Contrarians Denninger, Dent, Faber and Hoye Looking for Dollar Rebound

The dollar has been decimated over the last six months as investors have piled into global stock markets. In hindsight, the risk seems to have been worth it, with stock markets in the US, China and Europe exceeding gains of 50% since the March 2009 lows. There has been much talk of correction or crash since stocks began to rise, to no avail. Markets, regardless of forward looking economic fundamentals, have continued to edge up.

In March 2009, the daily sentiment index showed there were 2% bulls. Today, we have the opposite extreme, with a 90% investor bullishness. As the dollar collapsed during the stock market rally, sentiment has also swung to the opposite extreme. Dollar bulls are few and far between, as indicated by the 95% bearish sentiment as of late September.

While it seems that most market participants are looking for a continued rise in stock prices and deterioration of the US Dollar in the near-term, leading contrarian investors like Karl Denninger, Marc Faber, Bob Hoye and Harry Dent have a different take.

On Friday, October 23, 2009, economist and cyclical forecaster Harry Dent of HS Dent Investments advised his subscribers that markets are at a critical juncture:

Two things happened today that suggest we will see a correction near term as we have been expecting. First, the markets reversed down after very good earnings news late yesterday. Second, the Dow Transports did not make a new high recently and is reversing down faster. This correction will be critical as it is possible we could see a sharper crash ahead if the markets have topped. But if we don’t break clearly below 9,200 by mid-November or so, then we could see the markets continue to edge up as late as December or February.

Dent’s recommendations for investors who would like to trade this market continue to be the S&P 500 unleveraged inverse ETF (SH) and the US Dollar long ETF (UUP), both of which will benefit from a rising dollar and collapsing stock market.

Karl Denninger, of the Market Ticker, has also turned bullish on the dollar, as discussed in his recent post Possible Credit Dislocation: Be Warned. Denninger may be reading the sentiment indexes as well, but his assessment is based moreso on assessments in the credit markets.

I have reason to suspect that the “monetary transmission mechanism” is full of rocks (again), and we are about to have another instance of what could colloquially be called “fun.” (Yes, that’s sarcasm.)

Denninger’s forecast:

If you want to speculate on this outcome levered bets on radical dollar appreciation look like one of the best choices out there, followed closely by bearish levered bets on commodities. I would not consider such a speculative play that is not characterized by defined risk, as this analysis is based on nothing more than observation of behavior by market participants that all point toward their foreknowledge of an event that might happen in the reasonably-near future and is not, at present, backed up with actual significant credit-spread widening or other objective criteria.

Disclosure: Initiated a small speculative, defined-risk play LONG the US Dollar (UUP CALL options for March 2010)

The last time Denninger smelled something fishy in credit markets was September 24, 2008 and advised his readership. The markets subsequently free-falled into the November 2008 lows.

Bob Hoye, of Institutional Advisors, in an October 23, 2009 interview with HoweStreet.com,

We also have now, the opposite [of the Euro Index] on the US dollar index, which is the sequential buy.

This is going to change the platform of speculation which has been massive speculation against the dollar and long anything that was moving. So, we think there’s going to be a huge rearrangement.

We’re looking for weaker stock markets into maybe the end of the year, early January.

Marc Faber, publisher of the Gloom Boom & Doom Report, in a September 3 interview, turned short-term bullish on the dollar as well.

I wouldn’t be surprised if the Dollar would for a change strengthen and equity markets would correct and possibly quite meaningfully so.

Faber gave a window in the range of about three months for a dollar rally to occur. In his October 2009 GBD report, however, he suggests that any recovery in the dollar will be short lived, so investors should be forewarned.

I should add that the Fed won’t increase short-term interest rates to protect the value of the US dollar given the high level of unemployment and slick in the economy. So, aside from brief recovery phases, we should assume that the US dollar will continue to lose its purchasing power over the next five to ten years, and probably at an accelerating rate. Other currencies are likely to be in the same boat and will also lose some of their purchasing power.

As was discussed in CAUTION: Crash/Collapse Dead Ahead Say Faber, Rogers, Dent and Celente, the contrarians continue to look for a correction/collapse in US and global stock markets, likely resulting from strengthening of the US Dollar. This may affect all asset classes, especially stocks, commodities and precious metals.

