Dollar discussion
KAREN GIBBS: The greenback is under pressure. It has been for the past three years. If you’ve traveled overseas, you know it’s more expensive now than it was just three years ago. In that time, the dollar has fallen 38 percent against the euro and 23 percent against the Japanese yen. Even our trade partner to the north is getting in on the act, with the Canadian dollar gaining on our currency.
The dollar’s fall in raising fears of a global crisis, and investors are trying to find a way to profit from the decline. But are we arriving a little too late to the party? What should investors do to protect their dollar denominated portfolio?
ProFund Advisors just started a fund to take advantage of the dollar’s moves.William Seale advises the fund and joins us in our studio. Allan Sloan is Newsweek magazine’s Wall Street editor, and he says steer clear of this hot trend, or you could get burned.
Well, Bill, why is the dollar falling, and why should anyone care?
WILLIAM SEALE: Now the simple reason that the dollar has fallen is that we have a six-year uptrend and it maxed out. We’ve been in a three-year downtrend now, but very simply we’re borrowing too much and we’re spending too much, and that’s the reason that the dollar’s on the way down.
GIBBS: Why should investors care about the direction of the dollar?
SEALE: Well, it changes your life, very simply.
GIBBS: It hasn’t changed mine.
SEALE: Well, it will, it will. Because what’s going to happen, it’s going to be reflected in inflation. You know that $10 box of chocolates that you like to buy that was made in Belgium that you buy for special events a couple of times a year, well you go in and you’re going to buy that and next time it’s going to cost $15. Now if you think about that, that’s a $5.00 wealth reduction that you’ve experienced right there because of changing currency, and that’s the only reason. The chocolates are the same chocolates you bought last time.
GIBBS: Allan, Bill just mentioned the dollar’s falling creates an inflationary environment, but I haven’t seen it in the Consumer Price Index or the Producer Price Index, as well as the fact that the Fed raised interest rates this week, meaning that they’re probably going to affect the dollar positively. Should we be worried about this dollar crisis?
ALLAN SLOAN: Well, if you’re worth $100 billion and you have no assets outside of the U.S., sure you should be worried. The question is if you’re a modest investor like me or maybe like you – I don’t know how well public television pays – do you want to get involved in this?
GIBBS: So what should an individual investor that doesn’t have $100 million do to offset the erosion that could happen, Bill, to their portfolio that’s based in dollar-denominated assets?
SEALE: Well, there are three things that you can do with our funds, with our Falling Dollar Funds. One is that you could simply make a directional play on the dollar. You think the dollar is going to go down, you simply go long the fund. The second thing you can do is you can hedge. If you have foreign, if you have dollar-denominated assets that you’re worried about going down or foreign currency assets that you think are going to go down, you can use the funds for that purpose. And the third thing you could is you could simply hedge with it. You could put on a hedge and say, gee, I’m really worried, I’ve got a few hundred thousand dollars here that I need to convert for some reason or other to foreign currency, and what I’ll do is I’ll use the funds to hedge.
GIBBS: Allan, what about that? Because we do have some suggestions for individual investors with a little bit of money to open foreign-denominated savings accounts. What do you think about that?
SLOAN: Again, I wouldn’t do it personally. What people do is their business. I wouldn’t do it, if only because everyone’s now talking about it. And I’m the Wall Street editor of Newsweek, as you said before, and one of the old jokes is, you know, the best buy signal in the world is a bear on the cover of Newsweek. And we’re out there writing about the fall of the dollar. It was a very good story and very well done, but the reason we’re doing it is it’s on everybody’s lips, and my feeling always is if it’s on everybody’s lips, then it’s already priced in, and you have to make a macro call here, as they say on Wall Street.
Do you think the dollar’s going up? Do you think the dollar’s going down? Since I haven’t the slightest idea, and other than professionals I don’t know who has the slightest idea, I again wouldn’t let it bother me. Just one thing, Bill. What is the minimum investment in your fund?
SEALE: Allan, our minimum investment is $15,000 in our family.
