Dollar downtrend confirmed; business cycle ending?

The end of the dollar rally is a topic that I’ve discussed previously. Now that the period of congestion (or sideways trading within a range) is over, the short and intermediate term trends seem to be re-aligning with the longer term downtrend in the exchange traded value of the US currency.

While this downward move is likely only in its early stages, it’s important to remember why the dollar rally happened in the first place: A Fed rate fake out.


Time and time again from 2014 and on the Fed said it would raise rates. Talk of tightening even prompted taper tantrums and rate hike jitters leading to large, volatile market moves.

Now that the Fed has walked back on its promise of 4 rate hikes in 2016, and may not even hike again this year, reflation is beginning to show itself in various commodity prices. And this is a good thing.

The weakening of the dollar is the natural response to a situation where the international interest rate differential is being neutralized by a nervous central back here at home. What had caused the rally is now being discounted. And the rally started at a much lower exchange traded rate — so chances are that this downturn in the dollar has much farther down to go.

Translation? Higher commodity prices, resource stocks will continue their rally and the international players that benefit from a weaker dollar (like exporters) will benefit. Prices for food and energy will rise. Services will follow.

This is the natural final inning of a business cycle approaching. There’s nothing wrong with it provided that an exit plan is mapped out.

Correction brings opportunities in resource sector

The resource sector is getting slammed today on account of a marginally higher dollar, and one dissenting Fed member (Bullard) jawboning an April rate hike (conceivably to test the market’s reaction).

In all likelihood, given that the Fed has all but lost its credibility and certainly doesn’t want to be credited with causing deflation, a rate hike will not happen in April.  In fact, if anything I expect more dovish language on account of a deteriorating domestic housing market, more global economic uncertainty and the fact that we are right in the midst of election season (and the Fed seems to have more of a democratic bias — perhaps because many republicans are openly hostile toward the Fed).

My thought is that Bullard’s bluff will be called. That means the lower prices I am seeing now across the resource sector could be a wonderful opportunity to allocate capital at a discount.

Stay nimble.

Negative interest rates, positive investment returns?

I wrote in January that it was time to look at the resource sector. Since then energy, materials and precious metals producers have provided double digit returns. And this is likely only the beginning.

Negative rates are the new normal.

Major changes are occurring in the global picture. Changes that may appear to be disorienting.  Such as today’s ECB rate cut and QE extension causing a massive near 2% rally in the Euro, defying all expectations.

Or the Bank of Japan’s negative interest rate program boosting the Yen.

This may be a sign of something much more critical to resource sector stocks: a beginning of the end for the US dollar rally.

I wrote last year that the US dollar rally was stalling. Since then the dollar has stalled, moving up and down, but having a very hard time making a decisive continuation of its short term uptrend — or its long term downtrend.  Instead it has been consolidating with a more downward bias as of late.

This to me is suggestive that the US dollar rally is in a phase where the next trend is being decided by the conviction of buyers and sellers and the global economic picture as it changes.  And it is changing — rapidly.

There is no doubt that the US economy has made some progress since the depths of the crisis in 2008-2009, but it is not the level of progress that the stock market would suggest or that the unemployment rate seems to portend.

Instead we’ve enjoyed a very slow, very weak recovery that has mostly created part time, low paying jobs. And this is not as much of a political issue as it is a monetary policy issue.

QE, low interest rates and bail outs have transferred wealth from the working class, and shrinking middle class to the wealthy.

This actually hurts the economy. Slowing consumption, reducing confidence and shrinking the job market. Reality is setting in. Federal Reserve policy makers seem to be realizing that their hawkish hopes of hiking interest rates may be just that. We may even see negative interest rates before we see a 1% Federal Reserve interest rate again.

Such a development is very positive for those traditional inflation hedges.  Which is why I will continue to circle various components of the resource sector in pursuit of misunderstood or undervalued companies which could be valuable investments for the long term.

Seesaw market creates opportunities in volatility

There is a lot of emotion charging the market, creating exaggerated moves both up and down.  One day everything is fixed, the next everything is broken.  Manic depression wouldn’t even begin to describe the back and fourth being witnessed.

