The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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A Cut In Pay

Imagine your boss telling you that he needed to cut your pay by 7% — you would probably survive, but you would not be happy, and that job would be a whole lot less valuable to you.

Johnson & Johnson, the huge multi-national consumer staples company announced their quarterly earnings this week.  Sparring you the many details, one item jumped out at me — their profits were down 7% because of the strong dollar!

Also, the International Monetary Fund routinely estimates GDP growth of most countries.  They just cut our 2015 GDP growth estimate by half of 1%.  That doesn’t sound like much, until you recall our estimated growth rate was only about 3.5%.  That means our GDP growth is expected to decrease by about 14%, due to the stronger dollar.

Now, what is so patriotic about having a strong dollar?  Tell me again!

Does this mean stock prices will necessarily drop?  No, history shows us that a rising dollar usually accompanies a higher price multiple.  In other words, investors are willing to pay more for each dollar of earnings when the dollar is high.  This is probably because a strong dollar sounds so patriotic??

Does that mean our exports will decrease?  Yes, because we sell our exports for dollars, which are now more expensive for foreigners to purchase, to pay for the stuff we export to them.  If your job is making stuff to be exported, update your resume.