USD: 1978-80 -30%

High approx. 160 USD: 1985 +100%

Low approx. 80 USD: 1990-95 -50%

High approx. 120 USD: 2000-02 +50%

Low approx. USD 70: 2007-11 -40%

High approx. 115: 2022-2025 +60%

If you look at the highs in 1969, 1985, 2001 and 2017, you can see a relatively stable 16-year cycle. The next high point would be around 2033. There is also a 16-year cycle for the low points: 1978, 1994, 2010. The next one would be around 2026. Roughly speaking, this results in the following cycle: USD falls for 9 years and then rises for 7 years. On average, the USD appreciates by 70% in an upward cycle and depreciates by 40% in a downward cycle (100 +70% -40% = 102). The economic reason for this cycle is probably to be found in the US election periods and the different economic policies.

Each cycle tells its own story:

1969-1978: Oil crisis and stagflation

1979-1984: Reaganomics

1985-1994: Political turnaround and emerging markets boom

1995-2000: Internet boom and emerging markets bust

2001-2010: Internet bust, financial crisis and emerging markets boom

2011-2016: Zero interest rate policy and US tech boom

2017-2026: AI boom/bust and Trump(?)

What does this mean for the next few years? The current phase did not look like a devaluation phase for a long time. We are still only 10% below the peak of the last appreciation phase 2011-16/17. The current depreciation phase ends in 2026/27. For the cycle of the last 60 years to be maintained, there would have to be a significant USD depreciation of 30-40% in the next 1-2 years.

Ergo: If the cycle remains intact, we are on the verge of a true USD crash! Of course, it will hit everyone unexpectedly, especially our political economists - but not you! You now know the cyclicality. How can you profit from it now?

2. the performance of asset classes in the cycle phases

Here you can see the real return (performance minus inflation) of the most important markets S&P500, emerging markets, gold and commodities in the individual phases of the cycle in USD (I have left out bonds):

S&P 500

Period Real (p.a.)

1969-1978 -0,5 %

1979-1984 4,4 %

1985-1994 10,9 %

1995-2000 17,5 %

2001-2010 0,0 %

2011-2016 10,3 %

2017- 2025 7,5%

MSCI Emerging Markets Index

Period Real (p.a.)

1969-1978 -

1979-1984 -

1985-1994 12,0 %

1995-2000 2,0 %

2001-2010 9,4 %

2011-2016 -3,4 %

2017- 2025 2,1%

Gold (USD per ounce)

Period Real (p.a.)

1969-1978 23,8 %

1979-1984 2,5 %

1985-1994 -4,9 %

1995-2000 -5,5 %

2001-2010 14,7 %

2011-2016 -5,0 %

2017- 2025 9,2%

Commodities (CRB/BBG Commodity Index)

Period Real (p.a.)

1969-1978 5,0 %

1979-1984 -2,1 %

1985-1994 -4,2 %

1995-2000 -0,4 %

2001-2010 5,0 %

2011-2016 -10,4 %

2017- 2025 -0.7%

If we select the top performer for each period, the following picture emerges:

Period 1st place (real return p.a.)

1969-1978 Gold +23.8 %

1979-1984 S&P 500 +4.4 %

1985-1994 EM +12.0 %

1995-2000 S&P 500 +17.5 %

2001-2010 gold +14.7

2011-2016 S&P 500 +10.3 %

(2017-2025 gold +9.2 %)

The result is quite clear: the S&P 500 performs best in the USD appreciation phases. Gold and, to a lesser extent, emerging markets perform best in depreciation phases. There is also an economic logic to this: when the US economy is booming, international capital flows into the US market, which strengthens the USD and causes prices to rise. Gold is traded in USD and becomes cheaper for ex-US investors when the USD falls and more attractive for US investors when share prices fall. Emerging market companies and governments are often indebted in USD, which lowers the debt burden when the USD falls.

