We're always looking for the "ugly duckling," and right now, there’s one asset that looks pretty ugly…
What if I told you there was an asset that was sitting at 52-week lows. It has some negative fundamentals, and a few relative positives, but no foreseeable absolute positives. Long term, this asset has very little cashflows, is difficult to value, and everyone thinks is worthless. It has the potential to become a huge value trap. It has a brand name which has lost global appeal. It is vulnerable to macroeconomic whims of politicians. I can go on and on about the negatives and positives, but will say one final bit: almost everyone has some long exposure to it already and almost everyone believes that it will go down in the near future.
The asset, of course is the U.S. dollar:
While I don’t know that this is the absolute low for the dollar index, I do have to wonder: how much of the bad news is already priced in? How much of the inflation fears are already priced in? How much more strength can the yen and euro (which together account for around 70% of the index) exhibit? I’m already short yen and euro in various vehicles, and I have to admit that I thought dollar strength would become evident as geopolitical turmoil generated a flight to safety mentality. The fact that this did NOT happen leads me to believe that either the U.S. dollar is no longer the safe haven recipient or investors did not actually seek safe haven storehouses at all. The latter is hard to argue, since gold, the other safe have stand-by, continues to approach all-time highs.
Maybe that’s the end of the story. Investors have flocked to gold as the de facto reserve currency and are expressing their fear through the yellow metal rather than the greenback.
The flip side of that is that the dollar is still just a fiat currency and as it has gotten weaker, the euro and yen got stronger, presumably on weaker fundamentals and weaker demographic and tax bases. So I’m not that quick to draw the above conclusion. There is nothing for me to do with this view right now, but – in line with our thoughts on everything being relative – we can wait and watch, because I believe there is an opportunity forming.