Is Betting Against the US Dollar Really
Such a Good Idea?
Justin Rohrlich October
19, 2010 1:40 PM|
97% of investors think one thing, it's usually time
to do the opposite.
to Shawn Hackett, founder and president of Hackett Financial
Advisors, only 3% of traders are bullish the US dollar
right now. In June, that number was 95%.
such an extreme sentiment; I mean, we see this at bottoms,
not tops,” Hackett tells Minyanville. “I think we’ve
really, really played this inflation trade to its fullest.
Now that everyone’s bearish on the dollar, I wouldn’t
be surprised to see a big bounce on the horizon. This
could be exceedingly difficult on precious metals --
just today, gold is down $28/oz, silver is down 75 cents.
To me, the story over the next month or two is a macro
one, with the dollar reasserting itself on the expectation
of inflation subsiding.”
parsing the words of Timothy Geithner, who said yesterday
that the US would not devalue the dollar for export
wonder what will happen now that the People's Bank of
China said it will raise the one-year yuan lending rate
to 5.56% from 5.31%, and the one-year yuan deposit rate
to 2.5% from 2.25%.
worry about potential black swan events, quantitative
easing in other countries, and the ever-present possibility
that OPEC could switch from petrodollars to eurodollars.
is looking at where the money is positioned -- data
much less susceptible to interpretation and conjecture.
“No one talks
about a dollar rally -- people think it’s going to zero,”
he says. “All the movement has been on inflation, China
demand, QE2. Yet, when you look at where the money is,
you’ll see that the inflation trade is as overweighted
as it was in early 2008.”
it’s important to bear in mind that our economy is terrible.
and commodities haven’t been running up because things
are booming,” he says. “If we remove the inflation risk,
or that risk becomes less of a concern, the market then
has to operate based on real demand. Gold (GLD),
crude oil (USO), copper (JJC).
GE’s (GE) products, Intel’s
(INTC) products. What kind of earnings are
they really going to show? The valuations are way up
there because they’re expecting an inflationary environment.
Of course, not everything’s overvalued, there are still
a few things that are cheap. But not many. I would still
recommend caution in the capital markets; it’s the wrong
time to go down to your local bank and borrow a bunch
of money to sink into stocks.”
the market is beginning to self-correct and tone inflation
fears back down.
give the inflationists exactly what they want; it’ll
never give the deflationists exactly what they want.
Understand that we’re going to keep trading on sentiment,
emotion. When the market gets too bulled up on inflation,
walk away from that trade. And vice versa. I guarantee
we’ll be having this conversation again in a couple
of months and it’ll be time to go back the other way
again. Caution and cash are key, because when this deflationary
period reaches its peak again, with cash available,
you can catch it at just the right time.”
Hackett points out that the dollar has not been dropping
as precipitously as people believe.
“If you look
back, the dollar has actually been rising,” he says.
In March of ‘08, we had a dollar low. Then we had a
big rise, after which we made a higher low last December
at $0.75. Then, there was another big rally, and now
it looks to me that we made another higher bottom at
$0.77. It’s been in a steady uptrend. This is a big
contrarian story that very few people have the guts
to talk about when almost 100% of the people out there
are betting against it."
if the dollar isn’t phenomenal right now, in Hackett’s
words, it’s “the best of the worst.”
would you buy instead? “The Japanese yen?" He asks?
"Japan has four times the debt-to-GDP ratio we
have. The Chinese yuan is a blocked currency. The Brazilian
real is too illiquid. And the euro arguably won’t be
around in ten years. So, the US dollar isn’t backed
by gold? Well, nothing is these days.”
a broader lens, Hackett maintains that “there’s always
a fallacy lurking in the tail end of the bullish story.”
story is usually legit in the beginning, credible in
the middle, and a fallacy in the end,” he explains.
“Eventually, people start to grab onto things that don’t
make sense. Then, when everyone realizes they’re on
the wrong side, they all trample each other to get to
the opposite side -- and not everybody makes it.”
disagree, it never hurts to hear another perspective.
Because many times, 3% of people get it right while
the herd comprising the other 97% do not.