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Updated @ 7:00 a.m. EST, Tuesday, February 12, 2008.


WELCOME TO TRUE CONTRARIAN! I will attempt to create an entertaining, readable, and hopefully refreshing viewpoint a few times each month. Each issue will feature my intermediate-term financial outlook, my long-term financial outlook, and a personal reminiscence.

The past year has proven that there are millions of ways to make money in the financial markets, and billions of ways to lose money. --Steven Jon Kaplan

The U.S. DOLLAR'S RALLY WILL PROVE DECISIVE (February 12, 2008): The U.S. dollar index has completed a very bullish double bottom with its historic low of November 22, 2007 being followed by a higher low on February 1, 2008. The implications of this event are still being ignored by the mainstream media, but will soon be felt profoundly throughout the global financial markets.

As the U.S. Federal Reserve has been quick to cut interest rates, while other central banks have been reluctant to follow suit, this ensures that the U.S. economy will come out of recession sooner than the rest of the world. In addition, actual U.S. growth over the next year is likely to be very close to expectations, whereas growth in other countries--especially in emerging markets--is likely to fall several percent short of the current consensus levels. This will lead to a continued rally in the U.S. dollar, as currency fluctuations are primarily a function of actual growth rates relative to expected ones.

In addition, the increasing anticipation of the election of a Democrat as the next U.S. President will imply a return to the higher taxes from the 1990s and a gradual withdrawal from Iraq. Both of these will reduce the U.S. budget deficit, which will also be positive for the U.S. dollar.

Equity markets around the world are finally beginning to reflect the reality of a global economic contraction. However, commodity markets remain in their own private fantasyland in which precious metals are surging even as physical demand has collapsed, while wheat and soybeans are behaving as though they are about to be declared illegal substances. This will not remain the case for long. Crude oil has already completed its peak on January 3, 2008, while gold mining shares topped out on January 14, 2008. It's just a matter of time--and not much time at that--before all precious metals, agricultural commodities, and energy commodities undergo accelerated declines. The intensity and magnitude of each of these commodities' pullbacks will surprise the vast majority of investors who have not recognized that the apparently relentless move higher in the commodity markets is about to be sharply reversed. The duration of these respective corrections will be brief--likely only a half year or less.

Meanwhile, most equity investors remain astonishingly complacent toward the likelihood of a substantial additional decline for stock markets around the world, as evidenced by implied volatility indices such as VXO which currently stand at only half the typical peak levels seen at any major correction bottom such as we experienced in 1997, 1998, 2001, and 2002. Just as investors deluded themselves at the end of last year that the August 16, 2007 bottoms for most equity indices would hold strongly to the upside, most investors today believe that the late January 2008 lows will provide strong support. The truth is that the July 2006 lows for nearly all global equity indices will be closely approached over the next few months. This implies that the Nasdaq still has about 20% remaining downside, while most emerging markets will decline by an additional one third to one half from their current levels.

It is difficult for most investors to envision a world in which the U.S. dollar is rallying strongly, while equities and commodities are declining rapidly. However, that is the world in which we will exist over the next few months, so the sooner that you modify your investment portfolio to reflect this reality, the greater you will profit from it.

THE LAND OF THE RISING SUN WILL RISE AGAIN (February 12, 2008): Has anyone on a chat site or in your office bragged lately about why they're invested in Japanese equities? Do you even know anyone who has money in Japan's stock market? As emerging markets have become the darlings of investment portfolios around the globe, Japan has been virtually completely abandoned as an investment choice. Many hedge-fund managers specializing in Asian equities have a zero-percent allocation to the island nation that still has the largest total market capitalization outside the U.S.

Since Japan's stock market had peaked way back on the last day of 1989, brokerages worldwide have had nearly two decades to reduce their staff and their time spent on Japan. This has caused smallcap Japanese equities in particular to become almost totally ignored and therefore absurdly undervalued. Consider also that Japan will be perhaps the only country in the world that will not suffer from collapsing housing prices over the next several years. This in itself will cause economic growth in Japan to easily surpass almost the entire world over the next decade or so.

