Diary of a Financier

History Rhymes: US Dollar Reliving 1992

In Capital Markets on Mon 12 Sep 2011 at 16:08

The US Dollar Index (DX/Y) is reliving 1992 all over again. (That might be a bit redundant.) When I think of 1992, I think of Savings & Loan Crisis and Black Wednesday… the dissolution of the European Exchange Rate Mechanism I (ERM I). With the Euro (EUR) on the brink, I don’t think I need to offer any more corollaries. Check my full explanation from July.

To express that in pictures, look at DXY 1992 v 2011… an exact analogue in the monthly fractals:

DX/Y (1975-92)

DX/Y (1994-2011)

USD ripped through a bull market in the 1990s. Suffice to say, I’ve been awaiting the onset of a USD bull all year long. It’s here.

Best way to profit? I’m not necessarily settling for the US Dollar Index ETF (UUP), but something bearing yield, like US bonds. From 1992-2000, DXY gained +29%, and bonds certainly benefitted from that capital flow to the USD, with 10-year Treasury Yields (TNX) dropping -48%. Remember, history rhymes, but it’s never exactly the same twice:

DXY monthly (1974-2011)

One thing is for sure, as I mentioned last week:

Correlations are crumpling. There’s something more to this stew, and my nose tells me it’s not the garden-variety.

Investors will have to get used to new correlations, and I’m already working on some research to figure out exactly what that means for major asset classes like equities & commodities–places where history may not be exactly redundant. I’m inclined to start with my contrarian mistrust of the multi-year Ag boom, which futures I’ve patiently tracked along with the Agricultural Commodities ETF (DBA) for the last few months.

Back in June, I discussed the 1990s’ rare period of positive DXY/SPX correlation:

[N]otice… 1985-95 & 2002-present, the periods of an inverse DXY/SPX correlation… Most notable to me was the 1995-1999 segment, where the stock market continued to strengthen along with the backdrop of a surging USD. That’s a time of organic growth in the US (innovation & technology). That’s during the Clinton budget surplus, during the baby-boom crest, during the www. wonder, before the .com bust, before the Y2K overstimulation, before the Barney Frank housing push. I cannot emphasize more the structural nature of this Great Recession. Low capacity utilization and high unemployment are persistent structural realities. The hard-wrought solution is a new organic driver.

I need to figure out how the chips will fall this time around.

–Romeo

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