SLOAN: So this is not a Ma & Pa fund, you know, where someone’s got $20,000 or $30,000 that he wants to hedge and spends $15,000 in this fund. I mean that’s not what this is for, right?
SEALE: Absolutely not. ProFunds is for professionals and for sophisticated investors. ProFunds is a family of index funds. We have 50 funds, 49 of them are index funds, one is a money market fund. And we are benchmarked to a number of broad indexes. We have leveraged funds, unleveraged funds, we have currency funds, we have fixed income funds, we have inverse fixed income funds. And the one thing that we have to offer is we offer the investor unlimited flexibility in moving their money among our funds.
We’ve opened two funds, the Rising U.S. Dollar Fund and Falling U.S. Dollar Fund. And what it is is that we’ve benchmarked these to the U.S. Dollar Index.
If the index goes up 1 percent, we would expect the Rising Dollar Fund to go up 1 percent in its NAV. Conversely, if it went down 1 percent, it would go down 1 percent. And the inverse of that is the way that the Falling Dollar Fund works.
GIBBS: But Allan, don’t you think that there is some benefit from diversifying your portfolio to include some foreign assets?
SLOAN: Well, sure. And I actually never believed in it, but then I went and did it five or six years ago and it’s worked out very well. And if you’re buying, say, a U.S. fund that invests in foreign stocks, then there are two things at play there. One is do you trust the manager to buy things that are worth buying, you know, at a good price? And second is you may get a boost from the dollar falling against the currency in which these things are. So to the extent I’ve done anything, I’ve put some money into foreign funds, maybe a little more than I normally would have, but again, to me the idea that someone like me can successfully compete against Goldman Sachs or hedge funds or big banks or General Motors or God knows who in the currency markets is crazy. Again, if you’ve got a lot of assets and you want to do the thing Bill is talking about and you want to hedge, I mean by all means, but this is not the thing for the average person to do. The average person should just go and buy the normal kinds of stuff and not sit here and try to guess about currency because you’re going to get killed if you do that.
GIBBS: But Allan, let’s talk about some of the factors that are causing the dollar to decline as dramatically as it has. The twin deficits that we hear talked about that nobody really pays much attention to, the budget deficit and the trade deficit. How are those two issues going to be fixed so that the dollar turns around rapidly?
SLOAN: Again, I don’t know what’s going to happen, but it’s not going to be fun. I think in the end what’s going to happen is interest rates in the U.S. are going to rise much more than they otherwise would in order to make our currency more attractive to the rest of the world, and someday maybe people in the rest of the world are going to figure out, maybe they already have, that the dollar is not what is used to be and maybe they should have some of their reserves in euros or yen or heaven only knows what else.
GIBBS: What’s the implication of that though to investors and our economy?
SLOAN: Well again, the implication is this would not be a good thing, but there are a million factors involved in the economy, right. There’s spending, there’s capital investment, there are a lot of factors to focus or obsess on only one factor and to make macro decisions based on it is not what I think again an average retail person should do. And whenever I say things like this, people in profession are always disappointed in me because, you know, they want me to give answers and tell people how to take action. I mean the time to have done this was three years ago and I didn’t think of it then.
The fact that I’m thinking now that the dollar is going to go down forever, I mean I’m sort of thinking that means that it won’t. And you chase things and you get killed. In ’99 there were record sales of tech funds, remember? And that didn’t turn out too well. I mean this whole obsession, including my occasional obsession, with the dollar compared to other currencies is probably a sign that the process is correcting itself and the masses as always are going to get caught going the wrong way.
GIBBS: Bill, what do you think about that?
SEALE: I’m not sure about that. First let me say that as a firm we’re perfectly agnostic, but as an economist I don’t see any reason that the dollar is going to turn around and go up. I think your best case scenario it could stay flat from here on. Now my reasoning is very simple. I don’t think that we’re going to do the two things which are going to be necessary to cause the dollar to turn around, and one of those is to get a grip on our imports. We cannot run trade deficits in the $700-plus billion a year range and have the dollar turn around.