The real irony is that in the 1980s when Japan's total GDP actually surpassed that of the U.S. (in absolute terms, not just in per-capita terms), American companies and the industries of many other nations sent thousands of workers to Japan to learn the secret of that country's success. In recent decades, however, almost no one has gone to Japan to study the reasons for their subsequent failures. If this had been given a higher priority, the rest of the world might have learned why promoting housing bubbles can prove deadly, and why too heavy an accumulation of household debt can be a serious drag on the economy. As they say, we are too soon old and too late smart.

  • Overview of Gold Mining Shares, updated on February 12, 2008.
  • Learn more about Steven Jon Kaplan and watch a live interview on MarketWatch.
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    IT'S DECOUPLING, IT'S DIVERGENCE, IT'S DE-NONSENSE! (January 21, 2008): There has been a very popular myth in the financial markets during the past several months which has found its insidious way into the mind of many investors. As the global economy shows clear signs of accelerating its contraction, there continue to be those who insist that certain sectors will be able to diverge positively from the overall downtrend.

    I'm really surprised that the media doesn't also tell these folks that if they click their heels together three times, they'll be immediately transported to Kansas in the 1930s.

    In real estate, for example, there remains the absurd belief that prices which are already at double or even triple fair value will continue to rise as long as you're in the "right markets". Manhattan, for example, is thought by many, who perhaps also believe in the tooth fairy, to have real estate "which can only go up because of all that foreign buying". Maybe foreigners are not allowed to sell in Manhattan? It's obvious to anyone who has studied the fundamentals that Manhattan real estate will soon collapse by far more than 50% in order to catch up to the downtrend that has already affected the rest of the United States.

    Real estate is far from the only sector in which a grand delusion is the order of the day. In the equity market, until just a few weeks ago, there were numerous largecap names such as Apple Computer, Coca-Cola, Procter and Gamble, Google, etc., which were assumed to be immune from any stock-market correction. The fact that a nearly identical fairy tale was popular in January 1973, known as the "Nifty Fifty", has obviously been forgotten by nearly everyone. At that time, it was assumed that as long as you owned the "right stocks", you would continue to make money even in a bear market. Then came 1973-1974, and the Nifty Fifty of course collapsed far more than the broader equity market.

    Even during the past few weeks, as the few very popular names finally began to collapse, analysts insisted, "Energy and oil shares are still going higher, buy those!" A week later, those collapsed, so the media shouted "Gold mining shares are still surging, switch into that group!" Then they plunged by double-digit percentages, so the hype of the week became "Get into the agricultural-related sector, it's red hot!" Just in the past few days, that equity sector also has suffered sudden sharp declines.

    You can choose to invest as though you are Peter Pan in NeverNeverLand, but you're going to make a lot more money if you can recognize the general trend that's taking place right here on planet Earth. If your ship has hit an iceberg and is sinking, you shouldn't look for the place on the ship with the best view or the most trendy people--you should look for the lifeboats so you can get the **** off the ship as soon as possible. Why so many participants in the financial markets can't figure this out is a mystery that even Sherlock Holmes would find unsolvable.

    There was a fantasy a few weeks ago that if you owned the "horsemen" of the Nasdaq, you couldn't lose money. At the very end of 2007, the horsemen ran into a huge pile of horse****. The most nimble of the momentum traders quickly shouted neigh and dismounted, leaving the army of amateurs left holding the reins. These clueless folks will continue to ride these poor overworked beasts all the way to the slaughterhouse, as they eventually become horsemeat. These weekend warriors had no idea that the momentum traders were just horsing around with these shares, and thought they represented real bargains or great long-term ideas, or whatever complete lack of horse sense the TV analysts were promoting so loudly that they became hoarse. Amateurs will almost surely continue to hold these shares until their huge losses accelerate later this year, at which point they will be thrown unceremoniously from their mounts, and sell in an emotional panic. The only real winners will be the thoroughbred horsy executives, who kept their equine-imity, and more importantly who were heavy sellers of these shares in late 2007.

