-- Posted Wednesday, 13 April 2005 | Digg This Article
In the late ‘90s it was fashionable in some circles to talk of the "Plunge Protection Team" (also known as the PPT) that periodically rescued the stock market from falling too far and too fast during the late ‘90s bull market.
You may recall there were several times during the course of the runaway market of 1997-1999 that the broad market needed bolstering, notably in October 1997 and September 1998. Led by appointees of the Clinton Administration, the convenient and timely "plunge protection" efforts on the part of PPT as they were called always seemed to catch the proverbial "falling dagger" at pivotal support levels and succeeded in turning the market around. Make no mistake about it, the PPT was called to action many times during that era.
Now we have a new administration, a changed economy, and a different set of parameters for what constitutes the key driver of U.S. economic policy. And the primary focus of the new PPT in recent months has been the U.S. dollar. Since the long-term benchmark support of the U.S. dollar index at approximately the 80 area was tested earlier in the year, the support from the financial regulators has been obvious at a time when many commentators had completely thrown in the towel on the greenback.
As we’ve chronicled in recent months, this super-bearish sentiment on the dollar since late last year has been the most extreme anyone has witnessed in years. You’d probably have to go back to around 1995 to witness a similar level of bearishness. This was when the dollar index was against testing that benchmark 80 level. A top-selling book back then was "The Coming Economic Earthquake" not to mention other titles with similar themes. Economists and financial analysts were almost uniformly bearish on the dollar and U.S. economic prospects and many felt certain that collapse was just around the corner. That’s when bearish dollar sentiment hit a major extreme and the dollar turned a corner and mounted a stunning recovery.
In recent months as the dollar index has given fallen to near the 80 benchmark, we’ve witnessed a deluge of negative messages on the dollar’s future coming from all sides of the media. Even Saturday Night Live got in on the act by presenting a skit featuring the U.S. dollar being "beaten up" by other foreign currencies. This was followed by a cover story in Newsweek magazine entitled "Bottom Dollar: The Greenback’s Fall is Stoking Fears of a Global Crisis." (Although considering the fear-laden nature of the article perhaps a better contrarian headline would have been "Dollar Bottom.") Following on the heels of the Newsweek bear cover was the recent cover of Futures magazine which featured a bust of George Washington of U.S. dollar fame laughing. The headline that accompanied the depiction read "Why is This Man Laughing? Perhaps He’s Short the U.S. Dollar."
Such extreme bearish psychology is characteristic of interim bottoms, and so it was with the latest dollar bottom.
The dollar’s recent bounce off its lows wasn’t without fundamental reasons. The flow of funds into U.S. assets from abroad was higher than most seemed to realize, especially in light of the stock market rally last fall into early '05 along with the recent rise in Treasury yields. As Jes Black, hedge fund manager at Black Flag Capital Partners, recently commented: "Changing interest rate expectations are the principal determining factor behind medium-term decisions to buy and sell currencies…When deposit rates are on the rise it makes the U.S. dollar a more valuable asset to hold. Alternatively, if interest rates decline, the dollar’s store of value is diminished, provoking traders to sell."
While my point here isn’t to argue over the longer-term outlook for the dollar, the intermediate-term intention of the Fed has been made manifest, and that interim intent is to attempt a "soft landing" of the dollar’s 3-year slide for the purpose of preventing a major economic imbalance both here and abroad. Their stated goal of global economic integration hasn’t quite been completed, and until it is they won’t allow an outright collapse of the dollar – or the economy – to mess things up for them.
One rationale for the recent dollar recovery rally has been the improved U.S. economic data over recent months. Yet already there are early signs that dollar bulls will run to the same extremes that the dollar bears did earlier. This should keep the dollar index relatively range-bound in the interim and will likely prevent a runaway move in the dollar like the one witnessed in the late ‘90s. In other words, the dollar PPT appears intent on keeping the dollar on a tight leash this time around.
Clif Droke is the editor of the Gold Strategies Review newsletter, a forecast and overview of the precious metals market and North American gold stocks. He is also the author of numerous financial books, including most recently "Gold Stock Almanac 2005." For more information and recent articles visit www.clifdroke.com.
-- Posted Wednesday, 13 April 2005 | Digg This Article
