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Is Betting Against the US Dollar Really Such a Good Idea?

Justin Rohrlich October 19, 2010 1:40 PM|

       When 97% of investors think one thing, it's usually time to do the opposite.

According 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%.

“That is 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.”

Pundits are parsing the words of Timothy Geithner, who said yesterday that the US would not devalue the dollar for export advantage.

Analysts 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%.

Still others worry about potential black swan events, quantitative easing in other countries, and the ever-present possibility that OPEC could switch from petrodollars to eurodollars.

But Hackett 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.”

Hackett says it’s important to bear in mind that our economy is terrible.

“Stocks 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.”

Hackett believes the market is beginning to self-correct and tone inflation fears back down.

“It’ll never 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.”

Additionally, 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."

Even if the dollar isn’t phenomenal right now, in Hackett’s words, it’s “the best of the worst.”

What currency 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.”

Looking through a broader lens, Hackett maintains that “there’s always a fallacy lurking in the tail end of the bullish story.”

“The bullish 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.”

Agree or 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.

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