Making God laugh

MARKET MANIAC

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, recognising 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 per cent 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 per cent 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 than 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 favoured 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 then?

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 humour.

jamal@mecklai.com