Quotable
“Tape reading was an important part of the game; so was beginning at the right time; so was sticking to your position. But my greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities. In short, I had learned that I had to work for my money. I was no longer betting blindly or concerned with mastering the technic of the game, but with earning my successes by hard study and clear thinking.”
Larry Livingston [taken from Reminiscences of a Stock Operator]
Commentary & Analysis
This dollar bull could have a long way to run
It is interesting others are finally noticing “the currency formerly known as the ugly step-sister,” aka the US dollar, is rallying. Even the newsletter crowd, otherwise known as “the perennial dollar disaster promoters,” is recognizing just maybe they’ve gotten it wrong, again, when it comes to the buck.
Financial TV has been reporting the dollar has made a “huge” move. It is a perspective others seem to share because they are asking: When will the Federal Reserve do something to weaken the dollar? But if what we are witnessing is a true bull market, this thing has a long way to run. Heck, we haven’t even broken out yet.
I shared the following chart with my subscribers on Tuesday night.
In the box (in the chart above) to the left it shows the most recent US dollar index bear market, which ended on the same day the US government stepped in to save Bear Sterns—March 17th 2008. The red box on the right shows price action over the last six years since the dollar put in a major bottom. We are just now testing the downtrend from the previous swing highs gong all the way back to 2006. The key drivers are growth, yield, and money flow (foreign direct investment).
My guess, based on the length of the last two US dollar index bull markets since the dollar began floating, is this bull market could run 10-years or more. Given the relative positioning of the United States vis-à-vis its major country competitors, the idea of a 10-year bull market seems to make sense.
So, to give you a bit of perspective to see the potential in a real dollar bull market, and to help explain what I mean when I say this thing could have a long way to run, below is a little matrix I put together comparing where the major pairs were back in July 2001 to where they are today; plus the % move in each of the pairs if it the dollar index were to return to its 2001 high:
Granted, this is a bit simplistic. But I wanted to provide some perspective on potential and to suggest we haven’t seen much yet if my guess about a multi-year dollar bull proves correct.
I realize there are still many out there who cling to the notion the US dollar is doomed. The major newsletter houses have been telling you that for years. I have stopped reading their nonsense on the dollar. So in that vein, I want to leave you with these comments by Michael Pettis taken from his blog—I think a very reasoned view.
Professor Pettis acknowledges the dollar as reserve currency is not a guarantee, there are real risks. But he understands an end to dollar hegemony might not be all that bad for the US. Mr. Pettis’ also makes a point the dollar doomers always ignore—other countries use the reserve currency very much to their advantage; then complain about it when it suits their story. In short, it doesn’t appear the dollar will be relegated to the dust bin of history any time soon, so you can take advantage of this dollar bull.
Professor Michael Pettis [my emphasis]:
The US dollar will remain the world’s dominant reserve currency for a very long time, partly because it is the only currency that exhibits anywhere near the needed level of credibility, mobility, and low transactional costs, and mainly because for all the huffing and puffing about “exorbitant privilege” no other country is willing to pay the considerable cost of allowing its currency to be accumulated by foreign central banks whenever these countries experience weak domestic demand. The only way this will change, I think, is if, and perhaps when, Americans decide that they are no longer willing to enjoy the “exorbitant privilege”, and Washington imposes restrictions on foreign purchases of US dollar assets, as was the case until the 1960s.
Five years ago I would have told you that this would never happen, but two things seem to have changed. First, as Americans become increasingly aware that when foreign central banks amass hoards of dollars and prevent others, including the Fed, from reciprocating, they aren’t doing the US any favors (and if they were, why are they so determined to prevent other central banks, including the Fed, from returning the favor?). Their purchases are aimed at boosting domestic employment, and unless productive investments in the US are unfunded because of a savings shortage (which is all but impossible to believe), their purchases must result either in an increase in US debt or an increase in US unemployment. This may sound surprising to many people, including, shockingly enough, to many economists, but is actually quite easy to prove, either by using balance of payments arithmetic or by looking at the historical precedents.
So the next time someone tells you the US dollar is “way overvalued” and the “Fed must do something,” just show them the weekly chart above.
Black Swan Currency Options Strategist
I beat up our subscribers pretty badly in the March and June expirations, after doing quite well for them going into the time frame. Now we are back on track, recording some nice profits and seeing some nice opportunities. We are sitting on an open profit of 136% in a Dec Aussie dollar put (FXA). And below is a look at the last three trades we closed (not ½ denotes half position in the track):
Black Swan Currency Options Strategist Closed Positions:
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Thank you.
Jack Crooks
President, Black Swan Capital
