At the point of maximum pessimism, great investment opportunities are planted by contrarian-value investors. And the American dollar has to be the biggest contrarian bet in the world in late 2007 as everyone grows increasingly more bearish.
If Sir John Templeton -- widely regarded as the father of global investing, was still actively managing money today, I wonder what he would say about the U.S. dollar and its relentless six-year bear market versus virtually every currency on the planet. Would Sir John be accumulating cheap American assets or would he avoid depreciating U.S. dollar-denominated securities and overweight foreign markets?
I’d have to bet Sir John would indeed be looking to deploy more assets into American stocks, especially at the expense of foreign currencies that have markedly appreciated vis-à-vis the sad buck over the last several years.
Compared to every currency, except the Zimbabwe dollar, the dollar looks like a huge bargain. The dollar has plummeted against most currencies just about everywhere, including Latin America, Asia, Europe, the Middle East, Africa and the Indian sub-continent. At this point, I’d have to conclude the dollars’ decline is a joke; despite continued support for a “strong dollar” from the Treasury, it’s obvious the United States government desires a low dollar.
Over the last few weeks, the Canadian dollar has broken par against its largest trading partner and now buys more U.S. currency for the first time since 1976; the Chilean peso, a major copper producer, hit a fresh eight-year high yesterday and the Aussie trades at a multi-year high -- trading just 11% from par-value. The list reads like a horror story with many other units scoring record blows versus the U.S. dollar. It’s no wonder investors are scrambling to buy gold as the world’s reserve currency is literally being dumped en masse.
But that’s yesterday’s news. At some point, as impossible as it might be to imagine, the U.S. dollar will stage a recovery; whether this rally will be secular (e.g. 1995-2001) or cyclical (2005 dead-cat bounce) is hard to determine at this point. However, in 2008, I’ll bet heavily that the dollar will post a major reversal versus most currencies and shock the financial world. In an election year, the Fed and the government will do everything possible to keep the economy above water.
Impossible you say? Not really.
The catalyst for a cyclical, not secular, bull market is a declining U.S. trade deficit in 2008 coupled with a rising savings rate. The implications of this forecast, if correct, are very bullish for the dollar but extremely bearish for stocks.
A sharply lower dollar is making American exports extremely competitive in 2007 while at the same time imports are declining as consumers purchase less autos and other non-essential items amid a slowing economy and a bear market in housing. Americans are now saving more. And historically, a rising savings rate is bad news for corporate earnings as consumers, responsible for 70% of domestic consumption, spend less.
Let me set the record straight just in case you might think I should have my head examined with a bullish dollar forecast: If the dollar rallies, which I expect to occur in 2008, it won’t rally beyond 12-18 months in the wake of massive military expenditures in Iraq and Afghanistan, draining the Treasury and over time, inciting inflation. Wars are not bullish for a currency, especially if your budget deficits are skyrocketing. Alternatively, if the United States exits Iraq, the dollar would skyrocket. But the odds of that happening are very low.
The U.S. dollar is therefore being primed for a cyclical “dead-cat” bounce in 2008. A bear market rally for the dollar can be extremely powerful and will cause some serious dislocations among hedge funds and other speculators who have long overstayed their welcome betting against an oversold currency. In 2008, dollar bears should “beware.”
Comments