Dollar short: This Advice Has Cost Investors a Sh*tload of Money… and It Promises to Get Worse!
Perhaps, like me, you’ve been hearing “the dollar is going to die” nonsense for the last few years.
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Last week I woke to 3 articles forwarded to me by some friends. I don’t typically pay any attention to these particular writers as I categorize them in the “marketers”, not “professionals” basket. The reason for friends forwarding them to me was to laugh at the duplicity. All three have been in the “dollar’s going to hell” basket and equally interestingly, literally overnight all three have begun the spin process of changing their tune. The “unexpected” PBOC devaluation of the renminbi has been the catalyst. Politicians could actually learn a few tricks from these guys.
Rule number 1: Never admit to being 100% wrong, and
Rule number 2: Ensure you spin any market event to appear as if “why yes, of course you knew all along that the RMB was going to devalue”.
Quite frankly, the articles my friends forwarded me are a pig to read, filled with emotionally laden sound bytes, arrogance, inaccuracies, and logic which like a cardboard cutout goes soggy in the rain. It gives me a headache, and as I read through, I found myself yelling obscenities at my computer which had my dog cowering. In the interests of my dog I had to stop reading.
It’s commendable in a morbid psychologically imbalanced sort of way. A few simple Google searches reveal the deception but no matter, press on we must, and revel in the fact that the vast majority of sheep will never do any meaningful due diligence. When I see that sort of duplicity, then all credibility disappears for me. We have to be able to acknowledge our mistakes otherwise we’re bound to repeat them.
We’ve gotten things wrong before and we’ll certainly get them wrong again, but I always encourage a debate on the topics. Nothing can be more valuable than a rigorous debate in order to flesh out and better understand. After all, what if I’m wrong? Then I lose money and what would the point be of that?
I have no particular ilk with any of these people. As a keen observer of market psychology and history I view it simply as another cog in the zeitgeist wheel which I find fascinating. Wolves will be wolves and sheep will be sheep. Nothing I say will ever change that and quite frankly, if it ever did then where lies the edge?
Along the same lines, another tale that’s been as popular as a Kim Kardashian nipple slip video, has been this idea that investors should be long the RMB, because really, no really, it’s going to replace the dollar and possibly even while you sleep. Yep, it’s gonna happen that fast. Never mind it’d be the first reserve currency in the history of the world to disappear overnight (and there are sound reasons why this is the case) but let’s not let rigorous analysis get in the way of sensationalism.
So long as the narrative fits the “anti dollar ”, it’s been wildly popular.
Before you send me any emails about the insolvency of the US government, let me stop you right there. Yes, the US government is bankrupt. Yes, they have a pension nightmare and yes, the country is a police state. But looking at the world in isolation together with an oft agenda driven myopic view needs to be seen for what it is. Marketing – nothing more and nothing less. No different to that “must have” shampoo that miraculously comes with a gorgeous loving nymphomaniac wife.
Dollar – Why?
I never fully understood why people would write such rubbish and get away with it. And it wasn’t until just the other day, during a conversation with a friend, it all made perfect sense to me. My friend, who I’ll leave anonymous so as to not get him into any trouble is a true professional investor who authors an investment newsletter. His niche is value investing and year after year he’s soundly beaten the market. All he focuses on is finding great companies which have a high probability of success and capital appreciation.
Our discussion ran to what his publishers have been telling him, and this is when it all made sense to me. Publishing houses test “copy” and when they find “copy” that works well, they devise a product around it and sell it. Boom!
I remarked how bass-ackward this really is. Marketing hype sans rigorous intellectual and analytical thought. No matter. If the narrative works marketers push it and push it big. My friend’s particular newsletter is less successful than many competitors even though, like clockwork, he beats them all hands down on a return basis.
Shortly after this conversation, I spoke with a long time reader who has become a friend. We discussed a purchase of land in Chile which he has made some time ago. I pointed out that he’s lost over 50% on his investment in dollar terms since 2011 and over 40% since 2013. It wasn’t something he’d thought about and thankfully he is un-leveraged. To break even on this trade he needs a 100% appreciation. Think about that. What’s more is I think the Chilean peso goes further. In fact, it’s just broken a long-term trend line and this is where we get big acceleration phases. I think you have to be short. I may be wrong and have been in the past. Our thinking is laid out in our report USD Bull Report.
We discussed what lies in store. My friend has been comforted by the idea that this is temporary, a short-term setback for the Chilean economy and currency. I think this is a huge risk. Failing to understand why the dollar is rallying in the first place means that the odds of understanding why and when it will end are vanishingly thin.
Part of the disconnect lies in failing to understand global capital flows, why the dollar is rallying, and why on the balance of probability we.re still at the beginning of this run not near the end.
I’ve heard the argument that China can sell their USD holdings to defend the RMB. Even if that were the case this fails to take into account the entire picture. There are many reasons for China to devalue, not the least of which is that it’s politically palatable, that they are still an export driven economy who have seen their currency rise substantially against their competitors such as Japan.
Trying to quantify their FX reserves as a % of GDP is nuts. Their numbers are bollocks and can’t be trusted. Mark Hart has a more meaningful measure of reserve adequacy. This is FX reserves divided my M2.
This looks like with a meaningful capital flight China will NOT have sufficient reserves to defend the currency.
The dollar will be strong NOT because it’s the reserve currency. That has always been the case but it’s NOT the answer. The dollar will be strong principally due to an unwinding ofthe carry trade. If you don’t understand this you’ll be lost.
If you have to pay back a loan to an individual who is insolvent… it doesn’t matter a damn. You still have to pay that money back. That the US Government is insolvent is IRRELEVANT right now.
The low hanging fruit then?
Poster child of external debt.
Both of these two are at major long term resistance levels. If they break from here it’s waterfall time.
Bottom line? Don’t go walking into investments in emerging markets without understanding their context.
When someone has a vested interest in telling you one thing make sure you understand the bias and agenda. One day when I’m involved in a fund or funds then be sure to question me on those. Until then I have no stake in the fight… other than to make money by being positioned correctly.
“Fortunately for serious minds, a bias recognized is a bias sterilized.” – Benjamin Haydon