The Slippery Slope of Hope
Have you noticed how strongly the Canadian dollar and US stock market are correlated lately? Every day that the stock market ticks up, the Canadian dollar ticks up too. In fact, if we check the long-term trends, this correlation dates back to 2002. From 2002 to 2007, the US stock market went up and the Canadian dollar went up.
For Canadians, another way to describe a strong Canadian dollar is “a weak US dollar.”
But the US dollar’s weakness went hand in hand with world stock market strength from around 2002. Not only that, but the weakening US dollar accompanied stronger prices for agricultural commodities, basic materials and energy. It seems we can tell the story of world economics by following the story of the US dollar.
How can we use this information for managing our investments?
In a previous article, we wrote that the 6-year US dollar down trend that started in 2002 and ended in 2008: “… the US dollar bottomed at a price of 71 currency basket units. Then, in the last half of 2008 it rallied to 88 units, dropped to 78, surged back up to 89 and dropped back down to 79: all this in one year.” [See “How to Break the Banks,” July 17, 2009]
Does the end of the decline of the US dollar proclaim the beginning of a down trend for world stock markets, commodities, materials and energy prices too?
That is exactly what it means.
In “How to Break the Banks,” we illustrated how the long-term weakness of the US dollar undermined the world’s banking system because the US dollar is the banks’ reserve currency. If the dollar gets weaker, it will put pressure on the world’s banks at a time when they are already shaky. But, if the correlation between the US dollar and the market continues to hold, a strong US dollar will put pressure on the world’s stock markets and commodities markets. The US dollar and the world’s banking system have a direct correlation: both are strong or weak at the same time. But the US dollar and the world stock market have had an inverse correlation for the past ten years: when one was weak, the other was strong,
Which will it be: a weaker banking system or weaker stock and commodities prices? Or, to ask the question from the other side of this correlation: a weaker US dollar or a stronger US dollar?
The only way the world can have strong banks and strong stock and commodities prices is for the US dollar and the markets to become uncorrelated. A new bull market in the US dollar would then help world banks, but not hurt the financial markets. Can they do it?
My book, Beyond the Bull, discusses two 10-year correlations between interest rates and the S&P500. For the first ten years, the stock market went up every time interest rates went down. For the second ten years, the stock market went up every time interest rates went up: the exact opposite. So, we know these correlations come and go. And we can always hope the US dollar vs. stock and commodities price correlation will go away too.
But managing your investments by hoping doesn’t work very well, as we learned in 2008 when the stock market dropped 40%+ in only a few months. Professional stock traders have a saying: “the slippery slope of hope.” When unsophisticated investors hold onto their stocks in a huge bear market, the traders mock them, saying: “They are sliding down the slippery slope of hope.”
Our advice? DON’T LOSE YOUR MONEY! If the slippery slope of hope develops because the world’s banking system needs a stronger US dollar, do what you wish you’d done in 2008. Cash in your chips and sit on the sidelines.
Ken Norquay, CMT
Chief Strategist, CastleMoore Inc
Links to my book, Beyond the Bull:
Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1
US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1
k
Friday, July 31, 2009
Tuesday, July 21, 2009
57 Banks go Bust
57 banks go broke
Fifty- seven American banks have failed so far in 2009. [Source: David Rosenberg of Gluskin Sheff]
When a bank fails in Canada, the Canada Deposit Insurance Corp makes good: CDIC insures that depositors get their money back, up to a certain limit. The Americans have a similar program. Because of this insurance, U.S. and Canadian depositors are not really at risk unless they deposit too much money in a single bank. With these bank failures happening in their own back yard, Americans are vigilant about making sure they don’t put too much money in any one bank. In 2009, there is clear danger in the US banking system; bank customers have to take the usual precautions seriously.
Why is it that a bank’s Guaranteed Deposit customer thinks so differently from a Mutual Fund customer? At the first sign of danger, Canadian bank customers review all their deposits to make sure they hold no more than the CDIC insurance maximum of $100,000 in any one bank. Amounts over $100,000 are not insured. If the bank fails, uninsured investors could lose their money.
Yet, in times of economic danger, those same customers won’t walk across the office to the bank’s mutual funds desk and redeem their stock market holdings. A stock market sell-off is way more likely than a bank failure, yet people do not protect themselves. What is it about the psyche of the average mutual funds investor that is so different from that of the average depositor, even when the investor and the depositor are the same person?
