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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!
Chip
Hanlon
President, Delta Global Advisors, Inc.
19051 Goldenwest,
#106-116 Huntington Beach, CA 92648 Phone: 800-485-1220
Fax: 800-485-1225 www.deltaga.com
A widely-followed
market commentator, Mr. Hanlon served as the C.O.O at Euro Pacific Capital
prior to taking the reigns at Delta Global. He had previously been the
President of Unfunds, Inc. and spent 7 years prior with Sutro & Company
as a Vice President and the company's Los Angeles Director of Syndicate
Offerings.
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