The second thing is is the federal government has got to get a grip on and deal with the federal budget deficit, and I don’t see that happening. I don’t think that there’s a credible plan in Washington to deal with the budget deficit. What I think we have is we have campaign promises that will reduce it 50 percent in four years, and I think that’s ludicrous because we don’t have any way of doing it. I don’t think interest rates alone, Allan, are going to cause the dollar to turn around and go up. Or if they did, those interest rates would be so onerous and so painful we couldn’t stand it.
SLOAN: Well again, I happen to agree completely about the budget, and I’ve been writing this for years feeling, you know, like Cassandra that this can’t go on, and the fact that the budget deficit is being financed almost entirely by foreigners, primarily foreign central banks is unhealthy and can’t go on. I agree with all of this. I totally agree with this, and I’ve written it to hoots of derision for years. But I mean I can’t explain to you how it’s going to happen, but I mean would you personally take 15 or 20 percent of your net worth on straight currency bet? I don’t think you would. You sound much too sensible for that.
SEALE: Well, I certainly though would consider the possibility of making it part of a portfolio. After all, currency is nothing more than an investment in an asset that pays a known yield, and what we’re going to have in that situation, we also have a non-correlating asset.
SLOAN: But what part of, you know, again assuming you don’t need the portfolio to live on tomorrow, I mean what part of the portfolio would you do? One percent, two percent? Certainly not all of it.
SEALE: The periphery. The money that you have in your portfolio where you say I think that I can play with this money and it’s not going to affect my lifestyle, it’s not going to affect my retirement, and we all have some of that. It typically I think probably runs around 10 percent of a person’s portfolio.
GIBBS: Well, you’ve got two sides to every coin and two sides to every trade. Allan Sloan, Bill Seale, thank you very much for joining us.
Retiring retirement
GEOFF COLVIN: When are you too old to work? That question is at the heart of a growing debate, as millions of aging Americans find they have to keep working, many others just want to, and companies discover they need older workers. Believe it or not, of all America’s new jobs in the past 12 months, half went to people over age 55.
Just this past week, two signs of the times: the Army increased the maximum permissible age for National Guard recruits, and Southwest Airlines joined a challenge to the rule requiring airline pilots to retire at age 60. Bert Yetman is a retired Southwest pilot who leads the group spearheading that challenge; he joins us from Dallas. Robert Morison is a consultant with the Concours Group and co-author of a Harvard Business Review article called It’s Time to Retire Retirement. He joins us from Miami.
Bert, the Federal Aviation Administration says the age 60 rule is a safety issue. It seems to be effective, so why change it?
BERT YETMAN: It’s never been a safety issue. They say it is because they can maintain the rule by hiding behind safety. However, the rule is promulgated by Elwood Quesada, the former FAA administrator in 1958 and ’59 at the request of American Airlines CEO CR Smith for economic purposes.
COLVIN: The economic purposes being what? They wanted to get the highest paid people off the payroll?
YETMAN: That’s right, and bring on young military pilots that were already trained in jets. Realize that Boeing 707s were just coming on the line then.
COLVIN: Right, but it is a fact that our faculties do deteriorate with age. Doesn’t the safety argument have some merit?
YETMAN: What age is that? No one has proven a certain age. We have plenty of studies that show that the pilots nearing age 60 are safer than any other group.
COLVIN: So you clearly think that the opposition to the rule change is based actually on considerations other than safety, right?
YETMAN: That’s correct.
COLVIN: But it’s now, what, 46 years since the rule was imposed. Are the economic considerations still the same?
YETMAN: No, they aren’t.
COLVIN: What are they now?
YETMAN: Times have changed. Well, when they wanted to get rid of the higher paid pilots, they probably had a good foundation for that. Nowadays, when a pilot reaches about 12 years at the airline, he is at the top of the payroll, and he doesn’t get anymore seniority raises past 12 years, relatively a young pilot at that time.
COLVIN: Well, and so what’s the argument today? Why does the FAA want to maintain that rule?