It’s the way these two different investments are sold.
A banker who persuades you to invest at today’s low interest rates will emphasize how safe Guaranteed Investment Certificates are. True, you don’t get much interest, but you are “guaranteed” not to lose. The banker’s pitch attracts investors who are afraid to put their capital at risk.
A bank’s mutual funds salesman or financial planner who sells you a stock market mutual fund will emphasize growth and higher long-term returns. The sales pitch includes a warning that mutual funds prices will fluctuate over time and that we should not sell because the stock market will be a good long-term investment even if it goes down for a while.
In other words, the mutual funds salesman prepares clients to take risk, but the GIC salesman prepares clients to avoid risk. So, at a time when 57 US banks have failed in six months, the GIC client checks his guarantee. But at a time when America’s biggest bank, stock broker, insurance company, mortgage company and car company had to be bailed out, the hapless mutual funds investor is told to hang in there and not worry.
It is clear that there are times of high economic risk, as well as times of less risk. But is there ever a time to ignore risk? Responsible investing is all about monitoring risk and making changes when financial risk changes. That change might be adjusting your GICs so that you don’t have over the insurable maximum of $100 thousand with any one bank; or it might be selling your stock market mutual funds and switching to some low-risk money market fund. But is it ever reasonable to expose yourself to big financial losses?
If those 57 American banks had been more risk averse, they might not have failed.
Fifty- seven American banks have failed so far in 2009. [Source: David Rosenberg of Gluskin Sheff]
When a bank fails in Canada, the Canada Deposit Insurance Corp makes good: CDIC insures that depositors get their money back, up to a certain limit. The Americans have a similar program. Because of this insurance, U.S. and Canadian depositors are not really at risk unless they deposit too much money in a single bank. With these bank failures happening in their own back yard, Americans are vigilant about making sure they don’t put too much money in any one bank. In 2009, there is clear danger in the US banking system; bank customers have to take the usual precautions seriously.
Why is it that a bank’s Guaranteed Deposit customer thinks so differently from a Mutual Fund customer? At the first sign of danger, Canadian bank customers review all their deposits to make sure they hold no more than the CDIC insurance maximum of $100,000 in any one bank. Amounts over $100,000 are not insured. If the bank fails, uninsured investors could lose their money.
Yet, in times of economic danger, those same customers won’t walk across the office to the bank’s mutual funds desk and redeem their stock market holdings. A stock market sell-off is way more likely than a bank failure, yet people do not protect themselves. What is it about the psyche of the average mutual funds investor that is so different from that of the average depositor, even when the investor and the depositor are the same person?
It’s the way these two different investments are sold.
A banker who persuades you to invest at today’s low interest rates will emphasize how safe Guaranteed Investment Certificates are. True, you don’t get much interest, but you are “guaranteed” not to lose. The banker’s pitch attracts investors who are afraid to put their capital at risk.
A bank’s mutual funds salesman or financial planner who sells you a stock market mutual fund will emphasize growth and higher long-term returns. The sales pitch includes a warning that mutual funds prices will fluctuate over time and that we should not sell because the stock market will be a good long-term investment even if it goes down for a while.
In other words, the mutual funds salesman prepares clients to take risk, but the GIC salesman prepares clients to avoid risk. So, at a time when 57 US banks have failed in six months, the GIC client checks his guarantee. But at a time when America’s biggest bank, stock broker, insurance company, mortgage company and car company had to be bailed out, the hapless mutual funds investor is told to hang in there and not worry.
It is clear that there are times of high economic risk, as well as times of less risk. But is there ever a time to ignore risk? Responsible investing is all about monitoring risk and making changes when financial risk changes. That change might be adjusting your GICs so that you don’t have over the insurable maximum of $100 thousand with any one bank; or it might be selling your stock market mutual funds and switching to some low-risk money market fund. But is it ever reasonable to expose yourself to big financial losses?
If those 57 American banks had been more risk averse, they might not have failed.
