BUY U.S. DOLLARS NOW, AND HOLD FOR 2-3 YEARS (June 5, 2011): The U.S. dollar has become an extremely unpopular currency worldwide. Some are obsessed with huge U.S. budget and trade deficits. Others are aggressively shorting the U.S. dollar on margin in order to buy numerous risk assets including silver, crude oil, and S&P 500 futures on margin; this is known popularly as the "carry trade". Still others are convinced that the U.S. dollar will collapse as hard assets such as precious metals will soar in price. Some are concerned with how QE3 and other actions by the U.S. Federal Reserve could erode the value of the U.S. dollar. Recently, the respected Market Vane survey showed that only 7% of investors were bullish toward the greenback.
Most investors have forgotten that during an era of stagnation, such as we have experienced since March 2000, the U.S. dollar will fall significantly whenever the global economy is expanding, and will rise strongly whenever the global economy is contracting. Recently, there has been increasing evidence that we are experiencing a worldwide slowdown in growth, along with the sharply increased likelihood of a double-dip recession. The U.S. dollar eventually rallied strongly to a three-year peak the last time we had a similar economic reversal in 2008-2009. However, investors must believe that it's different this time, since the U.S. dollar index has continued to grind lower even in the evidence of weakening economies worldwide.
In my opinion, this is a serious mistake. We have already experienced bear markets for many emerging-market equity bourses since early November 2010, including heavyweights China and India. GDX, a fund consisting primarily of large-cap gold mining shares which tends to be a reliable inverse leading indicator for the U.S. dollar, has been forming a bearish pattern of lower highs since December 7, 2010. The most reliable currencies of countries with high ratios of commodities to people, including the Australian and Canadian dollars, have been retreating for several weeks. Everything is pointing to a significantly higher U.S. dollar, except for the currency itself which doesn't seem to have gotten the message. Some investors are actually selling dollars because the greenback hasn't positively responded to negative worldwide economic news. In other words, many are selling or even selling short the U.S. dollar primarily because it has been moving lower.
The U.S. dollar index, with virtually zero fanfare, has formed a bullish pattern of higher lows for more than three years. On March 16, 2008, it slumped to its all-time bottom of 70.698. On July 15, 2008, the U.S. dollar index formed a higher low at 71.314, and more recently it completed another higher low of 72.696 on May 4, 2011. Other than the 30-year bull market for long-dated U.S. Treasuries which started way back in August 1981, this has to be the most disrespected bull market in existence today.
If I were forced to pick one asset which would be worth more two years from now than it is today, it would be the U.S. dollar index, without question. From an investing point of view, buying the U.S. dollar will not be nearly as lucrative as buying long-dated U.S. Treasuries and their funds including TLT, which is why being long TLT is by far my single largest position. Nonetheless, there is always the possibility that U.S. Treasuries will eventually surge to some kind of bubble top in 2012 or 2013 and begin a historic reversal. The U.S. dollar index, on the other hand, is likely to continue to rally until it peaks between 100 and 120, a level it has not enjoyed since 2003. No doubt this seems wildly inflated to most observers who are expecting a weaker greenback rather than a stronger one. But it would repeat the behavior of the U.S. dollar during similar past eras of stagnation dating back to when the U.S. dollar was decoupled from the Bretton Woods agreement four decade ago.