YETMAN: My opinion would be that the FAA doesn’t want the bloody finger pointed at them. If they change the rule and a 62- or 64-year-old hits a mountain, somebody’s going to say, well, you changed the rule. They want it changed by Congress or they want it changed by a judge or by the President.
COLVIN: Right. So it’s pure risk avoidance on their part as far as you can see.
YETMAN: That’s right, and they’re flying in the face of the rest of the world. Everyone’s changing to a higher age, if any age limit.
COLVIN: Well, that’s a good point and we may get into that too, but Bob, is this pilot dispute an example of why you say it’s time to retire retirement?
ROBERT MORISON: Yes, it is. I mean I was just thinking as both a researcher and a frequent flyer, I think I’d rather have more experience in the cockpit rather than less.
COLVIN: Well, it’s certainly understandable, but you say most companies, in fact virtually all companies in the United States have to change their attitudes completely because they are, as you say, going to walk off a demographic cliff in the next few years. What do you mean by that?
MORISON: Oh, absolutely. The notion of retirement as it’s commonly conceived and practiced or has been practiced really for only the last 50 years or so just is impractical these days. It’s impractical for the national economy because we’re about to see a rather precipitous decline in the growth rate of the workforce. It’s impractical for an individual corporation that is facing a brain drain as the baby boom generation marches toward retirement. If too many of us retire on time, then corporations are going to be in trouble losing all that experience. And it’s also impractical for the capable, older person who wants to keep working and wants to keep contributing and can do so.
COLVIN: So you’re saying that it’s in the self interest of companies to go out there and recruit older workers, to welcome them, to make the environment conducive to them, right?
MORISON: And to retain them and even after retiring them to set up programs whereby they can come back on their own terms and work part time.
COLVIN: And yet the attitude of most companies seems to be exactly the opposite of what you’re describing. If you’re over age 50 and you’re trying to get a new job, most people will tell you it’s extremely difficult, if not impossible. So what gives?
MORISON: Well, it is difficult, but you just quoted some statistics about new jobs going to older employees. That’s on the up tick. The typical large corporation should probably count on roughly doubling its proportion of workers over age 55 within the next 10 to 15 years, and that’s just what the demographics tell us. The workforce is aging as the population is aging. If we’re going to keep the economy moving, it’s going to be largely on the backs of older employees.
COLVIN: Well, so what should really smart companies be doing now and what are some real smart companies doing now?
MORISON: Well, they’re removing the kind of built in impediment. Some are procedural, some are attitudinal, toward they’re keeping some older workers from working. Change how you calculate pension payouts so you don’t penalize people who reduce their salary in the last few years of work as they phase into retirement. Create programs as I said where retirees can come back working maybe part time, maybe six months on, six months off, you know, whatever works for the retiree and the corporation.
COLVIN: Bert, you’ve been campaigning for quite a few years to change this rule. Now have you heard from people outside the airline industry who support what you’re doing?
YETMAN: Yes, we have. I can’t name them right now. However, several organizations, AARP for one is behind us. They are filing an amicus to the Supreme Court action that we’re presently seeking.
COLVIN: I’ve seen some stories, anecdotes about older pilots, pilots who are at the retirement age in this country or past our country’s retirement age in other countries, who have done amazing things. Is that part of the argument?
YETMAN: Not in this case. It is mentioned in our petition. The article recently in the paper was citing David Cronin and Charles Haynes with their spectacular saves a few years back. I think that’s what you’re referring to.
COLVIN: Well, that’s right. Those were two amazing things. That was back in 1989, but that was one a pilot who, piloted I think it was the Hawaiian airlines jet that …
YETMAN: No.
COLVIN: What was it?
YETMAN: No, it was United Airlines 747, David Cronin flying the plane, taking off from Honolulu.
COLVIN: It was in Hawaii, okay.
YETMAN: Yes, it was in Hawaii, correct. And the cargo door blew off and several passengers were sucked out into the ocean or into the air and then the ocean, and damaged two engines which were shut down, and he flew it back and saved the rest of the passengers by getting it back into Honolulu.