Friday, July 17, 2009
How to Break the Bank
The heads of state of the G-8 economically largest countries must be feeling very good about themselves. Last year they rescued a banking system that was coming apart at the seams; this year, the grey suit drama has been replaced by bread and butter banking. Those banks that survived are going back to basics. The G-8 central banks succeeded.
The heads of state put on their show in Italy last week. But the important players are the backroom bankers who meet before and after the politicians’ event: these are the meetings the financial press does not report. Now that all the secret meetings between the G-8’s boring bankers are over, it’s time to wonder what really caused the near collapse of the world’s banking system in 2008. We all know the cover story: the US sub-prime mortgage fiasco, billions of mortgages had been packaged and sold to bankers all over the world, mortgage loans that American homeowners couldn’t pay back. But, what was the real story? What was the real problem that took the world’s banking system to the brink?
We think the real story is in this 10-year chart:
[sorry - this blog site will not reproduce the chart I included in this article. I hope you can visualize it by reading the text. KN]
This chart measures the US dollar by comparing it to units of a basket of major currencies: the euro, yen, British pound, Swiss franc, and many others, including our Canadian dollar. As you can see, the US dollar peaked in 2001/2002, at 120 units. It went down for six years and finally bottomed in spring of 2008 at 71 units. That’s a 40% devaluation of the US dollar!
Why is this decline the real reason for the world banking crisis of 2008? It’s because the US dollar is the reserve currency of the world. And when the US dollar is devalued by 40%, the world’s banks’ reserves drop by an average of 40%. Yes, it is true that the American sub-prime mortgages contributed to the banking bust, but the real problem began six years earlier, when the US dollar peaked in 2001/2002. The fact that all those now-worthless sub-junk mortgages were also denominated in US dollars added fuel to a fire that was already burning.
Was it the Bush Republicans’ policy that depreciated the US dollar and brought the world’s banking system to the brink? Was it free market currency trading that drove the US dollar down? We may never know. But it is clear that the 2008 G-8 secret meetings produced a stronger US dollar.
Look again at the chart: the US dollar bottomed at a price of 71 currency basket units. Then, in the last half of 2008 it rallied to 88 units, dropped to 78, surged back up to 89 and dropped back down to 79: all this in one year.
It’s not hard to guess what the G-8 back room bankers decided in 2008 – they needed the US dollar to go up. And it did. And the world’s banking system did stabilize. Their plan worked. Can we guess what they might have decided at last week’s G-8 meeting in Italy? Their common goal would have been continued stability in the banking system. American officials would like stability at a low US dollar so as to help US exports in a weak economy. Other nations’ officials would like stability at a higher US dollar so as to help their exports in a weak economy. And, by now, a week after the high profile G-8 meeting, the back-room bankers will have reached a compromise.
We will see what that secret compromise was over the next few months. Will they let the US dollar decline and risk the banking system again? We doubt it. Will the Americans allow a big up surge in the US dollar and pressure their already weak economy? We doubt that too. It seems most likely that they will allow the US dollar to fluctuate in a narrow band of, say 80 units to 90 units.
What does all this mean to the average investor? What effect would stability have on the stock markets and bond markets? Last year the stock market crash ruined many Canadian’s retirement plans. Will a stable US dollar help us make our money back? Will it help us get our jobs back?
I’m afraid not. This is why:
Just as the six-year long devaluation of the US dollar hurt the banks, it helped Canada. No only did the US dollar go down when measured by the basket of currencies, it also went down when measured against a basket of commodities. Another way of saying that is: commodities went UP against the US dollar. The six-year decline in the US dollar was a six-year rise in energy prices, in raw materials prices and in food prices. Rising energy prices worked wonders in Alberta. Rising metals prices worked wonders in northern Canada. Rising grain prices worked wonders in the prairies. It was six years of boom time for Canada and six years of boom time for the Canadian Stock Market. Remember what happened in the last half of 2008 when the US dollar went up? Energy and materials prices went down. The Canadian stock market collapsed. Canadian pension plans lost billions. A strong US dollar doesn’t work for Canada.
If the US dollar stays at the same value it is now, does that mean energy and metals prices will stabilize too? Does it mean the Canadian stock market will stabilize at these levels? Will your RRSP stabilize? Will company pension plans stabilize? Will the price of your home stabilize?
