As a contrarian, it is my nature to worry when too many people start agreeing with me. Currently, many of my most vocal critics, who had previously ridiculed my warnings about the dollar, now concede that it will continue to decline. With so many people now on the bandwagon, some currency watchers have asserted that sentiment now has nowhere to go but up, and that the stage is set for a dollar rally. Although I am unnerved by the company, I take solace in the fact that the conclusions that many of these nouveau-dollar bears draw are completely off the mark.
The group is united by two basic assumptions. First is that the dollar's decline will be orderly, and second is that the decline will actually be positive for both the U.S. economy and the stock market. Therefore, other ways to confound the consensus would be for the dollar's decline to be disorderly or for it to be negative for both the U.S. economy and the stock market.
For the dollar to register a significant short-term bottom based on negative sentiment, I feel there would have to be a much greater sense of panic associated with its weakness. However such is clearly not the case. The overwhelming consensus is that a weak dollar is good for America. Ironically there is more worry in Europe over the strong euro than there is in America over the weak dollar. My prediction is that before we get any significant dollar bounce this complacency will need to be replaced by outright fear, and that the dollar needs to fall more sharply as investors actually act on those fears by dumping dollars.
Of course should such a run on the dollar commence, it will not be the orderly decline everyone seems to expect. However, I am still not sure why so many feel a declining dollar is not a problem so long as it does so in an orderly manner. If you're headed to the poor house what difference does it make how you get there? Whichever road you travel, you're just as broke when you arrive!
In addition to being wrong about how quickly the dollar will decline and how it will impact the economy, most dollar bears are also wrong when it comes to their explanations as to why the dollar is falling in the first place. Whenever benign inflation statistics are released, ensuing dollar weakness is always explained as resulting from increased expectation that the Fed will cut rates. Lower interest rates are seen as dollar bearish as they reduce the returns on holding dollars, making dollars less attractive relative to other currencies.
In actuality, officially benign inflation statistics (which are coming at a time when actual inflation is getting worse) give the Fed further cover to create even more inflation. So the dollar is not weak because inflation is under control as the consensus believes, but because the opposite is true. Inflation is completely out of control and the Fed, hiding behind phony government numbers that purport otherwise, has the green light to add additional fuel to inflation's fire. It's the ultimate irony that the lower the official preferred measures of inflation are (core CPI or the core Personal Consumption Expenditure Index,) the worse inflation actually gets.
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