One caveat regarding precious metals, is that it is difficult to say if gold and silver have decoupled from the broader stock markets and commodities. As of this moment, it looks like gold is benefiting from a falling dollar, though gold is also edging up in terms of other currencies like the Euro and Yen, as well as a basket of currencies as define by the Kitco Gold Index. So, while the dollar's weakness has something to do with the rise in gold, it is quite possible that what we are seeing is gold becoming the safe haven asset of choice for investors globally, regardless of what the US Dollar is doing.

As was suggested by David McAlvany in his October 21, 2009 Weekly Commentary, while we may see gold decline initially with a broader stock market down move, it is possible that gold will not fall as fast, and may actually entice buying at lower prices.

Disclosure: Short S&P 500, Long Gold

Comments

[User 353732:]

If financial markets do crash, again, wouldn't a flight to the dollar be a reflexive, visceral, reaction based on habit rather than a reasoned response?
How can the Fiat dollar become riskless if the symbol of what it represents is turning to rubble?

The dollar's value depends on the net worth of the US(falling) and on the capacity of the US economy to generate debt service(declining). Rising liabilities and debt service requirements must collide violently with falling assets and income. Once reason returns, will not global investors conclude that the reflexive response was wrong and then turn to other stores of value and other uses of capital, outside the US(and the UK for that matter)?
In which case, the rise in the dollar will be a mere transient decoupling from economic reality and a brief respite before the fall resumes and even accelerates.

No doubt very sophisticated , nimble and rich investors or traders or currency speculators can make a lot of money navigating these ferocious dollar rip tides and deadly reefs but the typical retail investor or small and medium sized institutional investor has almost no chance of getting the timing right on either entry and exit.

Oct 28 03:29 PM

[Socialism c...:]

"Record amount of U.S. debt ever sold in a week"

seekingalpha.com/artic...

Yet, we're supposed to be dollar bullish? Even short-term? I don't think so!!!

Oct 28 06:25 PM

[Dave Wrixon:]

Sold. How much did the Fed buy, and how much have other central banks acquired beneficially on their behalf. Not exactly sure I would count all this lot as Sales.


On Oct 28 06:25 PM Socialism cannot compete! wrote:

> "Record amount of U.S. debt ever sold in a week"
>
> seekingalpha.com/artic...
>
>
> Yet, we're supposed to be dollar bullish? Even short-term? I don't
> think so!!!

Oct 28 06:41 PM

[Dialectical...:]

I agree in principle. But even a small time investor like me can buy gold or silver (I prefer silver) on a pullback in price (caused largely by a stronger dollar) and then enjoy the increase in price later as the dollar falls again. Maybe I'm not talking about making a million bucks timing a short lived currency bubble, but there are some things retail investors can do to protect themselves (and even profit a little) during these highly volatile times.

On Oct 28 03:29 PM User 353732 wrote:


> No doubt very sophisticated , nimble and rich investors or traders
> or currency speculators can make a lot of money navigating these
> ferocious dollar rip tides and deadly reefs but the typical retail
> investor or small and medium sized institutional investor has almost
> no chance of getting the timing right on either entry and exit.

Oct 28 06:42 PM

[LilBob:]

I have to agree with the contrarians on a stronger than expected dollar. Right now the value of the dollar is inversely linked to the price of oil, and the two move in lock step. As recent reports have once again shown that American consumers have cut back more than expected in response to gasoline prices hovering around the $3 mark, we are likely to see a period of a stronger than expected dollar.

This may be the best argument out there for finally convincing some of the need for greater energy efficiency: when Americans consume less energy, the dollar gets stronger.

Oct 28 09:09 PM

[Denis Gould:]

Markets seem to be correlating up again; equities down = dollar up, bonds up. The idea that investors selling stocks and buying dollars to repay dollar borrowing could push the dollar higher, but it is less clear why it should push up bonds. Also are there really many investors actually doing this stuff? If you borrow dollars and invest in Chinese equities you have two ways of getting wiped out (dollar up, Chinese stocks down). Feels like something nasty is about to break.

Oct 28 09:15 PM

[surfgeezer:]

I think a lot of the Treasury buying was from central banks. Brazil just raised taxes and probably bought Treasuries to impact exchange rates along with China.


On Oct 28 06:25 PM Socialism cannot compete! wrote:

> "Record amount of U.S. debt ever sold in a week"
>
> seekingalpha.com/artic...
>
>
> Yet, we're supposed to be dollar bullish? Even short-term? I don't
> think so!!!

