MAKING GOD LAUGH Jamal Mecklai March 1, 2004
Some years ago, a friend of mine, recently returned from a sojourn near the Himalayas, told me that his teacher had told him that if you want to make God laugh, make a plan. Circumstance (another word for God) will ensure that the plan changes, probably dramatically. To put it in more mundane terms, man proposes, God disposes.
And so it is with the market, which, as I am sure you all know by now, is another – and vital – instrument of God.
The recent “correction” in the dollar’s long-running bear trend is a case in point. Till recently, there was not an analyst to be found anywhere – except, perhaps in the Himalayas, where I didn’t check – who could come up with any scenario under which the dollar could get stronger. I myself was a fully committed dollar bear. A couple of weeks ago, recognizing that this conviction – that the dollar had to continue to fall – had become so firmly ensconced in the world psyche, I found myself getting nervous. Everybody had the same plan. And I thought I heard a low chuckling in the sky.
The dollar (at that time at 1.2850 to the Euro) was inches below its all-time low, employment reports out of the US continued to show feeble job creation despite strong economic growth, the trade deficit continued to widen, and consumer confidence had slumped sharply in January. So, I wondered, why wasn’t the dollar falling faster? It still hadn’t broken through its all-time low, despite the fact that everyone had been targeting 1.32 to 1.35 for months. I also noticed that intra-day volatility had suddenly risen sharply, with the dollar moving by well over 1% against the Euro on several days; I remembered an old market adage that sometimes works – when a market is coming to the end of a trend, there is often a sharp increase in intra-day volatility.
I started writing an article (for this column, in fact) entitled, “Why is the dollar so strong?” But, I somehow couldn’t convince myself that the trend had actually reversed and so I shelved the piece.
In the event, the dollar did rally – and quite sharply, gaining nearly 4% in a week against the Euro. Everybody’s plans started going awry. The chuckling I heard seemed to get louder.
But, of course, after quite quickly licking their wounds, the analysts brigade pointed out that this is just an overdue correction, possibly even the beginning of a bear market rally, but not a change of trend – after all, nothing fundamental had changed. The US current account deficit, which has been one of the key drivers of the bear trend, continues to be a drain on the balance sheet of America Inc., and, barring a sharp recession in the US or a sharp fall in the dollar, there is little likelihood of a turnaround. Low US interest rates, another key parameter underpinning the carry trade, are extremely unlikely to rise any time soon. In an election year, the Fed is unsurprisingly less concerned with inflation that with job growth, which, more and more is beginning to look like a structural problem.
Thus, the story goes, the bear trend will reassert itself once the oversold (dollar) positions in the market get shaken out. Chart points (around 1.2350) have been alerted as oh-ohs, but the broad consensus is that the dollar decline will commence again. The plan remains in place.
Enter God, laughing more loudly.
Now, lest I be misunderstood, let me explain that I believe that the job of the market (acting, of course, as a favored agent of God) is to teach us humility, that in reality we know nothing. This is not with any malicious intent, of course – nothing personal. It is just that humans – and, particularly, well educated and well heeled humans – tend to believe that their knowledge (and/or their wealth) somehow sets them apart, gives them knowledge in a fundamental sense.
Enter the market (God, laughing infectiously) to turn everything we know to nothing.
And I believe this may be what is happening with the dollar right now. There is no reason for it to strengthen sustainably, correct? We know that. It’s so obvious. Try as I might, I can’t make a rational case for dollar bullishness at the current time. Can you?
So (and the laughter is getting louder all the time), what if the dollar strengthens beyond the 1.2350 level marked in red by the world’s for-once together technical analysts? What if it continues to strengthen to, say, 1.17 to the Euro? [At the same time, it surges to 125 yen. And, let’s say, 1.65 to the pound – I’d really like that, I have to be in London in May.]
What if it continued to rise – breaking, say, 1.10 to the Euro?
