Something's wrong in this market

Financial markets have a "hum" to them, a sound, a tempo, a buzz of people buying and selling. People who have been deeply immersed in markets for a long time internalise that hum and, even if we are not paying close attention to the details, are sometimes awakened by a strange sound, an unusual buzz, a change in tempo. Rather like driving a car -- you know from the sound of it, the feel of it, that something is wrong.

And, I find myself, yet again, sensing that something is wrong about the dollar.

Every analyst worth his (or her) salt has an extremely well-reasoned case for why the dollar has to fall, most centred around the fact of the huge indebtedness of US consumers and the economy's huge -- and growing twin (one analyst has a triple) -- deficits.

Some point to an emerging -- some say already in process -- commodity cycle; some talk of Kondratieff winters; and some point to the "end of an era" process in which Asia rises to take the baton of global leadership from an effete America. Many of these strands run in parallel, each reinforcing the other, making the case for a dollar collapse even stronger.

Yet, the dollar -- at around 1.22 to the euro -- remains in the steady range it has been in for the past six months.

If everybody believes the dollar has to weaken, why hasn't it started weakening? Why isn't it, for instance, below 1.30 to the euro? Why isn't gold reaching for grotesque highs, as some analysts have been predicting for a couple of years now? Why haven't the Asian central banks started dumping dollars yet?

Now, one of the biggest problems in market analysis, or, for that matter, any analysis, is not getting so completely wedded to your beliefs that, in a manner of speaking, you begin to believe your own press releases.

As we all know, when you strongly believe something, everything in the world conspires to confirm that belief. And then, God -- in this case, through the market -- turns things upside down, perhaps only to bring you down to earth.

As a "recent" example, I recall that around four years ago -- September/October 2000 -- the dollar was so strong that it was hard to believe it would ever turn weak again. Even though the US economy at that time was showing the first signs of weakness -- the Nasdaq bubble had already been pricked and some of the excesses of the previous few years were beginning to show up in company collapses, huge capacity overhand, and a growing disbelief that the party was over -- the fact remained that the dollar was the only place in town to put your money (or so it certainly seemed at that time).

Japan was chasing its own tail – slowly -- in search of growth, and Europe was bickering over such important details as where to locate the European Central Bank while growth and employment remained hostage to the "Old European" approach to life.

Thus, neither the yen nor the euro, which, in any case, had been falling since its inception, provided a meaningful alternative for investment. Gold, of course, was over as an investment option -- at $270 an ounce, it had produced negative returns for several years.

Remember that time?

Worrying about the fact that the market had become totally one-sided, I had even tried to write an essay describing a convincing scenario that would lead to a weakening dollar. I failed.

And, of course, the dollar did turn, and mightily. Since those heady days, the dollar has lost nearly half its value against gold and the euro. Interestingly -- and perhaps this is part of the answer -- it has remained more or less at the same level against the yen (and the yuan and, remarkably the rupee -- it was at 45.77 on September 1, 2000). All three of us have been buying dollars to prevent currency appreciation, so, if we discount the impact of this, the dollar has fallen dramatically across the board.

And, as I recall, there was no definitive cause for the dollar turnaround -- certainly, not tangible at the time. The market just decided it was time to go the other way. And, so it did.

And now, as night has turned to day, everyone is dollar-bearish -- from Hong Kong to New York. Again, I've been trying to find a convincing analytic scenario to show why the dollar should strengthen -- I have even assigned that homework to several well-considered analysts. But, I expect that before they turn the assignments in, the markets will have done some of that yet -- again "what happened" magic.

Several years ago, my daddy had taught me that when the whole world starts believing in a trend, it is, perhaps, time to start looking for the exits. And another old market adage is that a sudden sharp spurt in prices in the direction of a long-running trend sometimes signals the beginning of the end of the trend. Of course, the key words in the last two sentences are "perhaps" and "sometimes".

Volatility is low right now, so perhaps the turnaround isn't imminent. But watch carefully.

The market's job is to -- from time to time -- prove the majority dead wrong.

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