Oct 28 10:03 PM

[RussianEqui...:]

This market is ruled by big manipulators - I believe, heartbreaking revelations are underway... Look, if we talk about risk aversion phase, than why the heck Japanese yen is strengthening? It should weaken against the $ as much as other world currencies (supply/demand balance)!

Oct 29 05:28 AM

[Moon Kil Woong:]

The dollar may rebound but I believe it will just be a short term ploy. While it does expect the stock market to drop.

Oct 29 06:57 AM

[surgcare:]

I'll bet investors were 95% bearish before Bear Sterns and Lehman Brothers went Bankrupt .Any contrarian investor who bought stock in those companies at that point probably didn't do to well . I would look at the dollar the same . Maybe the reason 95% of investors are bearish on the dollar is because " IT'S JUNK " .

Oct 29 09:23 AM

[KAIMU BIZ:]

ALOHA !!

Simply put from a political perspective more Americans who vote with conviction have their futures tied to either the NYSE, NASDAQ or AMEX not the USDX and FX markets. It seems that a smart politically minded President who would like a second term would direct his energies to keep those 401k markets going and not the FX ones. Look at the PRICE FIXING that is going on in the real estate market(home buyers credit). All Americans with any kind of "means" depend on the US stock markets and the US real estate market to go up not down. Down is political suicide across the board, from retiring baby boomers to unions (think in terms of union member pension plans) and CEO bonuses. The Republicans certainly did not benefit from a crashing stock market in 2008. I think Obama understands this dynamic.

Certainly the US government did not get as BIG as it is by using "deflationary monetary policy"!! Not to mention US export markets benefit from a weaker US Dollar.

That leaves other export countries and their fiat currencies and USDX bulls sitting on the other side of the USDX trade. Hummmm??

A quote comes to mind back in 1971 attributed to the US Treasury Sec. John Connally. On taking the treasury post, Connally famously told a delegation of Europeans worried about exchange rate fluctuations that the American dollar "is our currency, but your problem." I believe America, the World Reserve Currency, still operates under that mantra! Certainly looking at a Denny's menu from 1960 would confirm that as fact ...

Oct 29 11:17 AM

[Michael Clark:]

"As was discussed in CAUTION: Crash/Collapse Dead Ahead Say Faber, Rogers, Dent and Celente, the contrarians continue to look for a correction/collapse in US and global stock markets, likely resulting from strengthening of the US Dollar. This may affect all asset classes, especially stocks, commodities and precious metals.

One caveat regarding precious metals, is that it is difficult to say if gold and silver have decoupled from the broader stock markets and commodities. As of this moment, it looks like gold is benefiting from a falling dollar, though gold is also edging up in terms of other currencies like the Euro and Yen, as well as a basket of currencies as define by the Kitco Gold Index. So, while the dollar's weakness has something to do with the rise in gold, it is quite possible that what we are seeing is gold becoming the safe haven asset of choice for investors globally, regardless of what the US Dollar is doing."

This is my position: markets down, dollar down, foreign currencies down, commodities down (no global recovery)...deflation.... appreciation of gold and silver (gold and silver miners too) as safe haven anti-currency.

Short-term? Harsh correction in equities markets, which is starting now:

seekingalpha.com/insta...

Look at the charts above, especially at the Asian indexes collapsing.

Oct 29 01:10 PM

[Living4Divi...:]

I pay no heed to what Dent and Faber say.

It seems that not too long ago, Faber was claiming that hyperinflation was coming to the US. Now he is saying that the he is bullish on the USD ?

This is why I don't trust Faber.

Oct 29 09:04 PM

[rawhamburger:]

Very nice compilation of some thoughts from very smart people. I am in complete agreement with this negative assessment ; in spite of Thursdays upward actively ...

