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I was struck the other day when
reading the words of Marc Faber in a Bloomberg article about the global
economy, he called himself a “reluctant holder of dollars.” Remember that phrase for a moment;
I’ll come back to it.
Look, just about anybody
you’ll talk to right now, whether bull or bear, will look at the Dollar
and say that it’s due for a pullback. Certainly, a look at a 1-year chart of
the US Dollar index shows it to be extended by most short-term measures:
Further, a look at the
recent commitments of traders also suggests there has indeed been a shift
toward the greenback and away from non-Dollar holdings such as gold, foreign
currencies and many commodities, with the technical conditions of each of
these assets suggesting an oversold bounce could occur anytime.
My problem is: the idea of
a Dollar pullback just seems too obvious at the moment.
Further, I would argue that
the move into the Dollar thus far in 2005 has not been a full-force embrace
of the currency but a tentative or, to use Faber’s revealing word,
“reluctant,” shift on the part of investors. Heck, I’ve been banging the drum
about a Dollar rally since early December, and I’d even call myself a reluctant holder of Dollars
(here’s the article stating my original shift from Dollar bear to bull,
written even before establishing Delta Global in January: http://www.safehaven.com/article-2314.htm …knowing exactly how immodest
this sounds, if there was a better call as to what the first half of 2005
would look like, I’d like someone to show it to me)!
Still too obvious are the
“twin deficits,” too popular are the dollar-perma bears and too
simplistic is the notion that foreign central banks will abandon the Dollar,
bringing about economic calamity in the U.S. at any moment (as a side note on
this theme: in March, the most recent month for which such figures are available,
foreign central banks, including both Japan and China, were actually net
sellers of U.S. Treasuries. Some
Dollar perma-bears did make their “a-ha!” mention of the
statistic, but my thought was this: if they were net sellers in a month the
Dollar rallied and Treasuries were essentially flat, doesn’t this at
least call into question the notion that the American economy would collapse
if such buyers went missing? One
month doesn’t make a trend, but my contention recently has been that
not only would there be no mass exodus from U.S. Treasuries as the
world’s central banks are clearly trying to manage their way out of
these economic imbalances, but that the bond market is also far too deep to
think that any one or two players control it).
So, sure, the U.S. Dollar
is overbought, is facing technical resistance as the Dollar Index approaches
90 and it is indeed quite likely to pull back sometime soon (perhaps a
“surprise” French ‘yes’ vote on the E.U. Constitution
this weekend would give traders reason to buy Euros and sell Dollars, though
this has little to do w/the anemic statistics we’re seeing from that
region’s most important economies… personally, I’d still
consider a ‘no’ vote to be the surprise despite what recent polls
are saying), yet I suspect any pullback will be as short-lived as this
year’s previous corrections.
Based on the residual mistrust of a currency that fell in a straight
line for 3 years, expect even the slightest hiccup in the Dollar’s
recent performance to quickly bring about a rise in pessimistic sentiment,
one that merely provides another Dollar buying opportunity.
I’m neither bull nor
bear here and if I thought it was time to be a long-term bear on the Dollar
once again, I’d be happy to say so and in the hopes of later bragging
about correctly calling the move in both directions. More and more, however, this Dollar
rally is feeling like a train I wouldn’t want to step in front of, one
that may have more staying power than even I originally imagined.
To view things from a
different perspective, take a look at a 20-year chart of the Dollar:
Not only is there the heavy
support at 80 on the Dollar Index that I’ve talked about in the past,
but notice the PMO, Carl Swenlin’s interesting indicator that functions
very much like the more familiar MACD: from a long-term perspective, this
isn’t exactly an asset that looks overbought. At extreme readings, the PMO tends to
be very useful and accurate with regard to stocks, stock indices, currencies,
you name it… I’d suggest it is not to be taken at all lightly in
the chart above.
Along these same lines,
take a look at chart of gold over that same long-term timeframe, perhaps the
ultimate anti-Dollar holding:
I’m one that has
still been calling himself bullish on gold in the long-term, but even that
thought is starting to worry me somewhat. Again, the PMO reading on the chart
above doesn’t suggest an asset that’s exactly near its lows and
screaming to be bought. And from
this longer-term perspective, essentially all the non-Dollar assets look the
same.
When the Fed Funds rested
at 1% and the benchmark 10-year Treasury was in the 4.5% range, we were
witnessing by far the greatest yield curve in American history, in percentage
terms. Watching this
metal’s recent performance, lately I’ve been finding it hard to
shake the following thought from my head: we recently saw the most
purposefully accommodative monetary policy ever, yet gold only managed to
make it to $450. What’s it
going to take to move gold to $1000 and beyond as the Dollar perma-bears so
fearlessly promise?!
Further, while there is
certainly a chance those perma-bears could be proven right (though it’s
not guaranteed, as they state with such conviction), it’s also possible
they’ll be dead right 5-10 years from now or more, long after most
investors will have been beaten up to the point of exhaustion.
For those who have been
overweight non-Dollar assets all year and are starting to feel the pinch, you
may catch a breather soon.
We’ll all analyze any such correction as it occurs, but it may
be wise for such investors not to treat any such retreat as the resumption of
the Dollar’s ignominious march to zero, but as an opportunity to
re-consider their asset mix and possibly re-balance their holdings
accordingly.
Chip Hanlon
President
Delta Global Advisors, Inc.
A renowned
technical analyst, Mr. Hanlon served as the C.O.O./Chief Domestic Strategist
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. His
current firm provides direct trading access to international markets and he
is also a regularly-published expert on commodities and precious metals.
19051 Goldenwest, #106-116 Huntington Beach, CA 92648 Phone: 800-485-1220
Fax: 800-485-1225 www.deltaga.com
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