HS Dent | The Lesser of Many Evils

The Lesser of Many Evils

By Charles Sizemore⋅ October 27, 2009 ⋅ ⋅ Post a comment

Hedge fund manager David Einhorn had some interesting comments on the dollar in the recent Value Investing Congress:

When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV, read speeches written by the Fed Governors, observe the “stimulus” black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar. But then I look at the other major currencies. The Euro, the Yen, and the British Pound might be worse. So, I conclude that picking one these currencies is like choosing my favorite dental procedure.

This more or less sums up our view at HS Dent. We agree that the dollar is a horribly mismanaged currency by an irresponsible and self-destructive government. The problem is…so is every other major world currency! It’s difficult to make money shorting the dollar when there is no viable option to short against.

Einhorn reaches the conclusion that, since all paper currencies appear to be in a race to the bottom, gold is the direction to go. We’d tend to disagree with Mr. Einhorn on this count because we believe gold will face some serious headwinds in a deflationary environment — and the bond market is still telling us, in contradiction to the gold market, that deflation is the real concern.

The dollar is a despised asset right now — it is nearly impossible to find anyone who is bullish on the dollar. This could make the dollar an intriguing contrarian investment.

Should the stock market roll over in a new bout of risk aversion, the dollar should rally sharply. But even if risk aversion remains benign, we would expect the dollar’s current weakness to reverse at least marginally in the next year. Its current depressed value against the euro would appear to be unjustifiable given the economic challenges that the eurozone faces.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

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Discussion

One comment for “The Lesser of Many Evils”

Conundrum! If Our Obamanomics team wishes to create for the US greater exports, then they will, by definition, try to keep the dollar lower. This will not have any effect on the deflationairy direction in which we are headed.
Perhaps Rodney Johnson’s idea - do I remember correctly? appologies if I’m wrong - of investing in Chinese gay bars which will accomodate their out of balance demographics isn’t such a bad idea.
Until then follow the trail that the current politics leads us. Maybe some commodities, healthcare, finacials - GS will get most of the C & T business, etc.

Posted by rankin.douglas | October 30, 2009, 1:48 pm