Beware the Secular Trend’s Potential Short-term Counter Move

Right now the markets are at extremes.  Essentially all of them.  Current price action across a broad swath of sectors and assets classes strongly reminds me of the end of 2019 and beginning of 2020.

My gut tells me that a fear-event is near.  And my gut is being primarily led by current action in the US dollar.  Short positioning in the buck is extraordinary.

Record Short USD Positioning (Dec. 2020)

Yeah, yeah, macro-top-down, commodity bull, central bank largesse, and all that in regards to the USD but this is egregiously exaggerated.  Not that it can’t get more extreme, but consider the following charts.

Seasonality, courtesy of SentimenTrader, tends to be pretty strong in January for the buck.

USD Seasonality - ST (Dec. 2020)

With currencies, large fast moves in a short period are atypical but we live in a time of atypical.  Pairs always have to be acknowledged and the anti-correlation to the euro is at a bit of an extreme.  In the last decade, every time the Euro to USD line (white-monthly) has approached 2 standard deviations above the 25-month MA, then it’s been go-time for a USD rally (green).

Euro vs USD (Dec. 2020)

Does this mean a reversal is imminent?  Nope.  Does it mean additional portfolio hedging here is warranted?  I’d say it’s a prudent use of capital.

The long-term case for the dollar’s demise is well documented.  Goldbugs have been the longstanding voice of fiat destruction, but more recently, Ray Dalio has picked up the baton.  Sam Zell has now officially thrown his name in the dollar-destruction ring with this recent quip.

The single greatest risk that we are dealing with today is the loss of the U.S. dollar as the reserve currency.  If we keep doing what we are doing right now, I think it is 10 or 15 years away.

These investment legends are right.  The USD will in all probability lose 30% to 40% of its reserve status this decade.  And world markets as well as geopolitics will be volatile as a result.

Why do you think Bitcoin has jumped so hard?  That’s institutional fear of central banking monetary policy, not retail FOMO driving Bitcoin.  It’s palpable, but it’s ahead of itself in the USD and Bitcoin.

Nothing moves in a straight line and short-term counter spikes in any trend are as sure as sunrise.  I’m not implying that a fear-event has to rival Covid’s March spikes or we’re at a long-term top in equities.  Just saying that a short-term move to remove some excess is worth hedging at this point.

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