Would you – would we – then find a rational expectation for dollar strength? Will the current account deficit no longer matter? What will happen to US interest rates in all this? What will happen to the rupee?
The laughter is deafening by now.
When you make a plan, make sure you have a sense of humor.
Wahyusamputra writes: "Yes, the surge in the dollar, and the stock markets, is surprising, equally now in 2008, but apart from perhaps leading one to the relaxed Buddhist attitude of the above article, there are also some much more traditional mechanical devices, tried and trusted, but temporary and fortunately not effective even in the medium term, whose levers are sticking out. Here are some of the “levers of power” sticking out of the “Amazing Dollar Rally.”
One is Germany’s decision to implement the proposed Iran sanctions before they’re even passed. Another is Jean Claude Trichet’s decision to hold EU interest rates where they are, and even speak dismissively of future rate rises.
One of the clues, perhaps, lies in the EU’s decision, under strong American pressure, it said on the TV news banner, to get moving pre-emptively on implementing the anti-Iran sanctions. This is surprising in a way because Teheran’s enriching to three or four per cent, rigorously surprise inspected by Mohammaed El Barradei, and the IAEA and found to be in compliance, sufficient to run power stations but nowhere near the 98 per cent enrichment needed for atomic weapons, and this is precisely the kind of solid evidence that Teheran had done no wrong that would normally encourage the Europeans to resist American pressure to ratchet up the tension, so the Americans must have been wielding a very big stick. The net effect is that “America is still in charge,” (and the neocons still call the shots) temporary though that might be. The very intensity of the pressure suggests lack of certainty that the opportunity will last as a possible rationale.
A similar example may perhaps be found in Trichet’s (Head of EU Central Bank’s) decision to hang tight on interest rates, even in his language, helping the Euro to lose strength against the dollar, a very helpful move in helping propel the dollar upwards. (That doesn't mean it wasn't very convenient for Trichet for other reasons also, of course. A nice drop in the Euro would make things easier for him on a number of fronts.)
They don’t usually get up to these sort of games at this time of the year, says my patchy memory; it’s usually in the run up to Christmas that the fat cats start enormous run ups, the “pump” before the “dump,” before the inevitable dreary hung over slump in January.
Both might have some basis in the recently revealed secret treaty forced on the Germans after World War Two, whereby the US has total control of a number of areas, see ”Secret Vassal Treaty”. With Germany leading, the others would probably go along. So therefore, I guess, we’ve done the “pump” bit of the operation, masterminded by the bald Wall Street guy currently running the Treasury, though at an unusual time of year for it.
The fact remains that nothing has changed. Freddie duly reported a set of results at least as dismal as Fannie had a few days ago, Senator Dunning remains the only member of the Senate (“The world’s premier debating forum,” hahahaha) who understands, or is willing to point out, perhaps, the calamitous results the bailout will have on the final remaining foundation of everything, the marketability of sovereign scrip issued by the US government. Such as T bills. And they're still going to print a trillion dollars to pay for the bailout.
Ah, well, lie back and enjoy it, I guess.
If you need something ominous to get your juices flowing on this fine day, try South Ossetia. In response to an all out Georgian military attack on the breakaway province, containing mostly Russian citizens, Russia moved massive troops into South Ossetia, and the Russian president, Medvedvev, announced it was his constitutional duty to protect Russian citizens. Most ominous, are 1,000 troops withdrawn from Iraq/Afghanistan and sent to South Ossetia, by the U.S., one assumes, but it may be one of their allies. And Rice has of course told Russia that South Ossetia is “important to American interests in the region,” and he’s therefore been told to back off. (If we say it’s important to us, ya gotta to just hand it over. Those are the rules!)
Hmmm. So we now have a border (in South Ossetia, in or around the northern parts of Georgia, where Russian troops are facing a little squirt of an army, not military likely to swing any balances, with “American advisors.” Now where have I heard that before?