A funny thing happened on the way to the dollar’s imminent destruction: it broke its downtrend and is now looking to finish 2009 strongly. (See chart)

We’ve been highly skeptical of the “dollar bear” argument for quite a while now (see “Short the Euro“).  We wonder if half of the “experts” who joined the anti-dollar bandwagon over the past two years have ever left the United States.  Had they been to Europe recently, they would have found that prices there already defy reality for those of us paying in dollars. (My recent visit to Madrid was nearly 50% more expensive that the one I took a few years ago…and this during a period where Spain is suffering a severe deflationary recession in which domestic prices are falling.)

Long suffering readers of the HS Dent blog are probably aware that we are temporarily residing in Paijan, Peru (see “Unconventional Medical Tourism“).   Even here, in the coastal Peruvian farm country, about as far in middle of nowhere as you can imagine (see map), the dollar has lost significant purchasing power.  Prices are increasingly expressed in the local currency, the nuevo sol, and more and more locals are opting to be paid in soles rather than dollars.

Yet none of this makes sense.  Is the US federal government spending an irresponsibly large amount of money these days on stimulus…much of it borrowed?  Absolutely.  But so is virtually every European country, and yet the euro remains strong.  The same is true for the Fed’s excessively lax monetary policy.   As bad as it is, it is only marginally worse than that of most other developed countries.  As we wrote in a prior post (see “Who’s Next?“), some Eurozone members are at significant risk of sovereign default.  And what might a default by a member or, in the most extreme case, the exit from the Eurozone of a major regional economic power like Italy, mean for the future of the euro?  Let’s just say it wouldn’t be good.

The dollar was too expensive in 2000.  But today, after nearly ten years of grinding bear market,  the dollar is cheap and despised.  Legendary speculator George Soros is credited with saying that the secret to making money in the financial markets is to find the trend whose premise is false and then bet against it.  And we believe that the dollar bear market is one such trend.  And Soros’s old partner, legendary contrarian investor Jim Rogers, agrees (see “Jim Rogers is Loading Up on the Dollar“).

We remain bullish on the dollar for the next 6-18 months and recommend steering clear of the anti-dollar hysteria.

Related Posts:  “Gold is a Lousy Investment“, “Must the Dollar Fall If Stocks Rise?”

Charles Sizemore, CFA

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

George Soros, the famous hedge fund manager, has spent most of his career defending his “Theory of Reflexivity.”  Like ourselves, Soros is a staunch critic of the orthodox view of market efficiency, specifically the idea that the market reflects all currently available information (see our prior post “Stating the Obvious: Markets Are Not Rational“).

One of the key points of Soros’s Theory of Reflexivity is that market prices are not merely a reflection of investor views about economic fundamentals but rather that the prices and fundamentals play off of each other in a self-reinforcing cycle.   In other words, falling stock prices do not just anticipate sagging economic fundamentals; they can also cause them.

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I hate criticising the CFA Institute because, as a charterholder, I end up inadvertently bashing myself. Still, the organization’s historical commitment to the Efficient Market theories has always been frustrating to me. The CFA Institute counts among its members some of the brightest minds in finance…yet much of its curriculum supports a theory that has been proven time and again in the real world to be patently false and unrealistic. Belief in the efficiency of markets given the series of meltdowns over the past decade is almost as crazy as continuing to believe in communism as an economic model given the failure of the Soviet Union. Read the rest of this entry »