For the last couple years, the US dollar has had a big impact on the global oil price – if the greenback goes up, oil goes down, and vice versa. Chris Temple is a near-to-medium-term US dollar bull. His newsletter – The National Investor – is ranked #1 on a risk-adjusted-basis in North America for the last five years by the Hulbert Financial Digest, and #5 in nominal returns.
Because of his track record, I wanted to hear his thoughts on where he thinks the US dollar is headed, and what that could mean for energy prices.
OGIB: Chris, welcome. Let’s get right to it. Last year, you were among the first to call an end to the US dollar’s decline and for a turnaround. What prompted you to make that call?
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Chris: In 2009, the US dollar-carry trade attracted a huge amount of money–by some estimates, as much as $1.5 trillion. To a huge extent, these were US dollars that were borrowed in order to purchase a host of other assets dubbed collectively as “risk assets”: oil, other commodities, emerging market paper of all kinds and stocks. It was largely the perception that all was well with the world that drove this activity, even though I contend that the resulting levels of all these risk assets got way ahead of the underlying fundamentals. From a market and trading perspective, everything became stretched due to this activity.
When everyone is on the same side of a trade, you’d be best advised to take the other side. And so number one, I was thinking those trades would have to reverse for one reason or another. And two, I am skeptical as to both the health of the financial structure in the world and the overall economy’s health.
I think that there are more shoes to drop in the months ahead, and that will increase the flight from risk, from the assets that have benefited from this carry trade activity. That money will go back into the dollar as a safe haven. In short, we’ll see a general replay of what all the markets did – and what the US dollar did – in late 2008 through early 2009.
And so the dollar has rallied, as of now, about 8% from its low.
OGIB: So even if those shoes are dropping in the US, you think the dollar could still go higher?
Chris: Let me make this observation. There’s a lot of people out there, Keith, who correctly talk about the long-term problems here in the United States – out of control debts, papering over those debts by printing more money, leading to a renewed debasement of the dollar over time.
We’ve learned something in the last couple of years, and we learned it in spades when the markets and financial structure were in such danger in late ’08 and early ’09. We saw glimmers of this again recently.
And that is, what is bad news for the global economy, for the financial markets, even for America, will translate into a stronger US dollar. That’s the reality of the markets now. This by no means suggests that traders like the dollar. They just need to get, and stay, liquid. In many cases, they will be compelled to do so by getting long dollars, and sell so-called risk assets such as stocks and commodities.
When we had this financial panic in ’08 and ’09, did the dollar go down? No, it went up. The dollar only started going down again in early ’09 when traders figured hey, the danger’s over. Now we can go out—now the casino’s open again. Do you follow me?
OGIB: And you tell me you’re bearish on oil because of a higher US dollar?
Chris: I am still bearish in the near term – I think we’re closer to the beginning than we are to the end of a cyclical dollar move up. And I want to stress, it’s a cyclical move. We are still in a secular bear market for the US dollar that will last as far as any of us can see, but right now, we’ve got a counter-trend cyclical rally for the dollar.
That will keep some pressure on commodities. Whether oil is going to get hammered all the way back down to the 30s again, I rather doubt that. But I would be very leery of oil over $80 a barrel right now. That’s my near-term view. Oil bulls had a shot fired across their bows back about a month ago, when margin calls – due primarily to a surging dollar – caused oil to plunge by the better part of $10 per barrel in just a couple days’ time.
I think China has got an interest in seeing the dollar strengthen and commodities go down. They have the ability to bring that about. That also concerns me.
And I think as far as growth is concerned, overall global economic growth is going to be sub-par at best. Whether we look at it in terms of the oil price or stocks, traders have gotten out in front of things, thinking that we’re not going to have a sub-par global economy; we’re going to have a stronger global recovery. And I think they’re going to be proven wrong.
So for all of those things in the near term, I continue to be bearish, even though I think that – in spite of another interruption coming – the secular uptrend for commodities is going to remain intact.
My long-term outlook for energy markets is very bullish, because again, I don’t think we’re going to be able to wean ourselves from oil and natural gas any time soon
OGIB: What would change your near term view?
Chris: Well, my viewpoint would be changed if we have no commercial real estate implosion. We have no banks that get their heads handed to them because of that.
If we were to see—and this is a big one – if we were going to see the contraction of credit here in America reverse, and banks start making loans again to consumers and small businesses; if we would get back to a true reflationary kind of scenario, that would change my mind. But the current evidence is completely the opposite of that, and so therefore, I believe that the markets at the moment are wrong.
Always remember that consumer spending accounts for some 70% of the American economy’s activity. And, perhaps for the next GENERATION, consumers will generally be paying down debt, retrenching, and learning to distinguish between needs and wants.
OGIB: So deflation equals bad news equals higher US dollar, and good economy equals inflation and lower US dollar – which is so counterintuitive! – as risk capital waiting in US dollars will be put to work again.
Chris: Broadly speaking, yes. I’ve already spoken of the example of 2008-09. Remember also, the flip side of this, as you stated it. In the recovery in 2003, the market peak in 2007 and 2009’s recovery, everyone believed times would get better. Thus, risks could be taken, fueled greatly by a falling U.S. dollar. Most everything else went up. What I am saying here is that, following the latest of these rallies, we will likely see he flip side of this equation, where the US dollar goes up and everything else goes down – for awhile.
OGIB: Could the US dollar start to decline again after this Greek debt issue is resolved and the Euro regains favour?
Chris: I think that Greece is only the first of what will probably be a series of problems in some of the European nations that have shakier finances. It’s notable that, as the Greek situation has seemed to abate somewhat, there’s been only a nominal rally in the euro; markets are still wary of that currency, as they should be.
In Europe, there’s been a lot of noise recently about policymakers there threatening to do something about what they call speculators. In some people’s minds it’s currency traders and speculators and arbitragers and all the rest of these evil people who have helped exacerbate this problem.
So of all things, Keith, we may see Europe become a little bit isolated as far as its currency and its markets as a means to protect—that’s how they would put it anyway—as a means to protect European markets and European currencies from any more damage than has already been done.
Now, if that kind of thing happens, what does that mean for the dollar? That means the currency traders really have only one big liquid market–America’s– because your money’s not welcome anymore in the euro zone.
The euro was supposed to be a companion global reserve currency to the dollar. Wouldn’t it be incredible if the euro’s custodians put out the “No Vacancy” sign to global money managers and traders?
OGIB: Chris, thank you. Any closing comments or summary?
Chris: Yes–particularly for all my fellow long-term energy and commodity bulls out there!
As I’ve argued, the near-term forces are almost all in favor of the dollar and, thus, suggest various levels of weakness pretty much everywhere else. But this won’t last forever. Uncle Sam’s currency will get its turn again in the dock, and when it does, all else being equal, commodities will have some upward pressure in dollar terms.
But beyond even this, it’s dawning on more and more people that, in the end, nobody’s fiat currency is really “safe.” Down the road, I think that key commodities will be embraced themselves as currencies. As real wealth, money. We’ve seen glimmers of that on and off over the last decade, but nothing like what is to come in the future.
Chris Temple, Editor and Publisher of The National Investor, has been a sought-after commentator and expert on the economy and financial markets for over 25 years. He stresses investor education, enabling his subscribers to fully understand the workings of the financial system and markets. His recommendations have resulted in The National Investor having the Number One risk-adjusted return over the last five years, of all those newsletters and advisories covered by the Hulbert Financial Digest.
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