The dollar. It's almost always the dollar. We keep on underestimating how strong the dollar is, and concomitantly, how weak every other currency is under the sun. And it is playing havoc like I haven't seen in ages as this earnings season goes along. It's become the number one reason why numbers have to come down when they do come down.
On Tuesday, when I got a chance to interview CEO Tim Cook about Apple's (AAPL) quarter, I was struck by how we all just shrug when we hear the strong dollar hurt sales. It comes with the territory, right? Our ears tend to tune out when we hear it.
But I caution about minimizing or overlooking the impact this strong dollar has when it comes to competitive disadvantage over other products that have similar high price points.
Plus, it's not going away. It's just getting more pronounced. Our rates are higher than most of the developed world. Our growth, while slowing, is still faster than most countries. Our inflation rate, while unsatisfactory to some, remains tame. Our ascendance because of our employment strength and our stable government -- I know it may not seem like that to you, but it sure does if you live or visit so many other countries -- makes the dollar the king, queen and rook of all currencies.
All of that makes the U.S. a magnet for investment, especially for our bonds -- and you have to buy dollars to buy those bonds to complete the virtuous circle for dollar lovers -- and, more germane, the vicious cycle down for trade afficionadoes.
Consequently, we are in a period where the dollar is truly beginning to price our merchandise out of a lot of very important growth markets.
For example, it's difficult to explain the gigantic 27% fall-off for Apple in the Chinese market without referencing the dollar in the mix. How much of the decline is a lack of subsidies by telephone companies? How much of the decline is the rise of nationalism not just in China but globally? The latter is something Tim specifically brought up when I talked about the Chinese people wanting to buy Chinese for a sense of national purpose. How much is the brutal competition from Huawei and Xiaomi and Oppo and Samsung hurting Apple?
And, perhaps least talked about and often ignored, how much has the dollar raised the price of the iPhone iterations above local manufacturers?
I would say it is significant enough to account for more than just three or four percent of that decline, which, when dealing with Apple, is a huge number. Apple does and did have to cut prices to defend itself from the dollar, which hurts gross margin more than analysts are imagining.
That's a story that is untold. We just hear about how Apple can't compete any longer, that it is not innovative enough, that it has lost cache.
To me the larger issue in China is how Apple has not one, but two hands tied behind its back: It is American and it is more expensive than before because of the strong dollar.
The weakness via the dollar crisscrosses the globe. For example, in the Turkish market, the weak lira cost Apple more than $500 million dollars in translation. That's right, just translation. Not nationalism, where President Erdogan has been blasting American goods to no avail. The lira is doing more to defeat Apple than the president ever could. Their numbers in many lesser developed countries with weaker currencies are just eyepopping -- and it sure isn't Apple's fault.
Yet, that's the crux of the problem. Our eyes may glaze over on any chatter about currencies at this point. But we are seeing radically different sets of numbers before and after currency.
Tuesday, for example, I found myself awash in translations for 3M (MMM) to figure out how it really did. Same with Caterpillar (CAT) the day before and United Technologies (UTX) and Johnson & Johnson (JNJ) the week before for that.
We are getting distortions at mind-numbing levels.
I think it has gotten to the point where if the Fed raises again, we will be at such a competitive disadvantage that we are going to have trade wars all over the place BECAUSE of currency disadvantages.
So you may think our companies aren't doing as well overseas as they used to. I say don't blame ingenuity, blame currency.
It has a lot more to do with it than I have seen in ages -- and it's a much more important factor than anyone, the analysts, the commentators and the thought leaders are making it out to be.