If the world’s economy experiences an outbreak of stability, it will give us all a chance to re-evaluate our lives and get back to basics. Instead of scrambling to buy a bigger house with a bigger mortgage so as to increase our exposure to a red-hot real estate market, perhaps we can find the house that matches our family’s needs. Instead of ploughing more and more money into a red hot stock market in hopes of ballooning our RRSPs, we can choose a more balanced portfolio of more conservative investments. Instead of getting rich in a fast bucks bubble economy, we can focus on bread and butter living. As the world’s banking system stabilizes, we can stabilize too. Back to basics.
The heads of state put on their show in Italy last week. But the important players are the backroom bankers who meet before and after the politicians’ event: these are the meetings the financial press does not report. Now that all the secret meetings between the G-8’s boring bankers are over, it’s time to wonder what really caused the near collapse of the world’s banking system in 2008. We all know the cover story: the US sub-prime mortgage fiasco, billions of mortgages had been packaged and sold to bankers all over the world, mortgage loans that American homeowners couldn’t pay back. But, what was the real story? What was the real problem that took the world’s banking system to the brink?
We think the real story is in this 10-year chart:
[sorry - this blog site will not reproduce the chart I included in this article. I hope you can visualize it by reading the text. KN]
This chart measures the US dollar by comparing it to units of a basket of major currencies: the euro, yen, British pound, Swiss franc, and many others, including our Canadian dollar. As you can see, the US dollar peaked in 2001/2002, at 120 units. It went down for six years and finally bottomed in spring of 2008 at 71 units. That’s a 40% devaluation of the US dollar!
Why is this decline the real reason for the world banking crisis of 2008? It’s because the US dollar is the reserve currency of the world. And when the US dollar is devalued by 40%, the world’s banks’ reserves drop by an average of 40%. Yes, it is true that the American sub-prime mortgages contributed to the banking bust, but the real problem began six years earlier, when the US dollar peaked in 2001/2002. The fact that all those now-worthless sub-junk mortgages were also denominated in US dollars added fuel to a fire that was already burning.
Was it the Bush Republicans’ policy that depreciated the US dollar and brought the world’s banking system to the brink? Was it free market currency trading that drove the US dollar down? We may never know. But it is clear that the 2008 G-8 secret meetings produced a stronger US dollar.
Look again at the chart: the US dollar bottomed at a price of 71 currency basket units. Then, in the last half of 2008 it rallied to 88 units, dropped to 78, surged back up to 89 and dropped back down to 79: all this in one year.
It’s not hard to guess what the G-8 back room bankers decided in 2008 – they needed the US dollar to go up. And it did. And the world’s banking system did stabilize. Their plan worked. Can we guess what they might have decided at last week’s G-8 meeting in Italy? Their common goal would have been continued stability in the banking system. American officials would like stability at a low US dollar so as to help US exports in a weak economy. Other nations’ officials would like stability at a higher US dollar so as to help their exports in a weak economy. And, by now, a week after the high profile G-8 meeting, the back-room bankers will have reached a compromise.
We will see what that secret compromise was over the next few months. Will they let the US dollar decline and risk the banking system again? We doubt it. Will the Americans allow a big up surge in the US dollar and pressure their already weak economy? We doubt that too. It seems most likely that they will allow the US dollar to fluctuate in a narrow band of, say 80 units to 90 units.
What does all this mean to the average investor? What effect would stability have on the stock markets and bond markets? Last year the stock market crash ruined many Canadian’s retirement plans. Will a stable US dollar help us make our money back? Will it help us get our jobs back?
I’m afraid not. This is why:
Just as the six-year long devaluation of the US dollar hurt the banks, it helped Canada. No only did the US dollar go down when measured by the basket of currencies, it also went down when measured against a basket of commodities. Another way of saying that is: commodities went UP against the US dollar. The six-year decline in the US dollar was a six-year rise in energy prices, in raw materials prices and in food prices. Rising energy prices worked wonders in Alberta. Rising metals prices worked wonders in northern Canada. Rising grain prices worked wonders in the prairies. It was six years of boom time for Canada and six years of boom time for the Canadian Stock Market. Remember what happened in the last half of 2008 when the US dollar went up? Energy and materials prices went down. The Canadian stock market collapsed. Canadian pension plans lost billions. A strong US dollar doesn’t work for Canada.
