A Walk Down Contrarian Street
My experience in the investing game is that it pays to be a contrarian, which is to say, go the opposite direction of where the consensus is going. This bromide doesn't always pay off, but I've found that it pays off more often than not over the course of time.
As long-time readers of this newsletter know, there is probably no better way to gauge the dominant consensus about the future direction of stocks, interest rates, the dollar, etc., than to examine the headlines of the mainstream financial press. This especially holds true of magazine covers and front-page newspaper headlines, for in order for a story to make it to the front page the trend usually has to be in place for long time and in most cases nearing the exhaustion phase.
Put another way, when a market outlook (whether bullish or bearish) makes the front cover of Time, Newsweek, or the Financial Times, the outlook is likely to be old news. I say this not to be disrespectful of the financial press in general, for they do provide a valuable service in many regards. But by definition they cannot but report the consensus outlook, which is usually wrong at major turning points.
With that introduction, let's take a walk down Contrarian Street and see what the consensus view of the economy, the stock market, the dollar, etc., happen to be. Along the way we'll see if we can't "read between the lines" and gain some clear perspective of what things are likely to be like in the months ahead.
Other than of course the stock market (which is always a point of concern in the mainstream press) the two dominant news items in the financial press right now -- near as I can tell -- are expectations about the "Bush Economy" in 2005 and the U.S. Dollar. This was highlighted in the November 15 issue of Business Week on the Editorials page under the heading "A Second-Term Agenda for President Bush -- and America." Among the bullet points discussed in the editorial were: "The budget deficit is out of control," "The dollar, and trade policy, are in trouble." These two points alone are very representative of the talk in financial circles today.
That's right, the greenback is once again making headlines and whenever this happens it usually means a turning point is near. Take a look at some of the headlines I've clipped from the Financial Times newspaper in just the past few days:
"Dollar's slide brings out bearish forecasts," "Declining dollar steals show," "Greenback hits nine-year low," "Buoyant data fail to prevent dollar freefall," "Slow dollar exit," "Bush threat to the dollar," "Dollar slides as hunger for U.S. assets subsides," "Dollar's slide prompts talk of intervention," "Dollar's slide gains momentum," "Treasury chief seeks stronger dollar as currency falls to eight-month low," "The greenback could be on the edge of a cliff."
Talk about bearish dollar headlines! Two front-page headlines from last week include: "Dollar falls to nine-year low (Bush's re-election also a factor in decline), and "Dollar hits new low against euro." Then there is a pull-quote from yet another dollar-related article in a recent issue of the FT: "There is only one way for the dollar to go -- lower." That quote came from Mr. Robert McTeer of the Dallas Federal Reserve.
Finally, there was a letter to the editor in one of last week's FT issues appearing under the headline "'Sharp brains' should have seen the dollar's slide coming." In it the writer states, "The U.S. under President George W. Bush has run up a massive current account deficit. The U.S. now needs $2.5 bn of capital inflows daily to fund its domestic savings shortfall. I would hope our international bankers did not expect us to pay this back without letting the dollar go lower against other currencies....Is there any doubt across the pond that he will stick it to those who were kind enough to lend us the money that has fueled much of America's consumption over the last four years?"
Now the above letter to the editor of the Financial Times is very revealing of what is rapidly becoming a major point of discussion among the public, viz., the "current account deficit 'crisis'" and the "domestic savings shortfall." When hotly-debated financial issues like this start showing up in the letters to the editor of the major newspapers, the "crisis" is nearing resolution. I've seen it happen time after time.
This is not to say that the domestic savings rate will suddenly and miraculously zoom upward, nor that the current account deficit will be completely fixed. It just means that the crisis potential that these issues pose are going to be alleviated for the time being in one way or another to the point that they will not be hot-button issues in the financial press for a while.
Then we have Mr. McTeer of the Dallas Fed stating that "There is only one way for the dollar to go -- lower." That's a tip of the hat that the "dollar crisis" is nearing its end and will soon be resolved. Do I believe the dollar is going to launch a spectacular new bull market that will eventually rival the strong dollar of the late 1990s? Not at all. I just suspect the dollar will not be allowed to much further from where it is now before it is eventually rescued by the powers-that-be and that a protracted trading range-type move for the dollar will most likely follow in the coming months. I'll have much more to say on this subject in coming weeks, I'm sure, as it remains a major point of concern for all investors across many asset categories.
The next major point of consensus appearing in the mainstream financial press is the expected impact of the second term of G.W. Bush and its effects on the U.S. economy, stock market, and dollar. I previously mentioned a recent FT article appearing under the headline, "Bush threat to the dollar." This serves to underscore how Bush is viewed by many at this time. He is seen as being a promoter of a weak dollar, inflation, and foreign wars. I submit that his second term will in many ways be unlike his first term of office, which happened to coincide with a major transitional point in the U.S. economy and financial markets. Simply stated, a weak dollar was viewed as necessary by the Fed and Bush team in his first term because of the challenges being faced at that time. A continually weak dollar is no longer desirable, and I strongly believe that it will not be allowed to continue to fall for much longer before a rescue effort is made. Just today, the Associated Press published a news wire article with the headline, "Bush may come up with 2nd-term surprises." For once, I agree with the mainstream press and I think his dollar policy will be one such surprise.
The final point of concern being expressed in the financial press is, as always, the stock market. Perhaps it's no surprise that many in the media feel that the economic outlook for the foreseeable future is somewhat gloomy since the first two years of Bush's first term of office were down years. Perhaps the pundits feel that 2005 will be a "hangover year" as one publication recently put it, for the massive spending initiatives of 2002-2003. Actually, I believe 2004 would qualify as a "hangover" year of sorts and that most of the imbalances created by the inflation of 2002-2003 have been mostly worked off. As you know, my outlook for 2005 is for a fairly bullish year.
Yet the press is leery of a second Bush term and many are predicting a bearish year to come. Business Weeks opines "The Squeeze is Already On" concerning corporate profits, stating that "Rising compensation and low pricing power will combine to shrink margins" in the year ahead.
Business Week also went on to predict a weak 2005 for Britain, stating, "For 2005 growth, much depends on how fast the house-price bubble deflates....Clearly, the BOE has set the stage for a slower growth next year." ("Slower growth" is mainstream press talk for bear market). The previous quotes were printed under the heading, "Pop Goes the Housing Bubble." Talk about a contrarian buy signal! Perhaps then it comes as no surprise that the London FTSE stock index actually broke out of its 2004 holding pattern before the S&P 500 a few weeks ago and made a new high for the year. IMO, this is a leading indicator of the positive investment climate for Britain in the months ahead.
I've said it before, but these mainstream financial guys are looking at the old, unreliable lagging indicators which never show you shifts in the market trend until well after the fact. The micro-mini recession we predicted for this summer has passed and only now are the mainstream economists picking up on it. This largely accounts for the bearish tone of the financial press these days. And from a contrarian perspective, I think that's just what this market needs!