Wednesday, February 10, 2010


We've been hearing for some time now how the dollar is in a long term bull market. Consequently gold is going down, stocks are going down, commodities are going down, generally it's the end of the world. :-)

Nothing could be further from the truth. Despite the worst deflationary event since the 30's the secular trend of the dollar has not changed since 2001. It has been and still is in a secular bear market.

The only thing that's happening is the normal regression to the mean that occurs in every market. When sentiment gets too bearish we get a counter trend rally back to or close to the mean. Once the market works off the extreme then the secular trend resumes.

Until we discover the next big technological advance (think internet, personal computer, electronics, trains, canals, automobile) the dollar will continue to languish in a long term bear market because the powers that be will continue to try and print their way to prosperity. It's never worked in history and it's not going to work this time either.

Money isn't productivity, it's a store of productivity. We need real productivity before the value of the dollar can enter the next secular bull market. These temporary rallies because of stress in the financial system cannot take the place of real productivity and as such they are never going to reverse the secular trend.

We've been hearing quite the cacophony of reasons lately for why the dollar is going higher. The thing is, we always hear this at or close to tops.

The fact is that retail traders now have the largest long position on the dollar in history. Large specs, the second largest long position. Meanwhile the largest, most knowledgeable traders, (commercials) have the largest short position in 10 years.

As bearish as sentiment was back in November it has now reversed 180 degrees and is now as bullish as it was at the March top.

When everyone is thinking the same thing, then no one is thinking.

The market is getting ready to hand the bag off to the retail trader again.