Wednesday, December 02, 2009

Why the Worst Case Conclusions are Already "Priced Into" the Market

Tom Dyson, one of my favorite investment writers/analysts, is also one of the very few lone soles left in the debt deflation / dollar bull camp (last one out, please turn out the lights!)

Last week, Tom penned an article that I thought articulated the case for a near term dollar rally brilliantly - and our good friends at Stansberry & Associates were kind enough to allow us to reprint the piece in it's entirety here.

So enjoy Tom's bet with his boss (who's another great investor BTW). And if you're interested in subscribing to Tom Dyson's premium service, The 12% Letter, we've arranged for readers here to receive a 6-Month Risk-Free Trial (click here to learn more).

***

Porter Stansberry Is My Patsy
By Tom Dyson

On Friday, I made a bet with my boss...

Porter Stansberry is my boss and a good friend. He's one of my favorite investment analysts in the world. An investor who is not reading his monthly newsletter is flying blind in a rainstorm.

But I have a disagreement with him right now. Porter says the United States government is broke. He says there's no way it'll be able to borrow enough money over the next 12 months to cover its obligations. There's going to be an enormous government cash crunch unless it "prints" the money.

By printing this money, the government is forcing our foreign creditors to make an impossible choice: Stay with the dollar and see 50% or more of your intrinsic value wiped out... or abandon the dollar completely and risk a global crisis.

Whatever happens, Porter says, gold soars hundreds of percent, the dollar spirals toward zero, and the price of government debt erodes.

Last week, I bet Porter he's wrong.

Specifically, I bet him the interest rate on the 10-year Treasury note would be below 4% at this time next year. The interest rate on the 10-year Treasury note is the price the United States government must pay to borrow money over 10 years. If the market thinks the government is broke and can't afford its debt, this interest rate will rise. Porter bet it'll rise above 4% in the next 12 months. I bet it will not.

Look at this chart of the dollar in terms of the Swiss franc. The Swiss franc is the most stable paper currency in the world. As you can see, the dollar has been falling against the Swiss franc for more than 40 years. That's Porter's big trend... and it's down.


But notice the long periods where the dollar rises... despite the big trend. There was a huge bull market from 1979 to 1985, for example, and another one from 1995 to 2001.

That's the thing about markets. They never move in straight lines. They overshoot in one direction and then overshoot on the way back. And the funny thing is, just at the moment when they are most stretched in one direction, investors feel the strongest desire to join the crowd.

Take 1979 as an example. It seemed as if the dollar was about to plummet. There were incredibly compelling arguments for selling the dollar and buying hard assets... as there are today. It just wasn't a good time for selling the dollar.

I actually agree with Porter's conclusions. I just think much of the worst-case conclusions have been "priced into" the market. The financial headlines are full of stories about gold and the dollar... billionaire John Paulson buying gold... the great money manager David Einhorn buying gold... India buying gold... Chinese housewives buying gold... Warren Buffett protecting himself against inflation.

It's a popular thing to do nowadays... nothing like in the early stages of the gold bull market in 2002.

The dollar's already been in a bear market for almost 10 years, and Porter's theory has as much traction as it did in 1979. It's an incredibly compelling argument... but my gut tells me if you bet on inflation now, you're walking into an ambush.

Now just isn't the right time to be placing bets on the end of the dollar. It's the easy trade that feels right. Any great trader will tell you the "hard trade" is always the right trade.

Unless you're a short-term trader or you still don't own any gold bullion, I recommend you avoid making any new investments based on inflation or the dollar's destruction. You'll make far more money on this sort of investment when the dollar is nearing the end of a multiyear bull market... like it was in 2000.

Again... this is a matter of timing. I'm still a gold bull. I still think people should keep 5%-10% of their assets in gold, for wealth insurance... for a way to own "real money."

But I'm making the "hard bet" that interest rates will not soar in the next year. I'm making the hard bet that the dollar with strengthen. And I'm not afraid to hold cash. It's going to grow in value over the next year. And I'm going to enjoy collecting more of it from my patsy, Porter Stansberry.

Ed. Note: Tom Dyson is the author of The 12% Letter, one of my top 5 favorite investment newsletters. To sign up for a risk-free trial, click here.

4 comments:

Brian said...

Good day to be owning DX. Hope your ES short works out for you.

Brett Owens said...

Yeah it was real interesting to see the dollar so frisky, with the markets trading even to slightly up.

Appreciate the well wishes...though I'm afraid I was too early, things sure are looking shaky right now, with rallies not having any real umph behind them.

allan Gering said...

Market Forces is being promoted as a thriller, a look into the edge of near-future corporate politics.For many key parameters, the climate system is already moving beyond the patterns of natural variability within which our society and economy have developed and thrived.
__________
Forexyard

SonicTrades said...

http://sonictrades.blogspot.com/

Most Popular Articles This Month