Editor’s Note: In today’s special Daily, PBRG’s editorial director, Tim Mittelstaedt, interviews PBRG Founder Tom Dyson. They cover the chaos sweeping over global markets… why it’s happening… and what to expect moving forward…
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Tim Mittelstaedt, editorial director, PBRG: Why is the U.S. dollar rising so much right now? Is it a temporary “safe haven” from the turmoil in the Middle East and China?
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Tom Dyson, founder, PBRG: It’s simple. There are more people who want to buy the dollar than who want to sell it. That makes its value rise.
I’ve been long the dollar since December 2013 in a major way.
I’d been expecting it to rise for a couple of years before that. I just needed confirmation that my instincts were right before I put the trade on with real money.
Tim: What do you mean by confirmation?
Tom: Sentiment. It’s how I generate all my trading decisions.
In 2008 through 2010, there was a strong consensus on Wall Street… and in the financial press… and among the popular analysts… the dollar would get weaker.
The Federal Reserve and the U.S. Treasury had pledged to do everything they could to fight deflation and reinvigorate the economy. Everyone assumed that meant a further devaluation in the dollar… which had already been happening for a decade.
I took the contrarian side of this bet. I figured if everyone thinks the dollar is going to fall, it’ll probably rise.
The market action in 2011 provided the confirmation I needed.
If you recall, the Fed was cranking up its quantitative easing (QE) plans. Gold and silver were hitting record highs and the “dollar devaluation crowd” reached a fever pitch.
Meanwhile, the dollar didn’t even make a new low. That, to me, showed a deep underlying strength in the greenback.
That’s when I knew it had to rise. If all that stuff couldn’t make the dollar go to a new low, then nothing could. It was a classic signal. A new dollar bull market had begun.
And now, the fundamentals are validating this trend, as they always do.
Tim: What do you mean by that?
Tom: I could write a book about this, but here’s the gist…
Every time the Federal Reserve manipulates interest rates lower to stimulate the economy—as it did in 1998, 2001-2002, and 2008-2009—it pushes a wave of dollars into all sorts of things, like commodities, emerging markets, the stock market, and other assets.
It does this by making borrowing cheaper. This encourages the international community to borrow dollars, convert them into local currencies, and speculate with them. They know the Fed will always serve as a backstop in case there’s any trouble.
This is why we’ve seen debt explode all over the world economy. It’s all based on borrowing cheap dollars.
Tim: You say debt is like a short position on the dollar. Can you explain?
Tom: Sure. People borrow dollars to do something with them… not to just let them sit in a bank account. They’ll use them to build a factory, or buy property, or invest in the stock market.
So borrowed dollars are spent dollars. A spent dollar is a “sold” dollar. So that is akin to taking a short position in the dollar.
Remember, when an investor “shorts” something, he sells borrowed assets.
And that’s what someone does when taking on debt. It’s a borrowed asset (dollars) he sells for something else.
The problem with short positions is they have to be unwound in a hurry if the trade goes in the wrong direction.
Now, in my basic way of thinking, this “sold dollar” trade is too “crowded.” Everyone’s gotten into it. There are just no buyers left.
To be unwound, millions of trades will have to sell “stuff” to get those borrowed dollars back—to pay off the dollar loans that originated these funds in the first place.
That’s why I say all that dollar debt is like a giant short position on the dollar that’s beginning to unravel.
It’s going to take a long time. The dollar could rise for a decade or more. This is just the beginning.
Tim: How do you plan to play this new dollar bull market?
Tom: I’ve been long the dollar for two years now… against the Swiss franc, the euro, the Canadian dollar, the British pound, the New Zealand dollar, and the Australian dollar.
I have no intention of closing my trade until investor sentiment views the U.S. dollar as the “it” investment… when everyone wants to own dollars and no one wants to own anything else.
When the dollar is king, I’ll start investing in other assets. The dollar should be so strong by then, other asset prices will be “bargain basement” level. That’s when I’ll go “all in.”
But we’re still a long way from that point. As I said, it could take another decade.
All along the way, we’re going to keep recommending long-term positions that benefit from a rising dollar in The Palm Beach Letter. And we’ll keep recommending high-profit, short-term trades in Tom’s Confidential.
