Jamal Mecklai: The foul smell of capitulation

Most people I know think (I think) that I am nuts in a delightful way at my permanent optimism. I am sure there are many who simply think I am a fool. So, hear this:

For the first time in my life I got a strong whiff of the foul smell of capitulation in the forex market last Friday. I was home early "" around 530 "" and happened to see that the yen had risen to nearly 100 to the dollar. I don't track the market minute to minute "" I have a team that does. But, having been around for 20 years and having tracked it minute to minute for probably 12 to 15 of those, I like to think I have a feel for whats going on.

And the feel was bad. I had believed, for some months, that the dollars decline (particularly against the euro) had gone way, way, way too far and that at some point, the market would surprise everybody and turn around. But it wasn't doing that. And I was already getting a bit nervous about this view a couple of weeks ago or so, but on Friday, it just hit me.

I called the office and spoke with my coolest analyst. He, too, had held a similar view on the dollar and, over the past two years, his views had almost consistently been more correct than mine. I asked him what was going on. He said he didn't know. The first time ever.

Later that evening, I was at a party and ran into the head of a foreign bank in India. He and I enjoy (I think) our occasional battling. I'm always convinced India can only grow faster than the most optimistic estimate; hes always convinced it will be slower than the least ""maybe that's not exactly it, and, if so, sorry for putting words in your mouth. But as he turned to the bar to get a drink, his normal composure slipped a bit and he said something like, Boy the market today was tough - the yen....

Remember this is the CEO of a bank "" he usually doesn't (and shouldn't) have time to worry about the level of the yen. But the way he said it sounded like he hadnt seen anything like this in a long time.

That's it, I thought. Capitulation.

It is a well known fact (and one that I have often brought up in columns) that markets will wait for every last bull (or bear) to get on the bandwagon before turning sharply against them, laughing all the way.

Which theoretically would be great - my long-held view (that the dollar must appreciate) would be vindicated. Yes, but...

Capitulation can happen in many ways. And my fear "" that smell I spoke of "" is that it could begin with a very serious dump of the dollar and more and more and more credit assets. The Fed and every other global regulator has been full on trying to increase liquidity, find cajole, demand capital from institutions to patch up the multifarious tears that are showing in the credit fabric. But is isnt going to work. The market isnt going to bite till it believes "" completely "" that (excuse me) all the shit is out of the system. And that could take a long, long time. Or it could happen in a hurry.

Starting today, for instance, with a speed that could well wreck (at least) one of the many vulnerable global financial institutions.

Too big to fail, they say. Well, its never been tested on this scale. The good news is the Arabs (and the Chinese) are standing by.

If that does happen, markets would scramble around in the primordial-seeming mud of non-liquidity for who knows how long.

There would be NO WAY of even beginning to judge whether the dollar was going to fall some more, rise sharply, rise a bit and then fall more sharply, or what. And this is against any currency.

Equities "" the same in spades. Except they will certainly rise after the game is done. And, while here I certainly mean Indian equities "" DON'T SELL ANY INDIAN STOCKS YOU OWN; THE SENSEX WILL BE EASILY 25,000 IN TWO YEARS "" I think it will also hold true for the Dow; Europe may be a bit trickier.

But, like I said, this is NO TIME TO MAKE FORECASTS. REDUCE ALL MARKET RISK OUT TO 3 MONTHS AT LEAST.

This means hedge all exports and imports in all currencies and get out of any short or leveraged positions in equities.

One caveat "" I have had a viral flu for the past week, so maybe I am just hallucinating. And maybe "" hopefully "" I will be wrong. If I am wrong, you will lose a little money; if I am right, you will save a LOT!