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Time, the avenger! unto thee I lift
My hands, and eyes, and heart, and crave of thee a gift.

Lord Byron

Commentary & Analysis

Nine reasons why the US$ multi-year bull market is[likely]still intact

About four years ago we shared with our clients these nine reasons to support our belief the dollar had entered a multi-year bull market back in March 2008. It may be the third dollar bull market cycle since the major currencies began to float against one another after President Nixon shut the gold window.   

Let’s review the original reasons with updated comments [in brackets]: 

  1. Credit Crunch Sea Change

    US Savings going up; debt sentiment changed

    [Though US households have done a lot of deleveraging since the credit crunch, I do not expect a rebound in consumption to prior levels anytime soon.  I believe the tendency to save more and spend less is a secular change in habits and is ultimately a net positive for the US economy.]

  2. Risk Bid Trigger Again…initially

    Greece and Dubai

    [Though wrong on Dubai, the idea Greece would be a trigger for haven flow to the US dollar was    correct.  Of course now we have Greece rescue #3 in the works; I am sure this one will do the trick.  Is the euro single currency regime still a potential source of global systemic risk?  I believe it is for reasons already shared despite the apparent stabilization across the Eurozone.]

  3. Growth – Not as bad as expected; it’s all relative

    Non-farm payroll and Mr. US Consumer

    [Despite the tepid US growth we have witnessed during this so-called recovery, it has been more robust than growth in Europe, UK, or Japan.   Thus, the US is leading on relative growth.  The point about “Mr. US Consumer” goes to the idea that in a world still struggling for demand, those countries with a larger consumption base will likely take less of the brunt to their domestic economies from global rebalancing compared to those countries which are more export dependent.  This theme continues to play out.]

  4. Carry trade idea history

    Fed hikes before BOJ and before ECB

    [This still makes sense.  And going forward I believe the yield differential will rise in favor of the US dollar, as the Fed moves first.]

  5. US Assets are very cheap

    Foreign Direct Investment Flow  (currency cycles play that role)

    [This goes to the idea that the dollar looked very cheap and made US assets cheap to the rest of the world accordingly.  I expected this reality would be the catalyst for a rebound in foreign direct investment (FDI) flow back into the US.  This is a key fundamental theme; FDI is often a major driver of a currency’s longer term trend.  I believe we are seeing this trend in FDI accelerate on the back of cheap energy for manufacturing companies in the US and re-shoring of manufacturing from China.]

  6. Sentiment – Newsletter writers are in apoplectic territory

    Everyone hates it and one-way bet

    [At the time we initially shared our reasons for a long-term bull market, the newsletter writers of the world, the guys that actually don’t need to trade for a living (guilty to a degree, but I do trade real money and eat my own cooking, so to speak), were apoplectic about the dollar disappearing as a reserve currency.  Many still believe this. And someday it may come to pass.  But in an environment where global cooperation on key issues financial is scant at best, we are a long way from fashioning together a substitute for the US dollar, even though Mr. Triffin was right all along about the imbalances that would be created if the dollar was to replace gold at the center of the global monetary system.   Anyway, with universal sentiment in the dollar so bad back then, it only made sense that Mr. Market would do what it does best–fool as many players as it can at any one time.]

  7. Correlation – it has changed

    No new low with gold blow off and stock high

    [Gold and the US dollar had been tightly correlated during the era of free credit.  It made sense.  But, when gold blew off to a new high, the dollar finally didn’t make a new low, i.e. its longer term correlation changed (ditto for the oil-US dollar correlation that broke down in 2008).  This indicated to me that problems in the world were no longeronly a dollar problem.  It was a piece of the puzzle to support our bullish dollar view.]

  8. Technical

    Broke its weekly down trend & extremely oversold

    [Speaks for itself I think.  We have seen a nasty retracement from the original move that started in March 2008.  But we saw the same thing during the ten-year bull market in the dollar from 1992-2002, i.e. a rally then a very deep retracement, then an explosion upward that started in late 1995 and ran till 2002].

  9. Euro craters as a currency

    Rush to dollar-the world reserve currency punctuated

    [The euro has depreciated sharply over the last four years.  But, I have to say the euro has not “cratered.”  The euro remains supported and its sharp rallies at times have surprised me.  That said, even if a “cratering” does not occur, it seems the dollar wins against the euro on economic growth and interest yield differential over time. ]