Montreal, Canada
Jim Rogers, who co-founded the Quantum Fund with George Soros in 1970 and subsequently went solo several years later, is now widely regarded as one of the premier global investors. He's also been instructive to my investment career since 1991; no other investor has made a bigger mark on my investment strategies than Rogers. I'm sure many other investors have been equally inspired.
Rogers, who now lives in Singapore and is the author of several books on global investing, including my favorite, Investment Biker (Random House), thinks the U.S. dollar is poised to rally at the same time global equities post a long overdue correction. The U.S. Dollar Index is heavily oversold and has plunged 14.5% since hitting a post-August 2008 high of 89.17 last March.
As the dollar eventually rallies global markets are likely to violently dislocate – depending on the duration of its recovery.
Over the last 26 months, the dollar has proved to be one of the few beneficiaries of a global crash along with Treasury bonds, the Japanese yen and, to a lesser extent, gold.
Each time risk-based assets decline sharply, the dollar rallies. This inverse relationship to risk has caused all sorts of dislocations for leveraged traders since mid-2007 and will probably result in more losses should the dollar's rally last several months or longer. That's because the dollar is the new "whipping boy" among traders whereby the carry-trade is facilitated by cheap zero percent U.S. money and then sold and deposited, for example, in Australian dollars at more than 3%.
The Norwegian kroner, ranked among the strongest currencies this year along with the Brazilian real, is another beneficiary of the dollar carry-trade since it provides a greater yield. Both units are also surplus currencies – driven mostly higher because of booming commodity exports.
Any dollar rally, in my view, must be seen as another opportunity to sell the currency in favor of gold, the Norwegian kroner, the Canadian dollar and the Euro. If the market is beginning to discount a U.S. rate hike next year then I've got to believe a rally will be short-lived because the country can't handle an interest rate shock or a strong currency. The Fed might tighten in 2010 but much less aggressively than other central banks.
The United States cannot tolerate a strong currency in this cycle because it is still trying to defeat the forces of deflation across several segments of the economy – namely real estate, bank lending and the loss of financial intermediation. The last thing the U.S. needs is a dollar bull market. The Chinese, as the world's largest exporting nation, also can't handle a strong dollar since their currency is still largely dollar-pegged.
Over the next several months more central banks will raise short-term interest rates as the pressures of post-crisis fiscal management become a necessity. Already, the Reserve Bank of Australia has tightened and the Norwegians are likely to follow suit later today in Oslo. Though I don't expect an aggressive cycle of central bank tightening in this environment of slack industrial capacity and rising unemployment, it is clear that this phase of the "easy money" period is now almost behind us. This implies new headwinds for financial markets over the next 12 months.
Again, use any intermittent dollar rally as another opportunity to dump dollars. There's absolutely no compelling case for a dollar bull market any time soon. The nation has completely gone off the deep end, recklessly spending out of control and in the midst of a massive spending spree that's about to finance healthcare reform at the worst possible time.
The Fed has no exit plan after this cycle and, for all intents and purposes, is the cause of systemic risk in the financial system. The Fed should be abolished while the dollar, at the very least, is demoted to a multilateral global exchange rate system whereby its role as reserve currency is shared by other more fiscally responsible nations. Unfortunately, a crisis of epic proportions will force a U.S. reserve currency downgrade sometime in the future. Got gold?
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Posted by: goldsilveralert | October 29, 2009 at 05:00 AM