Oct 29 11:28 PM

[Albertarocks:]

On Oct 29 01:10 PM Michael Clark wrote:

> "As was discussed in CAUTION: Crash/Collapse Dead Ahead Say Faber,
> Rogers, Dent and Celente, the contrarians continue to look for a
> correction/collapse in US and global stock markets, likely resulting
> from strengthening of the US Dollar. This may affect all asset classes,
> especially stocks, commodities and precious metals.
>
> One caveat regarding precious metals, is that it is difficult to
> say if gold and silver have decoupled from the broader stock markets
> and commodities. As of this moment, it looks like gold is benefiting
> from a falling dollar, though gold is also edging up in terms of
> other currencies like the Euro and Yen, as well as a basket of currencies
> as define by the Kitco Gold Index. So, while the dollar's weakness
> has something to do with the rise in gold, it is quite possible that
> what we are seeing is gold becoming the safe haven asset of choice
> for investors globally, regardless of what the US Dollar is doing."
>
>
> This is my position: markets down, dollar down, foreign currencies
> down, commodities down (no global recovery)...deflation.... appreciation
> of gold and silver (gold and silver miners too) as safe haven anti-currency.
>
>
> Short-term? Harsh correction in equities markets, which is starting
> now:<

I don't understand why you get "thumbs downs" for an honest and well thought out analysis and opinion. Obviously there are readers out there who upon seeing the word "down" in any post, mindlessly think that is a signal to hit the "thumbs down button".

Your perspective is based on a lot of your own analysis which itself is based on enough logic and common sense that in my view is deserving of a listen. I personally want to hear what you have to say.

>This is my position: markets down, dollar down, foreign currencies down, commodities down (no global recovery)...deflation.... appreciation of gold and silver (gold and silver miners too) as safe haven anti-currency.<

About a month ago I saw a very interesting concept that you'd proposed. It was something I'd never quite realized and it made a lot of sense. So I did my own analysis and came to the conclusion that you were right. In that comment you'd expressed your wish that you could see a particular chart. I put that chart together for you, and I know you've seen it since. I post it again here for discussion purposes, and for anybody else who's interested, to take a look at:

stockcharts.com/h-sc/u...

Based on the fact that this chart shows an absolutely locked inverse relationship between the dollar and the S&P since 2006 and arguably since 2003, I'd have to conclude that a strengthening dollar would result in a declining stock market. The action of the last 10 days or so once again proves that assumption to be correct.

So although I agree with most of what you say Michael, I don't quite understand if you are seeing the dollar down and the stock markets down in the near future or the more distant future? If you mean the near future, I wouldn't agree with you. But it you're referring to the more distant future, I do agree with you that it's likely.

That would mean that the inverse relationship we've been seeing since 2006 between the dollar and the equity markets is going to take a rather catastrophic flip-flop, where they do indeed move in tandem.... down. If I understand that scenario correctly, it implies a falling dollar, a falling stock market and a weakening economy.... or "stagflation".

You also said that you foresee dropping prices basically in all asset classes... a deflationary scenario. With a falling dollar, from the perspective of Americans or relative to the American dollar, how is that possible since deflation basically means a rise in the value of the dollar? If the inverse relationship between the dollar and the S&P (let's use that as a proxy) does indeed switch to a "tandem" relationship (as we've seen in eras past when the US economy was genuinely strong), what I'm still not grasping is how deflation can happen in a scenario where the dollar is falling.


>So, while the dollar's weakness has something to do with the rise in gold, it is quite possible that what we are seeing is gold becoming the safe haven asset of choice for investors globally, regardless of what the US Dollar is doing."<

I think you're right about that at this point in time. But that would only continue if there a hefty uptick in global inflation, would it not? If we're looking at global deflation, even gold would drop in value.... unless.... it becomes the safe haven asses class as you suggest, out of sheer panic on behalf of the citizens of the world. What could cause that? I shudder to think, but I know who would cause it.

I'm not arguing your points, because you've made enough sense that your opinion or viewpoint is valued.

Oct 30 12:25 PM

[jmann83:]

These guys put out so many ''recommendations'' that statistically speaking some of them are going to come correct, Ive seen Faber on CNBC one day, and he must of gave out no less than 10 different recommendations, yes some of them came true the others not, they will be sure to let you know which one's came correct, obviously, however when it comes to showing a long term track record of investment returns things go a little quiet.

Nov 01 01:57 AM

[thotdoc:]

Thumbs down most often reflects a reader's perception that this person is a liberal and socialist or they support the administration.

It is also often the case that those using thumbs down, when the article is internally consistent and logical, are emotional thinkers.

It is amazing how often those two reasons are veridical and highly correlated.


On Oct 30 12:25 PM Albertarocks wrote:

> On Oct 29 01:10 PM Michael Clark wrote:

Nov 01 12:02 PM