Over the last decade, US multinational companies have kept an astounding amount of money parked overseas. As the US Dollar has lost substantial value, these profits denominated in foreign currencies have naturally grown in terms of dollars. When it comes to earnings, which are the driving force of stock prices, the dollar’s devaluation has given a huge boost to the bottom line for many Fortune 500 companies. To make a long story short, QE is aimed at devaluing the US Dollar to help big business manufacture earnings and hide the true lack of growth.
While QE has certainly punished the dollar, the effects new and extended bond buying programs have on the markets are diminishing. If the Fed announces QE4 tomorrow and the dollar does not begin to spiral lower again, there will need to be a new plan from government to help their friends in big business keep earnings looking good. Otherwise, earnings forecasts are going to continue being slashed and stocks are going to melt down.
In 2005 President Bush enacted a one-year tax break, from 35% to 5%, for US multinationals repatriating overseas funds. This was the last time we saw the dollar truly trend higher. There have been talks about doing this again. At first glance, you might say: “Wait, I thought a stronger dollar would crush the earnings for these big companies.” That’s true, so the timing will be the key to making it work.
US multinational companies have overseas profits sitting in other currencies like EUR, CNY, and JPY. These profits have ‘grown’ as the dollar shrank. If congress gives a heads up to their executive friends that another tax holiday is coming, they can repatriate the overseas profits before USD rallies. When the dollar then does rebound, those overseas profits begin magically growing as USD rises versus the currencies the profits were earned in. The shuffle game can work both ways; essentially turning these companies into big Forex speculators rather than hedgers.
It sounds a little far-fetched, but if the dollar does not tank soon there are few options left for the Fed and government to rescue the guys who give millions to political campaigns. Those contributions don’t come free. As long as congress gives them an early nod, this tax holiday can help companies mask a lack of growth. Meanwhile, it gives congress the appearance of concern for the public as companies put the repatriated dollars to work in the US economy.
The US would benefit greatly from it. We are a net importer, so a stronger dollar is helpful in getting more "bang for our buck". Employment would improve as companies promise to use the money for expanding domestically. Perhaps the only problem is the $16T elephant in the room known as the deficit. A stronger currency makes our debts more expensive as we repay lenders with dollars of higher value than those that were loaned to us. It will be interesting to see how politicians toe this line if the Fed’s magic bullets can’t kill the dollar.