COLVIN: And he was forced to retire, what, two months later?
YETMAN: Less than two months. He flew the flight the following week to Hawaii, and upon landing he had his birthday in Hawaii and he had to sit in the back of the airplane on the way home.
COLVIN: The other story is to me one of the most amazing stories in all of airline history, which is the man who piloted that plane into Sioux City, Iowa with only the engines being used to control it, and most of the people lived. It was incredible.
YETMAN: That is incredible. I’ve seen several videos of that and the fireball was terrific, but it’s just amazing that people lived through it.
COLVIN: Bob, there’s another angle here that I know a lot of people are thinking about. They’re thinking, okay, maybe a company should hire more people who are older workers, but the fact is those are not going to provide the next generation of management that the company needs, and to the extent the company restricts the younger labor pool, they are restricting the pool of future managers they’re going to have.
MORISON: I think what companies should be doing, first of all, the generation immediately behind the baby boom is disproportionately small, and so a lot of companies are already feeling a pinch in their management development ranks. I think the smart thing to do is team up older employees with younger ones as managers, as mentors and mentees, if you can stand the word, and let the experience transfer that way and let management development happen the most natural and most effective way possible. So team them up.
COLVIN: So if we retire retirement, as you advocate, what replaces it? What is life like? We don’t have then working until 60 or 65 and then retiring. What replaces it?
MORISON: What replaces it is a customized blend, if you will. Let the individual put together whatever combination of working, leisure, other pursuits, together with whatever financial package makes sense based on retirement savings, maybe an employer’s pension, maybe Social Security, and earned income, and put those things together to lead the type of lifestyle you like. You know, we recently conducted a nationwide worker survey, employee survey. We found that roughly one third of workers would like to just retire in the traditional sense. By the way, that correlates with…
COLVIN: Meaning two thirds wouldn’t.
MORISON: Two thirds wouldn’t. The one third who do, by the way, correlate pretty closely with those who also say they don’t particularly enjoy the work they’re doing now. The two thirds who want to work in retirement have a wide variety of patterns they’d like to follow.
COLVIN: The customized blend you’ve described sounds very appealing, but there are a lot of problems with it, or at least some problems, like trying to withdraw money from an IRA, collecting your pension, things like that. How do companies and people work around that?
MORISON: Absolutely. Well, some things require legislative change, in order, for example, to let you get at your IRA earlier than 59 or 59 ½. Also the restrictions on pension payouts while you’re back working for the same company, those need to be changed. There are some things that the Congress needs to do to make it easier, but there are also things employers can do. There are work-arounds.
COLVIN: Bert, what’s the next step in your challenge? What happens next?
YETMAN: Well, right now we’re having the amicuses filed. We filed with the Supreme Court March 14th and anyone trying to submit an amicus has 30 days after that to get theirs in. In fact, JetBlue just came through with one. They’re going to be filing an amicus in our favor as well as Southwest. We have to wait and see what the Supreme Court says, whether they’ll hear us or not.
COLVIN: Well, you’re a retired pilot, so presumably you’re over age 60. Would you want to be an airline pilot again if the rules permitted?
YETMAN: Well, I don’t think I would be going back. However, until two years ago I was delivering aircraft around the world, empty aircraft, but it’s the same plane I was flying at Southwest Airlines. I’ve taken to Russia, China, Indonesia, places like that, and flying the same airways over the same cities and towns. It doesn’t make any difference.
COLVIN: Bob, a famous consulting firm, the McKinsey firm, has a rule requiring that those consultants retire at age 60. Do you have anything like that at Concours?
MORISON: No, I’m afraid not.
COLVIN: And I take it don’t plan to.
MORISON: No, and I won’t tell you our chairman’s age either.
COLVIN: It’s a deal. Bob Morison, Bert Yetman, thanks so much.
YETMAN: Thank you.
MORISON: Thank you.
NEXT WEEK: Financial makeover
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