If the US dollar stays at the same value it is now, does that mean energy and metals prices will stabilize too? Does it mean the Canadian stock market will stabilize at these levels? Will your RRSP stabilize? Will company pension plans stabilize? Will the price of your home stabilize?
If the world’s economy experiences an outbreak of stability, it will give us all a chance to re-evaluate our lives and get back to basics. Instead of scrambling to buy a bigger house with a bigger mortgage so as to increase our exposure to a red-hot real estate market, perhaps we can find the house that matches our family’s needs. Instead of ploughing more and more money into a red hot stock market in hopes of ballooning our RRSPs, we can choose a more balanced portfolio of more conservative investments. Instead of getting rich in a fast bucks bubble economy, we can focus on bread and butter living. As the world’s banking system stabilizes, we can stabilize too. Back to basics.
Monday, July 13, 2009
US Dollar - a bullish prognosis
The July G-8 Meeting and the US Dollar
Every once in a while, the right thing to do is to change your mind. One year ago was a good time to change your mind about buying and holding stock for the long term. And right now is a good time to stop being bearish on the US dollar.
The overall trend of the US dollar is the most important economic trend in the world right now. Last week the heads of state of the biggest economies in the world were huddling in Italy to formulate their next play in the world’s economic stadium. Since 2007, when the US sub-prime lending fiasco erupted, they have been aggressively cooperating to try to stabilize the world’s banking system. At this July’s G-8 meeting, they must have been feeling very proud of themselves for doing such a good job. By and large, most of the world’s banks have survived.
But, one surprising economic fact has remained hidden in all the reassuring rhetoric and political posturing: the long-term trend of the US dollar has reversed. It’s going up now.
Analysts measure the US dollar against a basket of foreign currencies made up of the euro, yen, British pound, Swiss franc, and several other minor currencies [including our Canadian dollar]. On this basis, the US dollar entered a long-term bear market in the winter of 2001-02, at a price of approximately 120. It traced out a six-year zig-zagged decline that ended in spring 2008 at about 70 – that’s an over 40% decline! That significant, long-term down trend happened during George Bush’s Republican administration. The US dollar’s downward trend ended with a world banking crisis and the bailout of America’s biggest bank, biggest insurance company, biggest brokerage firm[s], biggest mortgage company and biggest auto manufacturer.
And now an overwhelming majority of currency analysts hate the US dollar. They think it’s going lower. The financial press is full of reasons why the US dollar will resume its long-term down trend. But that’s not what’s happening. Last year it rallied 28%, from 70 to 90, followed by a 10% decline to its current level of just over 80. And now that US dollar is around 80, the economists all hate it.
This is the perfect set-up for the American dollar’s up trend to continue.
G-8 central bankers would like to see a stronger US dollar because it is the reserve currency of the world’s banking system. When a bank’s reserves depreciate, the banks become weaker. Will the world’s central bankers get their way? Will the US dollar continue its long-term up trend?
The answer to this question does not lie in the secret minutes of the backroom meetings that occurred at the G-8 conference last week. The answer is in the attitudes and actions of economists and analysts all over the world. If they continue to be bearish about the US dollar, they will continue to act negatively in the currency marketplace. They will continue to hedge their currencies to protect themselves from the weaker dollar they forecast. But if the US dollar continues to hold up under this hedging pressure as it has for the past few months, the up trend will re-appear. The central banks will get their way. And the second consecutive year of US dollar strength will emerge.
Ken Norquay, CMT
Chief Strategist, CastleMoore Inc
Links to my book, Beyond the Bull:
Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1
US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1
Every once in a while, the right thing to do is to change your mind. One year ago was a good time to change your mind about buying and holding stock for the long term. And right now is a good time to stop being bearish on the US dollar.
The overall trend of the US dollar is the most important economic trend in the world right now. Last week the heads of state of the biggest economies in the world were huddling in Italy to formulate their next play in the world’s economic stadium. Since 2007, when the US sub-prime lending fiasco erupted, they have been aggressively cooperating to try to stabilize the world’s banking system. At this July’s G-8 meeting, they must have been feeling very proud of themselves for doing such a good job. By and large, most of the world’s banks have survived.