But with chaos comes opportunity.  And the opportunity here is finding beaten up, misunderstood and frankly cheap assets.  Right now the areas that seem to be most attractive are commodities, commodities companies, energy and energy companies.

The global markets are pricing in worldwide depressed demand.  Oil producers are pumping at frantic rates, more concerned about the flow of cash than the margin on each sale.  This has created a glut of energy supply — and with little demand oil prices have crashed below $30.00 to about $28.00 a barrel for West Texas Intermediate Crude (WTIC).

Consider the following opportunity: The US dollar has had a rally which induced a de facto tightening even before the US Federal Reserve raised interest rates.  As such, one can reasonably expect that the actual pace of interest rate tightening, with the backdrop of a softening US economy, will likely be subdued.

Markets have priced in a more aggressive interest rate hiking cycle, which is putting pressure on everything that’s priced in dollars.  Even stocks.

I think that we’re getting ahead of ourselves here.  The Federal Reserve is unlikely to let this situation turn in to a full blown 2008 panic again, unless there is a desire to bring back all the calls to audit the Fed and the political upheaval that protests and social unrest would bring.  Instead, especially given that it’s a critical election year, I believe the Fed will tap the breaks and ease off the gas, leaving interest rates at 0.25% and possibly cutting them to negative levels if the global slowdown increases in momentum.

Stocks, dollar topping. Commodities closer to bottom.

It’s my opinion that the stock market rally, which lasted from early 2009 until late 2014 by many accounts, is largely over. Charts show a consolidation churning over the last year that gives reason to believe that the bull market is long in the tooth. The momentum in stock market buying has significantly stalled on a technical basis.

Fundamentals don’t look much better as earnings haven’t been particularly stellar in retail, materials, energy, construction and industrial equipment.

The dollar rally, which brought the dollar from about 78 in 2011 to just over 100 in 2015 seems to be topping out as well.  There’s not much conviction over the 100 level and the long dollar trade is quite lop sided with bulls outnumbering bears by the highest levels in years.

Meanwhile, commodities have been sold off to lows we haven’t seen in years if not decades in some cases.  The very stuff that drive economies, trade and the basic fundamentals are selling off as if the abundance of supply and lack of demand now is a permanent situation.

Markets always look ahead, until they don’t.  And sometimes they get a bit emotional both on the way up and the way down.  That emotion can drive exaggerated reactions.

The biggest emotional reactions tend to happen during periods of excessive greed during a top or excessive pessimism during a bottom. These emotional extremes can drive prices in to areas where opportunities may be realized by taking the opposite position.

That is to say, sometimes being a contrarian, while risky, can also pay off big.

I’m of the belief that this is one of those times.  The emotions are running high with stock and dollar bulls as well as commodity bears.  In fact I think it’s reasonable to speculate that many of these trades are tied together: long the dollar and stocks and then short commodities (and their equities) to maximize alpha.

It’s been a great trade for several years — there’s no doubt about that.  Most funds participating in such a trade have delivered outsized returns.  But now that positioning has matured, the gains have been largely realized and taking the opposite position may be more lucrative and less risky.

It may be time to consider going long commodities and taking a short position against equities. But don’t do anything risky without talking with a qualified investment professional. Good luck investing!


Crude’s crash could cause conviction crisis

Oil prices haven’t been this low since 2009. Energy stocks are collapsing, credit markets are rattled and the commodities complex is capitulating.

What does it all mean?

Commodities, and especially energy, are a barometer of global economic health.  The current reading indicates we are heading in to a serious storm.

China’s exports have been dropping, which shows curbed demand from Europe and the United States.  Thus, demonstrating that the consumption-driven global economy is struggling.

Where do we go from here?

It’s quite possible that a global recession is the next leg down.  We’re already seeing signs in the economies of the Euro zone, Japan, Canada, Brazil, Russia and others that a soft landing may not be in the cards.

How does one protect their capital?

Conventional financial investments tend to get bludgeoned during recessions.  This is because risk adversity grows and investors convert stocks in to bonds, cash and other assets that are perceived to be ‘safe havens.’

My inclination is that gold, silver, the Japanese Yen and Treasury bills will see a supportive bid in 2016.  The US dollar and equity markets will likely see a corrective pullback, if not a larger decline.