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Mighty Dollar: Economist Contrarian Cover Nails The Top

By Mike (Mish) ShedlockMarket OverviewJul 19, 2017 03:59AM ET
www.investing.com/analysis/mighty-dollar:-economist-contrarian-cover-nails-the-top-200201966
Mighty Dollar: Economist Contrarian Cover Nails The Top
By Mike (Mish) Shedlock   |  Jul 19, 2017 03:59AM ET
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Magazine covers tend to coincide with extreme sentiment. The Economist is particularly good at offering contrarian articles.

In December of 2016, The Economist nailed the peak in the US dollar with its “Mighty Dollar” issue.

The dollar has been gradually gaining strength for years. But the prompt for this latest surge is the prospect of a shift in the economic-policy mix in America. The weight of investors’ money has bet that Mr Trump will cut taxes and spend more public funds on fixing America’s crumbling infrastructure. A big fiscal boost would lead the Federal Reserve to raise interest rates at a faster rate to check inflation. America’s ten-year bond yield has risen to 2.3%, from almost 1.7% on election night. Higher yields are a magnet for capital flows.

The trade deficit will widen as a strong currency squeezes exports and sucks in imports. In the Reagan era, a soaring deficit stoked protectionism. This time America starts with a big deficit and one that has already been politicized, not least by Mr. Trump, who sees it as evidence that the rules of international commerce are rigged in other countries’ favor. A bigger deficit raises the chances that he act on his threats to impose steep tariffs on imports from China and Mexico in an attempt to bring trade into balance. If Mr. Trump succumbs to his protectionist instincts, the consequences would be disastrous for all.

US Dollar Index

US Dollar Index Chart
US Dollar Index Chart

Special Treat

As a special treat, The Economist takes you “Behind the scenes” for a look at its contrarian cover that proved to be a market-topping call.

Edwards Carr Deputy Editor discusses the “Mighty dollar” with Editor-in-chief Zanny Minton Beddoes.

Click on the preceding link for a video. In hindsight, the video into is quite amusing with an animated George Washington flexing his muscles.

Beddoes offers this insight: “The consequence of a very strong dollar is America’s trade deficit will get much much larger.

About That Trade Deficit

The Economist seems to think a falling dollar will help exports. I happen to have a picture showing the results.

US International Trade in Goods and Services
US International Trade in Goods and Services

For further discussion, please consider Balance of Trade Deficit Near Expectations: Analyzing the Impact on Second Quarter GDP.

Let’s now investigate other contrarian covers.

Economist – March 6, 1999 – Drowning in Oil

The economist predicted $5 oil.

Newsweek – April 10, 2009 – Cheap Oil Forever (Why Prices Will Keep Falling)

I can only find a small image.

The Economist which thought oil was going under $5 in 1999 was worried about high prices in 2008.

Economist – May 29, 2008 – RecOIL

That very same week BusinessWeek was “Bracing for Inflation“.

The article is only available to Bloomberg’s “Professional Service subscribers”. However, I captured snips on my blog, and it’s a real flashback hoot.

Growing evidence suggests American consumers, businesspeople, and political leaders should all be bracing for double-digit inflation, probably as early as 2009.

The relative price stability of the past 15 years is giving way to worsening inflation, despite the recent softening of oil prices. The Consumer Price Index for all items shows the inflation rate averaged 2.6% a year from 1992 through 2007 but has doubled since January, reaching an annual rate of 5.6% in July. By next year, the monthly figure could hit double digits, and the inflation rate for 2009 overall could triple 2007’s 2.85%.

I say this not only because I have looked at a broad range of statistics that point in this direction. I also run a private equity investment firm that owns companies in a number of industries—including restaurants, the manufacture of gardening tools, oil and gas exploration services, and distribution of entertainment products such as books and videos—that are already being forced to pass price increases on to the consumer.

The skyrocketing price of oil is obviously a central element in the accelerating price spiral. But a sea change in China’s role is beginning to have a huge impact as well. ….

In 2016, oil prices crashed, and Goldman Sachs was right on time discussing $20 oil.

Time Magazine Goes Gaga Over Real Estate

The June 13, 2005 issue of Time Magazine cover: Home $weet Home marked the real estate top.

In my It’s Time to Shift the Arrow on June 5, I posted some amusing comments from economists about a permanently high plateau and ended with this simple statement:

“In case you missed it, here was the Home $weet Home top call.”

April 10, 2016 Mish

On April 10, 2016, in US vs. Japan Land Prices Pictorial Update I made a pictorial presentation of where we were and where we were going. I am especially fond of this post so what follows is a repeat.

In Spring of 2005 I announced It’s a Totally New Paradigm
At that time the chart looked like this.

In June I announced It’s time to shift the arrow on the basis of Time Magazine going gaga over real estate.

In December I wrote that It’s Too Late.

When you see stuff like this, not only is it too late, it’s way too late.

I am pleased to announce that we have moved the arrow once again.
The current picture looks something like this.

When Was the Top?

Based on Case-Shiller, some claim housing peaked in Summer of 2006 not 2005. I dispute that allegation. Case-Shiller does not include condos, and I believe Case-Shiller did not take into consideration kickbacks, free pools, free cars, free trips, and cash back arrangements widely used to seal deals starting summer of 2005. Contract price was often not what it appeared.

Finally, things went from people standing in line hoping to get the right to buy a condo via lotteries, to lines of zero length almost overnight, in numerous places. That happened summer of 2005.

Sentiment does not get more extreme than Time magazine going “gaga” (yes, they used that word right on the cover).

Harry Dent Contrarian Book Covers

Economist Harry Dent made a fortune with a series of 100% ass-backwards books.

Mighty Dollar: Economist Contrarian Cover Nails The Top
 

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Mighty Dollar: Economist Contrarian Cover Nails The Top

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