That Uneasy Parabolic Feeling

Where's the wall of worry that bull markets are supposed to climb? I sure don't see it.

In fact, I'm even willing to offer a "sure thing" theory in an attempt to explain it.

US Dollar Index

The markets are simply trying to price in a drop in the dollar index from 89 to 77 (a 13% drop in the dollar, which in a rational world would drive up the price of most things by 13% eventually).

If my theory is correct, then the markets have fully priced it in nearly twice so far.

I would also add that the dollar index might not go to 77 (and even if it does, it might not stay there). Conventional wisdom seems to suggest it will, but conventional wisdom isn't always right. Anyone remember what happened last year?

April 12, 2008
Dollar's Decline May Slow After G-7 Raises Concern About Drop

A weaker dollar has made U.S. goods and services more competitive in global markets.

Is it any wonder that G-7 was concerned about the drop? I just don't think we're going to get off that easy. Using the benefit of hindsight, you will note that the dollar actually skyrocketed higher (see weekly dollar index in first link above).

March 24, 2009
Yen Near 5-Month Low Versus Euro as Stocks Surge on Bank Plan

Gains in the euro may be tempered by speculation the dollar’s decline has gone too far. The 14-day relative strength index on the 16-nation currency versus the greenback, a gauge used by traders and analysts to project trends, rose yesterday to 71.6, near the highest level in three months. A level above 70 tends to signal a currency’s gain is too fast to sustain.

“Bottom line, I’m bullish on the dollar,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. “Our fiscal and monetary policy is more aggressive.”

As counterintuitive as it might seem, I guess I am too.

March 23, 2009
Euro Currency of Choice as Fed Easing Devalues Dollar (Update2)

“All major central banks will have to follow the Fed and adopt quantitative easing,” said Mackinnon, a former economist for the U.K. Treasury. “If the European policy makers are hoping they will get a free ride on the U.S. stimulus, hoping they will look more prudent, they are deluding themselves.”

I absolutely believe that.

“European policy makers are behind the curve,” said Neil Mackinnon, chief economist and partner at ECU Group, a London- based hedge fund with about $1 billion in assets. “The European economy will sink deeper into depression.”

I believe that too. Here's one more link as a reminder.

November 9, 2004
Trichet calls US dollar fall 'brutal' and 'unwelcome'

There has been speculation after recent speeches by Federal Reserve officials that the US Treasury is half-hearted in its declared strong dollar policy, and that the US favours a weak currency to help correct its huge current account deficit.

We are empty-hearted and alone these days, but I strongly doubt we will be alone forever.

October 3, 2003
Currency Devaluation and Economic Growth

Furthermore, within this framework, if a country tries to take advantage and depreciate its currency by means of a relatively looser monetary stance this runs the risk that other countries will do the same. Consequently, the emergence of competitive devaluations is the surest way of destroying the market economy and plunging the world into a period of crisis.

I have four observations relating to this quote.

First, this was said in response to our policies following the dotcom crash. It was not suggesting that the dotcom crash was the crisis but was instead predicting a future crisis.

Second, the crisis came as predicted. We are now experiencing the biggest financial crisis since the Great Depression.

Third, we are using these same currency devaluation policies again. Stick with what doesn't work apparently.

Fourth, if history is any indicator, we'll get a nice rally (2003-2007) and then another hard crash at some point in the future. Enjoy it while it lasts. As for me, I'm content on the sidelines.