But, one surprising economic fact has remained hidden in all the reassuring rhetoric and political posturing: the long-term trend of the US dollar has reversed. It’s going up now.
Analysts measure the US dollar against a basket of foreign currencies made up of the euro, yen, British pound, Swiss franc, and several other minor currencies [including our Canadian dollar]. On this basis, the US dollar entered a long-term bear market in the winter of 2001-02, at a price of approximately 120. It traced out a six-year zig-zagged decline that ended in spring 2008 at about 70 – that’s an over 40% decline! That significant, long-term down trend happened during George Bush’s Republican administration. The US dollar’s downward trend ended with a world banking crisis and the bailout of America’s biggest bank, biggest insurance company, biggest brokerage firm[s], biggest mortgage company and biggest auto manufacturer.
And now an overwhelming majority of currency analysts hate the US dollar. They think it’s going lower. The financial press is full of reasons why the US dollar will resume its long-term down trend. But that’s not what’s happening. Last year it rallied 28%, from 70 to 90, followed by a 10% decline to its current level of just over 80. And now that US dollar is around 80, the economists all hate it.
This is the perfect set-up for the American dollar’s up trend to continue.
G-8 central bankers would like to see a stronger US dollar because it is the reserve currency of the world’s banking system. When a bank’s reserves depreciate, the banks become weaker. Will the world’s central bankers get their way? Will the US dollar continue its long-term up trend?
The answer to this question does not lie in the secret minutes of the backroom meetings that occurred at the G-8 conference last week. The answer is in the attitudes and actions of economists and analysts all over the world. If they continue to be bearish about the US dollar, they will continue to act negatively in the currency marketplace. They will continue to hedge their currencies to protect themselves from the weaker dollar they forecast. But if the US dollar continues to hold up under this hedging pressure as it has for the past few months, the up trend will re-appear. The central banks will get their way. And the second consecutive year of US dollar strength will emerge.
Ken Norquay, CMT
Chief Strategist, CastleMoore Inc
Links to my book, Beyond the Bull:
Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1
US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1
US Dollar - a bullish prognosis
The July G-8 Meeting and the US Dollar
Every once in a while, the right thing to do is to change your mind. One year ago was a good time to change your mind about buying and holding stock for the long term. And right now is a good time to stop being bearish on the US dollar.
The overall trend of the US dollar is the most important economic trend in the world right now. Last week the heads of state of the biggest economies in the world were huddling in Italy to formulate their next play in the world’s economic stadium. Since 2007, when the US sub-prime lending fiasco erupted, they have been aggressively cooperating to try to stabilize the world’s banking system. At this July’s G-8 meeting, they must have been feeling very proud of themselves for doing such a good job. By and large, most of the world’s banks have survived.
But, one surprising economic fact has remained hidden in all the reassuring rhetoric and political posturing: the long-term trend of the US dollar has reversed. It’s going up now.
Analysts measure the US dollar against a basket of foreign currencies made up of the euro, yen, British pound, Swiss franc, and several other minor currencies [including our Canadian dollar]. On this basis, the US dollar entered a long-term bear market in the winter of 2001-02, at a price of approximately 120. It traced out a six-year zig-zagged decline that ended in spring 2008 at about 70 – that’s an over 40% decline! That significant, long-term down trend happened during George Bush’s Republican administration. The US dollar’s downward trend ended with a world banking crisis and the bailout of America’s biggest bank, biggest insurance company, biggest brokerage firm[s], biggest mortgage company and biggest auto manufacturer.
And now an overwhelming majority of currency analysts hate the US dollar. They think it’s going lower. The financial press is full of reasons why the US dollar will resume its long-term down trend. But that’s not what’s happening. Last year it rallied 28%, from 70 to 90, followed by a 10% decline to its current level of just over 80. And now that US dollar is around 80, the economists all hate it.
This is the perfect set-up for the American dollar’s up trend to continue.
G-8 central bankers would like to see a stronger US dollar because it is the reserve currency of the world’s banking system. When a bank’s reserves depreciate, the banks become weaker. Will the world’s central bankers get their way? Will the US dollar continue its long-term up trend?
