Now that the reality of the falling dollar has finally registered with the average American, and has been covered broadly by the media and has even been the subject of parody on Saturday Night Live, some individuals are raising the concept of an “inverse dollar bubble??? in hopes of persuading investors to return to U.S assets. However, any attempt to equate the irrational stock market mania of the late 90’s, with a supposedly “irrational??? fall in the dollar over the last three years, should be seen as empty rhetoric that merely reflects fantasy and ignorance, not reality and insight.
The fact that Warren Buffett and Bill Gates, two of the world’s wealthiest individuals, have signaled their agreement with former Fed Chairman Paul Volcker’s warnings of a dollar collapse by protecting their wealth through diversifying out of dollars, does not constitute a bubble in non-dollar assets.
While it is true that the dollar’s decline has been a mainstay in the financial headlines recently, to expect otherwise, given the importance that such movements have on the global economy, would be absurd. However, most of that coverage has been focused on the supposed benefits to American exporters and corporate profits, with relatively little attention given to it being symptomatic of a fundamental problem with the American economy, or portending any looming economic crisis.
Proponents of the “inverse dollar bubble??? assert that the media are so hungry for anti-dollar sentiment that will rush to quote anyone spouting doom. As one who has been in contact with hundreds of reporters over the past several years, I can assure anyone harboring such delusions, that this is certainly not the case. While I have been quoted a bit more often recently, such attention has only come after years of accurate forecasts. In reality, the vast majority of mainstream reporters still consider my bearish dollar outlook too radical for quotation.
Having just returned from the Orlando Money Show, I can assure anyone that the position that dollar bearishness has risen to the height of fashion is completely contradicted by reality. While my two presentations on the bearish case for the dollar were well attended they were greatly over-shadowed by those espousing the opposite point of view. Much more numerous in numbers, the dollar bulls were assigned the biggest rooms and spoke to significantly larger audiences. One attendee commented that my bearish outlook contradicted every other presentation he heard. Further, as hundreds of investors passed by my booth each day, those who had taken any action at all with respect to non-dollar investments were few and far between.
The fact is that despite all the talk of dollar weakness, there has been very little action on the part of dollar holders to do anything about it. I cannot speak for anyone else, but I have yet to go to a cocktail party where non-dollar strategies were being discussed. I have yet to over hear any such conversations at restaurants or while waiting in lines. I have yet to hear one cab driver comment on the profits he made in European bonds, or a single men’s room attendant give me a tip on a hot resource play in New Zealand.
In order for a mania to exist in an asset class, it is necessary for there to be wide-spread ownership in the asset, and a general belief among those buying it that its price can only go higher. For there to be a mania in non-dollars, the average American would have had to have already sold his dollars. How many people do you know who have bank accounts in foreign currencies?
Warren Buffett is one of the few prominent investors to have correctly identified the NASDAQ mania of the 1990’s as a bubble while still in formation, and to have had the discipline not to participate. Does it make sense that someone with enough investment savvy to have avoided that bubble, to now be foolish enough to participate in an alleged bubble in non–dollar assets? In fact, the same wisdom that guided Buffett to avoid tech stocks then, is the same wisdom that has him avoiding dollars now.
In addition, during the tech bubble of the 1990’s the NASDAQ increased twenty fold, to an absurd level never before reached in history. By contrast, the U.S. dollar Index is still higher than it was 15 years ago. In fact, all the dollar has done over the past three years is surrender the unwarranted gains it achieved during the tech bubble, when the world sought dollars to participle in the quick profits promised by the “new economy.???
During the last 15 years, despite the dramatic deterioration in America’s balance of payments, current account, and fiscal position, the collapse of its domestic savings pool, the dismantling of its industrial base, the explosion of money and credit creation, and the looming crises which will accompany the unwinding of asset bubbles in stocks and real estate, and their associated malinvestments, the dollar has actually risen in value. What kind of bubble in non-dollars is that? How can foreign assets be in a bubble when the price of such assets has actually gone down, especially during a time period when the fundamentals should have produced the reverse?
Another argument being advance in support of a looming dollar rally is the triple bottom in the Dollar Index formed in the early to mid 1990’s. This simplistic observation ignores the dramatic deterioration in the dollar’s fundamentals that have developed since then. Regardless of where technical support existed at that time, it has very little bearing on today’s situation. In addition, this technical support is widely known. The dollar Index is well followed, and anyone with a chart can see the historic support. My guess is that once enough speculative long positions are built up in anticipation of this support holding, it will promptly give way, ushering in a brand new leg down in the dollar’s long term bear market.
On the other hand, maybe Warren Buffett forgot to look at that chart of the Dollar Index? Perhaps if I sent him a copy he might give his friend Bill Gates a call, expressing the following “Bill, wait a minute, do you remember all those problems you and I discussed, and all those concerns we had for the U.S. economy and the dollar, and the fact that we felt it necessary to buy foreign currencies and foreign assets to preserve our wealth? I think we might have been a bit hasty. I just saw a chart of the Dollar Index and we can relax. I don’t know how we could have missed this, but there is a triple bottom in place from 1990 – 1995. That changes everything. We need to buy our dollar’s back ASAP. It’s a good thing I took a look at this chart. Otherwise we might have lost a lot of money being distracted by the fundamentals.???
Some dollar bulls have also tried to discredit the views of dollar bears by comparing them to broken clocks. The argument goes that since these “perma-bears??? have been bearish for so long, that anything they say on the subject should be discounted. Timing is always the hardest part when it comes to forecasting. It is always difficult to judge just how many straws can be piled on a camel’s back. It is easy to underestimate the strength of the camel, or over estimate the weight of the straws. In the case of the dollar, many of us underestimated the willingness of foreigners to fund U.S. consumption, their willingness to exchange goods for paper, or the resolve of foreign central banks to support the status quo, and overestimated the intelligence of investors. Of course, few of us predicted the “New Economy Bubble??? of the 1990s that would create temporary support for the dollar, or the “housing bubble??? in the wake of the shallowest “recession??? on record, that would extend America’s “wealth??? induced consumption binge beyond the bursting of that bubble.
In conclusion, the problems for the U.S. economy and the dollar have been a long time in the making, and the fact that a few of us were able to correctly diagnose the disease before its symptoms become more apparent to a small group of astute, high profile investors, should not be used to discredit our conclusions, especially as it appears the chickens are finally coming home for a long over due roost.