3. cyclical forecast for 2026/27

a) The USD is likely to reach its cyclical low in 2026. As it is still close to the high of the last cycle, it should depreciate by approx. 30-40% over the next 1-2 years.

b) The S&P500 has gained an average of approx. 3.5%pa (real) during the devaluation phases. From a level of 2400 points in 2017, this would be approx. 4500 points at the end of 2026 with approx. 3% inflation, i.e. approx. 15% lower than today (5300 points).

c) Gold has gained an average of approx. 11.2%pa (real) during the devaluation phases. From a level of USD 1300 in 2017, 3% inflation at the end of 2026 results in a gold price of approx. USD 4900, i.e. around 50% higher than today (USD 3300).

d) For euro investors, the depreciation of the USD must also be taken into account. This means that an unhedged S&P500 ETF would be approx. 45-55% lower in 2026 than today according to the cycle and unhedged gold would be approx. 10-20% higher than today.

e) From 2027, the USD should bottom out and then rise again until 2032. This would then also be the performance phase for the S&P500.

4. strategies and investments

a) Passive B&H savings plan investors (S&P500/ MSCI World/ ACWI)

B&H investors remain consistently invested and continue to save in their ETFs. However, they should be prepared for a massive test of their strategy and nerves. The drawdown could be massive (approx. -50%) due to the falling USD and falling equity markets. Those who have added emerging markets should be less affected by a falling USD.

Those who have the opportunity can consider at least hedging the depreciation of the USD. A factor certificate or ETC is most suitable for this. If you reserve 10% of your portfolio volume for a factor 10 short USDEUR, you can at least cushion a good part of the USD depreciation.

Wisdomtree 5x Short USD EUR ETC, DE000A12Z322
Vontobel 10x Factor Warrant EUR long USD, DE000VP3NYZ9

An alternative would be to pause the savings plan for the equity ETF and instead invest in a currency-hedged gold ETC or simply a money market ETF.

WisdomTree Physical Gold - EUR Daily Hedged, JE00B8DFY052

Another option is to switch to currency-hedged ETFs or redirect the savings plan to them. Such ETFs are available cheaply for the S&P500, MSCI World and ACWI.

Invesco S&P 500 EUR Hedged UCITS ETF IE00BRKWGL70
iShares Core MSCI World UCITS ETF EUR Hedged (Dist), IE00BKBF6H24
SPDR MSCI All Country World UCITS ETF EUR Hedged (Acc) IE00BF1B7389

b) Active investors (market timing, trading, stock picking)

Friends of sophisticated, strategic market timing have a few more options.

They can either switch immediately into a currency-hedged gold ETC or wait for a correction and invest in gold near the SMA100 via a factor ETC, for example.

WisdomTree Physical Gold - EUR Daily Hedged, JE00B8DFY052
WisdomTree Gold 2x Daily Leveraged JE00B2NFTL95

Or you can bet directly on a falling USD with a low-cost factor ETC/certificate (see above)

In addition to gold mines, equity fans can also target emerging market companies with high USD debt, as these benefit particularly from a falling USD. This can quickly add up to several 100% gains.

Finally, connoisseurs can bet on falling prices on the US markets with inverse index ETFs. However, due to the asymmetrical volatility, a good strategy and disciplined implementation are a must here.

Amundi MSCI USA Daily (-1x) Inverse UCITS ETF Acc LU1327051279

What other ideas do you have for profiting from a USD devaluation?

5. summary

The USD cycle has been very reliable over the last 60 years. Knowing it helps to better understand the major movements in the financial markets. The current break in the USD trend could be followed by a rapid and sharp depreciation of the USD in the next 1-2 years with serious consequences for the financial markets, especially for German investors with USD investments. Those who know the cycle can protect themselves against it or even profit from it.

I have hereby warned you.

And now on with the business!

Your Epi

17 Commenti

Nova@Nova_portfolio

IMO, there are two separate factors to weigh in here:
1. Depreciation of the USD
2. Risk of US economy underperforming peers

The first is more or less a given fact, most large institutions estimate the USD/EUR to reach 1.20-1.30 within a year due to decreasing belief in the stability of the US. Medium-term, stocks would have to overcome this 3-12% return just to overcome USD devaluation. Hence, I'm more reluctant to buy USD stocks, esspecially the more stable ones / those least likely to outpace this devaluation.