The answer to this question does not lie in the secret minutes of the backroom meetings that occurred at the G-8 conference last week. The answer is in the attitudes and actions of economists and analysts all over the world. If they continue to be bearish about the US dollar, they will continue to act negatively in the currency marketplace. They will continue to hedge their currencies to protect themselves from the weaker dollar they forecast. But if the US dollar continues to hold up under this hedging pressure as it has for the past few months, the up trend will re-appear. The central banks will get their way. And the second consecutive year of US dollar strength will emerge.
Every once in a while, the right thing to do is to change your mind. One year ago was a good time to change your mind about buying and holding stock for the long term. And right now is a good time to stop being bearish on the US dollar.
The overall trend of the US dollar is the most important economic trend in the world right now. Last week the heads of state of the biggest economies in the world were huddling in Italy to formulate their next play in the world’s economic stadium. Since 2007, when the US sub-prime lending fiasco erupted, they have been aggressively cooperating to try to stabilize the world’s banking system. At this July’s G-8 meeting, they must have been feeling very proud of themselves for doing such a good job. By and large, most of the world’s banks have survived.
But, one surprising economic fact has remained hidden in all the reassuring rhetoric and political posturing: the long-term trend of the US dollar has reversed. It’s going up now.
Analysts measure the US dollar against a basket of foreign currencies made up of the euro, yen, British pound, Swiss franc, and several other minor currencies [including our Canadian dollar]. On this basis, the US dollar entered a long-term bear market in the winter of 2001-02, at a price of approximately 120. It traced out a six-year zig-zagged decline that ended in spring 2008 at about 70 – that’s an over 40% decline! That significant, long-term down trend happened during George Bush’s Republican administration. The US dollar’s downward trend ended with a world banking crisis and the bailout of America’s biggest bank, biggest insurance company, biggest brokerage firm[s], biggest mortgage company and biggest auto manufacturer.
And now an overwhelming majority of currency analysts hate the US dollar. They think it’s going lower. The financial press is full of reasons why the US dollar will resume its long-term down trend. But that’s not what’s happening. Last year it rallied 28%, from 70 to 90, followed by a 10% decline to its current level of just over 80. And now that US dollar is around 80, the economists all hate it.
This is the perfect set-up for the American dollar’s up trend to continue.
G-8 central bankers would like to see a stronger US dollar because it is the reserve currency of the world’s banking system. When a bank’s reserves depreciate, the banks become weaker. Will the world’s central bankers get their way? Will the US dollar continue its long-term up trend?
The answer to this question does not lie in the secret minutes of the backroom meetings that occurred at the G-8 conference last week. The answer is in the attitudes and actions of economists and analysts all over the world. If they continue to be bearish about the US dollar, they will continue to act negatively in the currency marketplace. They will continue to hedge their currencies to protect themselves from the weaker dollar they forecast. But if the US dollar continues to hold up under this hedging pressure as it has for the past few months, the up trend will re-appear. The central banks will get their way. And the second consecutive year of US dollar strength will emerge.
Tuesday, July 7, 2009
July 09 Murphey's Law
Early July 2009- Murphy’s Law Applied
“If something CAN go wrong, it WILL go wrong.”
My unofficial mentor in technical analysis was Bob Farrell, former chief market strategist for Merrill Lynch. He was a master of Murphy’s Law. Bob [now retired] tried to assess current market opinion: when he found a significant consensus, he wondered what could go wrong. What would cause grief to the maximum number of participants in the stock market? Let’s try his technique.
Right now I notice that the consensus opinion about the US stock market is this:
1. The market bottomed in early March 2009.
2. There was one great three-month rally which peaked in early June.
3. Now there will be a reasonable correction, which may test or confirm the March lows.
4. Once that is over, the market will continue up in a multi year cyclical bull market.
5. The best strategy is to wait for the correction and then buy into this market.
What could go wrong? What events would frustrate the most investors? What would Murphy have to do to catch us all off guard?
Bullish Scenario: the market correction is very shallow and the upsurge starts sooner rather than later.
Bearish Scenario: the market correction is not just a normal correction – the dam lets go and the market has another big decline like it did last year.
Self-psycho Test: Does either of these two possibilities make you nervous? Do you feel a tiny twiggle of unrest in your stomach when you realistically assess these two reasonable scenarios? If so, you have bought into the consensus and you are in danger.