Tim: What do you think will cause the dollar to start falling again?
Tom: The opposite of what I said to start this interview: more sellers than buyers.
To get to that point, we’ll need the trade to get crowded in the other direction. To the point where there’s no one left to keep buying. That’s when markets change direction again.
Tim: What will spark this shift? Will it be a return to normalcy in Europe and China and emerging markets? Will it be an increase in inflation?
Tom: I don’t know. It could be years away. All I know is the bear market in the dollar will begin when there’s no one left to buy dollars… because everyone’s already bought.
Remember, it may sound backward, but fundamentals don’t drive prices. They follow them. Prices move based upon sentiment.
So the fundamentals only reveal themselves after market sentiment has already changed direction and a new trend has formed.
Tim: Do you think inflation will pick up any time soon?
Tom: Let’s first define inflation as what most economists call “price inflation”: a general rise in the prices of things most people buy on a regular basis.
Under that definition, I don’t think inflation will pick up.
Some prices might rise, but I think the price of most things will fall as debt unwinds and people start preferring to hold cash over investments.
Tim: Do you think there will come a time in the foreseeable future when people lose faith in the Federal Reserve—and fiat currency (paper money) in general?
Tom: Yes. Perhaps the biggest, most dangerous bubble on the planet right now is the belief in the unlimited power of the central banks. Especially the Fed.
We believe the Fed can manage the economy and the central bank can make things okay no matter what.
It’s not true. But everyone assumes it is…
I call this the “Myth of the Central Banker.” There’s going to be a nasty shock when people realize the Fed has very little control over the markets.
As for fiat currency, I think the dollar itself is in a long bull market that’s just beginning.
It’ll be accompanied by a bull market in cash and saving, and a bear market in investing and spending. That won’t be a happy time for the economy. We’re entering a recession… or a depression.
People will lose faith in the Fed’s ability to make everyone rich and banish economic contractions… as it has for the last three decades.
They’ll also lose faith in some currencies, but they won’t lose faith in the dollar.
That’s because the dollar still remains “the cleanest dirty shirt in the closet.” If everything else is worse, that’s the one you choose to wear.
As long as the dollar remains the world’s reserve currency, it will remain the strongest paper money left.
Tim: What else can investors turn to for safety in this environment? Gold? A specific stock sector? Real estate? Farmland?
Tom: Cash. I see a bull market in cash and a bear market in “investments.”
I’m preparing by saving cash in my Income for Life policies. It’s a way for me to bank cash at 5% annual returns… 100% outside the stock and bond markets. It’s something no bank can offer.
I also have a long position in U.S. dollars against a few other currencies, as I mentioned before.
I’m waiting for the bull market in the dollar to climax—and the stock market and everything else to bottom. Then I’ll convert my cash into other assets.
Gold might do okay, but I’m not super bullish on it from a price standpoint. It couldn’t hurt to own some as insurance, though…
Tim: How late are we in the current bull market in stocks and bonds? Or will the markets keep running until we reach a “dot-com”-style mania again?
Tom: We’re very late. The dollar rising means the bear market in investing is beginning. Debt is going to start unwinding. Deflation is coming back.
The currency market is telling us to run for cover.
I don’t know when the bear market will start, but it will be soon… if it hasn’t started already.
Remember what I said about the dollar? About how it failed to make a new low in 2011 despite all the fundamentals showing it should?
Well, I feel that way about the stock market today. It’s failed to make significant new highs, despite the fundamentals saying it should have.
Tim: What do you think will be the catalyst to make it fall? Rising interest rates? Something more exotic (like civil unrest in the U.S.)?
Tom: Always a change in sentiment. But the ultimate catalyst for that will be a rising dollar… and people selling stock to pay down debt and hold cash.
Reeves’ Note: Tom’s “dollar bull” thesis lies at the core of his trade recommendations in Tom’s Confidential. One play just returned 63% for his subscribers in less than three months.
This exclusive research publication is only available to Palm Beach Infinity subscribers. For a limited time only, you can try Tom’s Confidential for three months, 100% risk-free. Click here to learn how.