The second factor is more difficult to assess as economic signals are as mixed as mr. Oranges decisions. If these would start to point more towards recession, I'd adapt my stock picks for this (e.g. pick healthcare or staples over US-based tech)

In general, I think this topic is too often neglected, curious to here the thoughts of others.

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Epi@Epi

@Nova_portfolio If you are already pointing out often neglected factors, here is one more: the US market is historically highly valued (Shiller PE, Buffett indicator), in some cases higher than at any time since 1929. This normally means at least 10 years of underperformance.
The coming years are likely to be uncomfortable for US investors on many levels.

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Global I.@gloinvest

Everyone is always talking about anti-cyclicals, only to then throw in 18 pages of justification as to why sentiment is now pro-cyclical.

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Epi@Epi

85% US share is quite high. Your portfolio will suffer in the event of a USD devaluation. But you know that.

With your time horizon of 15+ years, I doubt whether you need to change anything in the short term. After all, the horizon covers several cycles.

Perhaps a USDEUR short OS is enough for you for the next few months to cushion the ongoing devaluation?

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Christoph@ChrisBizz

@Epi I am actually satisfied with a US share of around 85%. But not for the next 12-18 months or so.

But you're probably right, with a long-term focus, short-term actions don't make much sense.

I have already made a note of the option with the OS from your original post. I definitely think that's a good option too 👍🏻

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Epi@Epi

@ChrisBizz Maybe this ETC is something for you? Relatively high factor, good issuer, low costs: $USE5

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Basti92@BavarianLion

So $BLK is currently 8% of my portfolio (largest single position)! I will definitely not sell, my investment horizon is similar to yours (15+ years)! Until then, so much can change in the dollar exchange rate, so I'm relatively unconcerned about it 😉 Sure, I was a bit annoyed with the dividend this time, but that's the stock market 😅

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Christoph@ChrisBizz

@BavarianLion true, the dividend payments also suffer, of course 😅

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Basti92@BavarianLion

@ChrisBizz Still no reason for me to sell US stocks 😉 The whole thing can change again quickly! As I said, 15 years is a long time... The only thing that surprised me was that the withholding tax was so high at BlackRock 🤯

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CrashBurner@Psychedelic_Sunflower

I have had my ACWI portion of the portfolio as a hedged variant for around three months now $SPP1. If the EUR/USD exchange rate falls below the 200-day line again, $SPYY will be brought back into the portfolio. However, Bitcoin and physical gold are currently suffering quite well from the weakness of the dollar😅

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Epi@Epi

@Psychedelic_Sunflower Interesting strategy. However, the sales are likely to incur taxes. Wouldn't a currency hedge be more tax-efficient?

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CrashBurner@Psychedelic_Sunflower

@Epi if the shares included have risen in dollars, then yes.
Do you think it would be cheaper to buy just one OS and hold ACWI in USD? Then you only have to pay tax on the sale of the OS, but it's also stupid if my ACWI is then possibly at -30% despite the USD-ATH just because of the currency losses.
Then there's the question of what ratio to the sum of the ACWI I should buy the currency hedge so as not to hedge too much or too little. Basically, I just want to participate in the price gains of the companies and not make a disproportionate currency bet.

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Mav83!@Maverick4831

The performance will certainly suffer during this presidency, but with my investment horizon I just see it as a positive and am happy to get more shares through the savings plans.
DCA all the way🤝🏼

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Finanzielle-Freiheit@Finanzielle-Freiheit

@Epi a trend break is only present below 0.8, before that it is only a change in trend momentum. Explanation: the 22/23 higher high has confirmed the higher low at 0.8.

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Epi@Epi

@Finanzielle-Freiheit Depends on your definition of a trend. I see a trend break when a clear trend line is broken.
Your trend break is of course stronger and more reliable, but it can also be recognized much later. Significant losses may have already been incurred. It doesn't have to be.

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federalreserve@federalreserve

You can think about it, you definitely understand the points. But I wouldn't sell. Especially not a winner, I don't know if this is the case for you.

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MrMister@MrMister

I am currently building up my US share again. But I'm staying below 20% of my portfolio. I have Berkshire, Microsoft, Alphabet and Parker-Hannifin. And the two sector ETFs deliver 60% US exposure in Quantum Computing and 24% in Nuclear.

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