Let’s review the bullish scenario: the market corrects only slightly, and then launches into a multi-year cyclical bull market. The stock market is a lead economic indicator, often bottoming about 6 months before the economy. Six months after March is September. If our bullish scenario unfolds, we should see some signs of economic recovery this fall. Before that, we should see the market go higher than the June highs. This scenario doesn’t really rock your stomach with worry, does it? Logically, if our bullish scenario unfolds, we would add to our stock portfolios if the market exceeds the June highs; and add still more if those earnings reports and unemployment figures start to stabilize.
Let’s face it: it’s the bearish scenario that rocks your boat! Last summer the market eased downward in July and August. Then the wheels fell off! Mutual funds and pension plans recorded serious losses: it will be years before they can break even. This is the scenario we all dread. Logically, if our bearish scenario unfolds, we should sell our stocks now. Sorry, I did not emphasize that enough. “WE SHOULD SELL OUR STOCKS NOW.” [Just like last year at this time.]
Self-psycho Test #2: Does the notion of selling out of the stock market now make you nervous? Do you feel a tiny twiggle of unrest in your stomach at the thought of not owning stocks at all? If so, you are way too bullish AND you didn’t learn from 2008. Murphy’s Law will get you.
In my book, Beyond the Bull, I discuss the emotional aspect of the stock market. How you feel is important. Uncomfortable feelings come from false beliefs and false logic. When you feel serious negative emotions about the markets, pay attention to them.
Canada:
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1
USA
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1
Ken Norquay, CMT
July 7, 2009
“If something CAN go wrong, it WILL go wrong.”
My unofficial mentor in technical analysis was Bob Farrell, former chief market strategist for Merrill Lynch. He was a master of Murphy’s Law. Bob [now retired] tried to assess current market opinion: when he found a significant consensus, he wondered what could go wrong. What would cause grief to the maximum number of participants in the stock market? Let’s try his technique.
Right now I notice that the consensus opinion about the US stock market is this:
1. The market bottomed in early March 2009.
2. There was one great three-month rally which peaked in early June.
3. Now there will be a reasonable correction, which may test or confirm the March lows.
4. Once that is over, the market will continue up in a multi year cyclical bull market.
5. The best strategy is to wait for the correction and then buy into this market.
What could go wrong? What events would frustrate the most investors? What would Murphy have to do to catch us all off guard?
Bullish Scenario: the market correction is very shallow and the upsurge starts sooner rather than later.
Bearish Scenario: the market correction is not just a normal correction – the dam lets go and the market has another big decline like it did last year.
Self-psycho Test: Does either of these two possibilities make you nervous? Do you feel a tiny twiggle of unrest in your stomach when you realistically assess these two reasonable scenarios? If so, you have bought into the consensus and you are in danger.
Let’s review the bullish scenario: the market corrects only slightly, and then launches into a multi-year cyclical bull market. The stock market is a lead economic indicator, often bottoming about 6 months before the economy. Six months after March is September. If our bullish scenario unfolds, we should see some signs of economic recovery this fall. Before that, we should see the market go higher than the June highs. This scenario doesn’t really rock your stomach with worry, does it? Logically, if our bullish scenario unfolds, we would add to our stock portfolios if the market exceeds the June highs; and add still more if those earnings reports and unemployment figures start to stabilize.
Let’s face it: it’s the bearish scenario that rocks your boat! Last summer the market eased downward in July and August. Then the wheels fell off! Mutual funds and pension plans recorded serious losses: it will be years before they can break even. This is the scenario we all dread. Logically, if our bearish scenario unfolds, we should sell our stocks now. Sorry, I did not emphasize that enough. “WE SHOULD SELL OUR STOCKS NOW.” [Just like last year at this time.]
Self-psycho Test #2: Does the notion of selling out of the stock market now make you nervous? Do you feel a tiny twiggle of unrest in your stomach at the thought of not owning stocks at all? If so, you are way too bullish AND you didn’t learn from 2008. Murphy’s Law will get you.
In my book, Beyond the Bull, I discuss the emotional aspect of the stock market. How you feel is important. Uncomfortable feelings come from false beliefs and false logic. When you feel serious negative emotions about the markets, pay attention to them.
Canada:
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1
USA
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1
Ken Norquay, CMT
July 7, 2009
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