Dont Confuse Brains With A Bull Market
Or in this case, a bear market.
The title of this article is a great old Wall Street adage that popped to mind a few days ago when discussing the heyday of the internet boom with a couple of friends. The travel, the extravagant lunches, the signing bonuses and, of course, the options... oh, those options.
Personally, I was rolling up on age 30 at that time, climbing the ladder of the investment firm that employed me and was even making a bit of a name for myself as a technical analyst. Things were pretty good and getting better all the time, but I was no internet rock star, which was made abundantly clear by a couple of friends who were living the technology dream; I recall being truly amazed while calculating along with them how much their options were supposedly worth.
Well, we all know how that story ends. In the case of those two friends of mine, they weren't among the lucky few who walked away with some of the winnings.
How about the typical Silicon Valley employees who were a part of that whirlwind - were they geniuses? More likely they were honest, hardworking people and there just occurred a raging bull market right where they happened to be standing.
It's this lesson that continues to bother me about the market's general opinion of the U.S. Dollar today. Despite its rally over the last few weeks, most people I come across still speak with certainty about the Dollar and its pending decline.
Sure, a look at the chart below suggests our currency may be a little overbought in the short-term and could be due for a small pullback:
...but I suspect that any pullback will continue to see this asset hold at or around the all-important 80-level on the U.S. Dollar Index.
Why? It just looks to me like we're witnessing a bubble in dollar bearishness.
Who's more popular today than Dollar bears? Predict the Dollar's going to be cut in half and you'll be quoted in the Journal. State that it's about to become worthless at any moment and you'll be even more widely-touted.
Look, I'm no Pollyanna here; I have written many times about the long-term challenges facing the Dollar and, until my December 8th article stating that there were far too many dollar bears for my taste, I had been a loud, longtime Dollar bear myself. That being said, I wanted to write this piece to warn the readers of this site: many of these dollar doomsayers aren't new, many of them have been here for - no joke - 10, 15 years and then some, literally predicting the same exact thing regardless of investment environment all that time. Now, they're simply having their day in the sun... their internet boom, if you will.
These people aren't geniuses, they're extremists. Fanatics. I'm not talking about the thoughtful commentary of people like Steve Saville (with whom my opinion currently jibes), John Mauldin (with whom I don't think it does, at least not with regard to the Dollar - and who, amazingly, writes lengthy, thought-provoking articles every week), or a small handful of others.
Many of you know the types I'm talking about - the stopped clocks. If you don't know these dollar perma-bears, however, you had better be careful to look into the long-term backgrounds of that newfound commentator/advisor you like so much... if he or she promised the end of paper money and the demise of America throughout, say, the entire 1990's, then that person could be hazardous to your health. Period.
I've said it before and I'll say it again: the following is the chart of the year:
There are three key takeaways from the chart above:
1) The Dollar's fall is not new; it is now fully 3 years old.
2) 80 remains an important level of support on the Dollar Index.
3) Dollar perma-bears were simply on the right side of a trend in their favor.
Geniuses? You be the judge.
To view things another way, take a look at just one foreign currency, the Pound:
Now where the heck is that chart going? Higher? OK, maybe... anything can happen in the market, of course. I do know, however, that Britain's yield curve is inverted; here, that happens to simply be the best predictor of looming recession. It also happens that central banks tend to lower interest rates when recession hits, which doesn't tend to be supportive of the underlying currency.
This isn't an over-arching case for the Dollar nor does it explain away the fact that we still spend too much and save too little, but our paper currency's attractiveness may just be ready to increase vs. that of other paper currencies (this highlights another area of frustration for me: these perma-doomers constantly decry the lack of a commodity backing such as gold to our currency, yet they have no problem falling in undying love with other fiat currencies).
Analyzing currencies, then, is simply an ongoing process of comparing one to another. Because we're in what may still be the early stages of a tightening cycle and foreign central banks are likely at the end of theirs (among many other factors, which I'll have to write about later), the Dollar may just become more attractive than others in coming months. If that occurs, it will make holding non-Dollar assets pretty darned uncomfortable for awhile.
Look, writing this column isn't particularly beneficial to me, personally; my firm specializes in precious metals, alternative investments and trading directly in international markets, so we benefit most from the falling dollar trend.
I also know this opinion will be unpopular, particularly in some of the places my commentaries are often featured. That, however, is where I like to be; over time, I've found that my "thing" is making calls that are exceedingly contrarian, turning point-type predictions.
I was unpopular on April 8, 2004, when I said silver would pull back from above $8/ounce to $6, literally 2 trading sessions before it happened. At the time, the consensus was that the metal would soon be at $10.
I was unpopular in mid-June of last year when I stated on national TV that the rise in interest rates was a head-fake, that they would surprise and head lower.
And I was unpopular when I first wrote in early December, 2004, that it was time for a Dollar rally, so I'm fine being unpopular now. In fact, check your own sentiment: are you itching to write me a nasty e-mail explaining all the things I don't understand about the market/economy/life? That's not a good sign for your case - your sentiment is too strong and your emotions may be dictating your investment decisions.
Speaking of sentiment, what's another one of the most interesting sentiment indicators I've seen recently? The weakling dollar on Saturday night live? The disappearing dollar making the cover of The Economist?
No, here's my favorite: it's the story about the sidewalk money changer in some far-flung Chinese province and how he's no longer accepting U.S. Dollars. Perma-bears take this as the big sign, their "Ah ha!" moment that the Dollar's demise is at hand.
I see it as the rough equivalent to getting a stock tip from your cab driver; by the time that guy stops taking dollars, the currency's move has got to be nearing its end.
Anyone want to bet that same money changer had a "no Euro" policy 3 years ago?
Remember, the extremists have always existed, and they have always been screaming the same thing. What worries me is that investors, in their search for fresh commentary on the subject of currencies, have stumbled across some of these dollar bears without realizing they've been saying the same things from time immemorial.
Let me put this one other way: was Henry Blodget a genius? Likewise, beware today's Dollar bears, who just experienced a bull market in gloom and doom... be sure you're not listening to a stopped clock.
And don't confuse brains with a bull market.
P.S. For a terribly interesting take on the interest rate environment, I strongly encourage investors to read, "Things Change," by Gary Carmell, President of CWS Capital Management, a highly successful real estate investment and management company located here in Newport Beach: http://www.cwscapital.com/pubs/qupdates/050130/change.html
I'm fortunate enough to call Gary a friend and am familiar with his powerful grasp of macro economics as well as his knowledge of interest rate history. You may not agree with what he has to say, but I can tell you he understands the risks to our global economy and he has been awfully right for a long time. I'm glad he's finally been persuaded to make his commentaries known/available to a wider audience...perhaps you'll even start seeing his essays included here on a regular basis. If so - don't miss them!