"If you want to retire rich," insists Bob Moriarty, president of
321gold, "go to a tattoo parlor and have them inscribe on your forehead, in reverse writing, 'ALL PARABOLIC MOVES END BADLY.'"
As it turns out, the U.S. Dollar Index is making a parabolic move at this very moment. So if that tattoo on Moriarty's forehead is correct, the dollar's recent parabolic move will also end badly.
Here's a thought: Why not beat the rush and start selling dollars now? Or at least start increasing your exposure to non-dollar assets?
"There are a hundred fundamental reasons to buy the dollar right now," Moriarty observes, "Everyone loves the dollar. The bullish consensus on the Dollar Index is the highest in recorded history." But as he also points out, this sort of extreme investor optimism is exactly what you find at market tops, not at market bottoms.
"Bull markets are born on pessimism... and die on euphoria," as the legendary value investor Sir John Templeton famously observed.
Stocks, commodities and currencies can move higher for lots of different reasons, but they go parabolic for only one reason: euphoria. That's why parabolic moves are so dangerous; they are the real-time expression of the kind of euphoria that kills bull markets.
At this point, some readers may be wondering, "What's a parabolic move?"
For simplicity, I would define a parabolic move the same way Superior Court Justice Potter Stewart defined pornography, "I know it when I see it"... and the parabolic move I have seen most recently is the U.S. Dollar Index.
"In a 'parabolic move,'" Investopedia explains, "a stock starts going up. Buying interest increases dramatically, sending the stock into orbit. The stock is basically moving up in a straight line, giving the chart the look of a 'parabola.'"
The chart below depicts a couple of infamous parabolic moves from the past: Bitcoin in 2013 and gold in 1980.
Two infamous examples from the world of stocks would include the Nasdaq's parabolic top in 2000 and the Japanese Nikkei's top in 1989.
All four of these parabolic moves "ended badly," which prompts the obvious questions, "Will the dollar's parabolic move also end badly?"
In a word: Yes... but probably not
that badly.
No one can identify the exact top of a market, of course. A bull market can go on and on and on for a very long time. But when a bull market "goes parabolic," risk also goes parabolic. This heightened risk does not mean a parabolic move will reverse immediately, but it does usually mean that whenever the reversal arrives, it will be swift and severe.
Bottom line: A parabolic trajectory is a very dangerous trajectory... and it is all the more dangerous because almost everyone believes it to be a "can't lose" trade.
Remember, a market goes parabolic for only one reason: euphoria. And as the chart below clearly shows, investors are "excessively optimistic" about the U.S. dollar. This chart, courtesy of
Jason Goepfert's terrific research service,
sentimenTrader, shows the trajectory of the U.S. Dollar Index in the top half of the chart, alongside the volume of dollars flowing into the Rydex Strengthening Dollar 2X Strategy Fund (RYSBX), in the bottom half of the chart.
The chart shows how capital drains out of the fund when investors are pessimistic about the dollar and pours into the fund when investors are optimistic about the dollar. At present, capital is not merely pouring into this Rydex fund, it is flooding in.
In fact, you could say that capital flows into the fund have gone as parabolic as the Dollar Index itself.
Admittedly, the dollar's "parabola" is relatively small compared to some of the epic parabolas of the past. The greenback has jumped only about 20% during the last six months, not 200% or 2,000%. Furthermore, there is no Law of the Universe that prevents the dollar's 20% gain from expanding to 25% or 30%, especially given the fact that the eurozone is in such disarray.
But if the dollar's recent upward spike reversed, and the Dollar Index simply dropped from the 95 level, where it is today, down to the 80 level, where it was last summer, the loss would be a hefty 16%. That's a meaningful number.
But the bigger issue with the dollar is not the looming risk; it is the
present opportunity. The
uber-strong dollar is presenting a compelling opportunity to diversify into non-dollar assets.
In other words, why not swap some richly valued dollars for attractive non-dollar assets... even were that "asset" nothing more than a Parisian holiday? Thanks to the euro's 18% drop against the dollar during the last few months, a European vacation is "on sale."
Or you could head up to the "Land of the Midnight Sun," where the Norwegian krone has tumbled 25% against the dollar since the last summer solstice. Or if vodka and caviar are your thing, you could book your dream vacation to Russia, where the ruble has lost half its value against the dollar during the last few months.
In short, the world is your oyster.
Within that oyster, the precious metals remain our preferred destination for dollars. Admittedly, the precious metals have not exactly sparkled during the last three years. But we expect them to regain their shine in 2015. [You can find all of our recent remarks about the precious metals sector
here].
Lastly, the overseas stock markets also offer a relatively attractive destination for U.S. dollars. Most of the world's stock markets have been doing a whole lot of nothing for many months. The MSCI foreign stock indexes for both developed markets and emerging markets lost ground last year.
In fact, the S&P 500 has been such a conspicuously strong performer, relative to foreign stocks, that bond manager Jeffrey Gundlach recently quipped, "The U.S. of A. has become the U.S. of Only."
Perhaps U.S. stocks will continue their world-beating performance, but at least two factors argue against that outcome.
First, U.S. stocks have been outperforming for so long that they have become fairly expensive, relative to their foreign counterparts. At the end of 2007, the S&P 500 and the MSCI EAFE Index of foreign stocks traded for roughly the same valuation, based on price-to-cash-flow. But today, the S&P is 30% more expensive.
Second, the European Central Bank's newly announced $1 trillion-plus quantitative easing campaign could help to light a fire under both the European stock markets and the European economy. At the margin, these trends could begin to suck capital away from the U.S. stock market and U.S. economy.
Oh, and by the way, if capital starts to drain away from the U.S., it would also be draining away from the dollar.
So why not beat the rush and sell some dollars now?
Good investing,
Eric J. Fry
for Free Market Café
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