The blazer is fashion that’s never quite in fashion, but never truly out of fashion.

It’s also been your editor’s experience that many often associate fashion with style, and in turn, style with elegance. So by default many often equate fashion with elegance.

Nothing could be further from the truth.

“The words ‘stylish’ and ‘elegant’ are often used interchangeably. And yet, one can be dressed in a completely ‘stylish’ manner and not be in the least bit ‘elegant’ while one who is ‘elegant’ is always ‘stylish’ whatever the clothes they happen to wear. In a similar way, the words ‘beautiful’ and ‘elegant’ are often confused despite the fact that ‘beautiful’ is not always ‘elegant’ but elegance is always beautiful,” said Michael Alden of the London Lounge.

Consequently, fashion is often stylish, but seldom elegant.

Alden continues: “Fashion is what is created in marketing departments driven by managers with fierce intensity to ensnare the unwitting and add significant value to shareholder equity.”

Ask yourself… Would you buy the classic Louis Vuitton carry-all if the parent company decided to adjust their particular sense of tact by removing the endless “LV” adorned on every inch of that brown canvas parading as genuine leather?

Would you accept the virtue that some “suit” working his way up the corporate ladder figured out that the best way to paint a $500 price tag on your average pair of Levi’s was to change the name, slightly alter the cut, and pay the current Hollywood “face” a prince’s sum to reap his boss a king’s ransom?

But the debt-ridden American consumers keep spending the money they’ve yet to earn, all in the name of fashion…keeping up with the proverbial Joneses, if you will. But as Coco Chanel once said, “Fashion is what goes out of fashion.”

And right now, the dollar is certainly “out of fashion.” The dollar has tumbled 23% since 2002, according to JPMorgan’s trade-weighted exchange rates. And that’s a significant fall considering Asian central banks keep buying most everything we print.

They kept the greenback “in fashion” to suppress the value of their respective currencies effectively supporting their export driven economies.

But it won’t be long before the export-driven countries of Southeast Asia start actually consuming what they produce…and when that happens, their appetite for our fiat paper will naturally begin to wane.

And those days look to be sooner rather than later. The “emerging economies” aren’t really emerging any longer.

Last year alone, these economies accounted for more than half of world GDP. They now churn out 43% of the world’s exports and hold 70% of the world’s foreign exchange reserves.

And while real wages in the developed West are either flat or even falling, wages among the up and coming continue growing.

Let’s take a look at China’s current dollar exposure. China’s foreign currency reserves recently topped the $1 trillion mark… And it’s estimated that 70% of those reserves are conveniently tucked away in U.S. treasuries.

But the Chinese currency will not remain “pegged” to the dollar forever. The “dollar peg” has given China financial stability, but excess reserves are creating liquidity levels that could ultimately undermine that coveted stability through inflation, excessive asset appreciation, and the persistent practice of banks funding non-performing loans.

But more importantly, the longer China continues to accumulate dollar reserves, the more they stand to lose when the yuan eventually appreciates against the greenback.

A mere 20% increase in the value of the yuan against the dollar would reduce the value of China’s estimated $700 billion in U.S. Treasuries by more than $140 billion — or roughly 6.3% of China’s 2005 GDP. And many estimate the yuan to the undervalued by upwards of 40%. That would equate to a value reduction in China’s treasuries $280 billion — or roughly 12.6% of 2005 GDP.

The same can be said with other Asian central banks. The longer they pile up dollars, the greater the eventual losses. I don’t believe they’ll support our green ink much longer.

What’s the answer for you the investor?

One solution would be to search for value-oriented foreign stocks that derive a majority of their revenues in currencies other than the U.S. dollar.

I also recommend picking up a copy of The Demise of the Dollar by Addison Wiggin. It was actually this book, along with Wiggin’s other work, Empire of Debt, that led me to Agora Financial.

Both works offer a much more comprehensive and enjoyable explanation of the current and future state of the American currency than presented here. And more importantly, they offer a more thorough guide on what actions you, the investor, are encouraged to take.

And now, you can you can learn savvy ways to turn the roller coaster ride of the U.S. dollar into one of the most important investing decisions of your life.

Sincerely,

Christopher Hancock
December 8, 2006

Small-Cap Fashion Stocks was originally featured in the Penny Sleuth.