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!
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.