    Commodities, also, have not been immune to this mass denial. Base metals began to decline in May, but people simply crowded into whatever other commodities were hot. They loved oil at $100 per barrel; they adored gold at $900 an ounce; and in recent days, the same hedge-fund folks and their fawning masses have been buying agricultural commodities, sending them to new multi-decade peaks. It's just a matter of time--and probably very little time, at that--before soybeans, wheat, etc., give back their 50% gains since August 2007. Sure, a lot has happened in the past five months, but I'm absolutely sure that people aren't eating 50% more food now than they were then.

    All along the way, the mainstream media have been misleading investors right and left. Usually, something easy to repeat to the gullible, along the lines of "Chinese and Indian demand coupled with reduced supply", has been the catch excuse for buying anything that's going up. Instead of recommending that people make real money by selling short equities and commodities which in some cases have been at multi-decade highs, they have been continually recommending buying whatever is a few days away from a historic collapse.

    Is it decoupling? Is it divergence? It's de-nonsense! When the global economy is slowing, all equities and commodities will eventually decline in tandem. It has always been that way, and it will always be that way. Once the contraction slows its rate of descent, then divergences become possible--but that's for future consideration. The present is all about convergence, not divergence. All that rises must converge. (My sincere apologies to Flannery O'Connor.)

    While precious metals shares have been in a strong long-term bull market for just over seven years, there have been five pullbacks averaging more than 1/3 for gold mining shares in less than six years. More details about this and similar information about precious metals investing can be found in the link immediately below:

    FINALLY, A SINCERE THANK YOU to Barron's for featuring me on page 50 of their November 19, 2007 issue, which appeared on newsstands worldwide.

    CURRENT ASSET ALLOCATION (February 12, 2008, marked to market): My own personal funds are currently allocated as follows: LONG POSITIONS: stable value fund (retirement fund with stable principal paying variable interest, currently 5.00%), 5.5%; municipal bonds, including MYJ, 2.5%; KRE, 1%; XRT, 0.5%; TOC, 1.5% (bought at a 15% discount); gold and silver coins and related metals collectibles, 6%; other collectibles, 0.5%; cash and cash equivalents including a long position in VMSXX and in the PayPal money-market fund, 7%; SHORT POSITIONS: Nasdaq-equivalent (QQQQ, NDX, GOOG, in that order), 38.5%; short EWM, 1%; short ILF, 1%; short GLD, 20%; short GDX, 3%; short USO, 4.5%; short SLV, 2%; short DBA, 4.5%; short BIK, 1%.

    REMINISCENCE OF THE WEEK (February 12, 2008): I visited Tokyo for just over two weeks in October and November 1987. When I was there, I stayed at a traditional Japanese inn which had one distinctly nontraditional feature: all of the other guests besides myself were working full time on tourist visas. One fellow was a lively Australian chap from Brisbane, who sang and played traditional American and Australian folk songs on his guitar near subway stops. That might sound like an unpromising way to survive in the world's most populous city, but he actually earned more money than any of the other people who were staying at the inn. From time to time, passersby would leave him tips as large as ten thousand yen (at that time, about $70 U.S.). Having stayed for more than two years at this inn, he coaxed the proprietress into giving him a special monthly rate and in eventually occupying the most desirable room available. We discovered that we could both speak some Spanish, so we would converse in that language when we did not want the other residents to understand what we were saying. That was especially true when he told me about his unfortunate and rather lengthy experience in a Mexican jail after he was caught with a small amount of marijuana on a music tour. Some of this guy's adventures, if they were true, would make Crocodile Dundee seem like a hopeless wimp in comparison, although they can not all be reprinted on a family-friendly web site. This chap made friends with the inn's other residents by always having on hand a generous supply of high-quality whiskey.

  • Best of Previous Reminiscences
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