The Capitalist Investor - Episode 135

While we may be experiencing some tough times here in the states, the European economy is taking some harder hits. For the first time since 2002, the value of the euro is about equal to the U.S. dollar again – a sign of a shrinking European economy and a surging American dollar. 

This week, Derek and Tony discuss some of the good news going around: a strong U.S. dollar, cheaper imports, and a much needed decrease in gas prices. But with good news follows some bad news. In this week’s episode of “The Capitalist Investor,” the narrative changes – it’s no longer about a looming recession, but coming to terms with the fact that it’s now here. Just how long and deep will it last though?  

Outline of This Episode:

  • [1:25] Strong U.S. dollar vs. strong U.S. economy
  • [5:50] Gas prices are finally dropping… BUT
  • [9:35] People’s spending is corroding
  • [12:10] Some lighter news: our British Open favorites

The strengthening of the U.S. dollar or a decline of the European economy?

This week, it was reported that for the first time in 20 years, the euro is at near-equal value to the U.S. dollar. Considering the Euro has historically always been worth more, it bolsters the U.S.’s status – headlines are raving about it. But ultimately, this news doesn’t come without some sort of downsides. 

But first: we’ll start with the pros of a higher U.S. dollar to euro value. 

If you ever wanted to travel abroad, or have a trip across the pond planned, now’s the time to do it because your dollar is going to stretch much further now than it ever has before. Back in the day, when U.S. currency was exchanged for euros, it took about 1.3 dollars to get just one euro – sometimes two. So today, good old U.S. money will get you further in Europe. 

Another plus is that imports are now cheaper and multinationals that do business in the U.S. benefit. Overall, our status as the world currency has significantly bolstered and that’s something to feel good about. 

And here comes the drawbacks. 

For Europeans, traveling to the U.S. just got more expensive. So, less people will visit here and spend money. Ultimately, a bolstered U.S. dollar will hurt our GDP count and overseas tourism revenue. Economic growth will take a hit. For all the U.S. companies that sell their products abroad, they will have a problem. All non-U.S. manufacturers that rely on American products will have to pay up. 

Eventually down the road, we may be seeing some serious trade wars. If our dollar is strong, it makes everyone else around the world hurt – it will be more expensive for them to do business with us and hurt export and import numbers. 

Additionally, we don’t think it necessarily means the U.S. economy is stronger, but just not as bad as the European economy – it’s quite a mess right now. 

Many European countries heavily depend on Russian pipelines to power and heat their homes. Due to the fallout of the Covid-19 pandemic and Russia’s War on Ukraine, this creates a lot of problems for Europe – fuel shortages, trade deficits and an already staggering value of currency. 

While all these problems are happening across the way, we can’t be ignorant to the fact that they will eventually trickle down to us here in the U.S. It might take quite a bit of time, but it will eventually bleed through. 

Gas prices are finally coming down, but it may not be the good sign you think it is

We got excited just like everyone else when we saw gas prices dip a bit this week. At least here in Ohio, prices fell at most 50 cents. Low gas prices are good to see for both our spirits and our wallets – they will help cool inflation. 

But don’t be too easy to fool; they didn’t fall from any sort of policy decision or Biden administration action. They fell because demand is falling. People are now beginning to slow their spending. Lower prices are a basic knee-jerk reaction to a recession. 

Yes, a recession. We most definitely have to be in a recession now. Based on last quarter’s low GDP readings and the predictions for the next – we don’t know how anyone can deny we’re in a recession. The narrative is changing – it’s not coming. It’s here. But it just feels different. 

People may not be quick to see the recession around us simply because job growth is still good, and unemployment remains low. But things are simply more expensive and people’s spending power is corroding. 

Over time, people had to pay so much more for all their basic supplies, energy, and gas. After a while it started to eat away at their spending ability and now, they are finding themselves being able to spend less. And prices are finding themselves dipping because of it.

It’s the crux of a recession and to combat inflation, it’s the direction we have to go. The question now is: how long is it going to last? Will this be a shallow recession or a longer, deeper one? 

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