back to blog homepage

Dollar Dominates Perfromance

screen-shot-2010-02-27-at-103830-am

Above is the chart of the various asset classes’ performance year-to-date. You can see that the big loser so far is the Ag sector and the big winner is the 30-year treasury bond, followed closely by the dollar.

Readers of this blog know that my view of the dollar is that we are currently in a counter-trend rally within a longer-term bear market. The deficits our country has been running over the years which have lately been kicked into overdrive, combined with the staggering level of our national debt that is projected to continue to grow, guarantees that the dollar will continue to fall in value over the long-term.

Below is the intermediate term view of the dollar in which you can see that we retraced 50% of the move down from last year and bumped up against that level a few times. We then broke above it with the news of the debt problems in Greece.

sc4

As news of European Union support for Greece has filtered into the markets, you can see that we’ve dropped back below the 50% retracement level. What we want to see is consolidation below this 50% line and then a gradual return to the primary downtrend.

Why do we want to see the dollar return to the primary downtrend? Take a look at what has happened to the world’s stock markets so far this year:

screen-shot-2010-02-27-at-105047-am

The dollar strength has wreaked havoc on the world’s stock markets year-to-date. It’s a natural reaction for the Brazilian market to retreat 8% given its 130% move off the lows last March, but its still not fun to endure when the fundamentals for their economy are so strong, the demographics of their society are good, and their growth rates are envious. It’s these reasons that waiting out an intermediate-term correction before a resumption of the primary uptrend resumes makes sense.

However, and this is the big gamechanger, if the sovereign debt problems in Greece spread to other countries (Spain seems to be particularly vulnerable and given is size – it is 4X larger than Greece – it could do damage to the world’s economies) we would be significantly reducing our foreign exposure (except potentially Canada and Australia) as we would anticipate a further rally in the dollar and treasuries in a flight-to-quality move by investors.

At this point, though, the world’s financial systems do not seem to be pricing in this sort of potential disruption. I’ve shown you this chart before:

screen-shot-2010-02-27-at-111326-am

The chart of the TED spread above shows that the risk of a sovereign debt crisis is not being priced into the market. The TED spread is one of the most reliable indicators of financial upheaval and systemic risk that I follow. You can see that it shows that systemic risk has fallen to normal levels from the post-Lehman Brothers bankruptcy’s impact on the world’s financial system shot it to record highs.

Until we see the TED spread jump, the current sovereign debt crisis in Greece is forecast by the markets to be contained, and by inference, the dollar’s strength is temporary. As long as the dollar’s strength is temporary, foreign and emerging markets should be viewed as attractive relative to US markets.

If we see a change in the fundamentals I will be letting you know about it here on the blog. Until then, we are not going to let the dollar strength disarm our strategy.

Your trivia today revolves around a bit of WWII history. This past week was the 65th anniversary of one of the US’s most memorable battles in the Pacific. One of my favorite books was written about the group of men who became famous because of a photo of them during the battle. Three of the men were killed in the battle and three survived. The photo went on to be used to model the Marine Corp War Memorial at Arlington Cemetery in Washington DC. Can you name the battle, the photo, and the book?

Mark