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

Barry Ritholtz posted a link to this excellent piece by Bloomberg’s Alice Schroeder on bubbles throughout history: “Gold Tells You US Bubble Hasn’t Popped Yet.”

Echoing our thoughts on gold from last week, Ms. Schroeder writes:

I’ve never been a gold bug myself. They get no respect. They are associated with survivalists, conspiracy theorists and nutcases. They are always looking for the hyperinflation that never comes. Gold bugs pay a premium over the metal price for gold and silver coins on the notion that they will need the currency, come the Apocalypse.

Ms. Schroder does give the gold bugs credit on one count, however. While gold has had a mixed history as an inflation hedge, it has offered insurance-like protection from currency crises. Fair enough. But buying gold today to protect against a dollar crash seems a little like closing the barn door after the horses are already out. The dollar has already been in a grinding bear market for nearly a decade. Is now the time to buy insurance? Or, to use another analogy, is there much of a point in buying storm insurance after the hurricane has already hit your house?  Or buying life insurance after you’ve been hit by a bus?

Only time will tell, of course. And gold could very well soar higher from its current levels. This is the nature of bubbles. But we should be clear that at current levels, gold is in a bubble, and monies allocated to gold should be viewed as highly speculative.

Deflation continues to be the real threat. Read the rest of this entry »

Yes, you read me correctly.  Gold, despite recently surging to new all-time highs, is a truly lousy investment.  And this is not just my view; it is the view of Benjamin Graham, the mentor of Warren Buffett and the father of modern investing!  Consider what Graham had to say about the barbarous relic in his classic The Intelligent Investor:

The standard policy of people all over the world who mistrust their currency has been to buy and hold gold. This has been against the law for American citizens since 1935—luckily for them. In the past 35 years the price of gold in the open market has advanced from $35 per ounce to $48 in early 1972—a rise of only 35%. But during all this time the holder of gold has received no income return on his capital, and instead has incurred some annual expense for storage. Obviously, he would have done much better with his money at interest in a savings bank, in spite of the rise in the general price level. Read the rest of this entry »

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