On the Dollar and Other Wasting Assets

Investing is trading with a longer time frame

—S. McNeil

My pal, Dick Diamond, trades options. An option is an investment contract for the right to purchase a security at a fixed price anytime prior to its expiration. On the expiration date, unless the underlying security is above the price at which the option holder can exercise his option to buy, the contract becomes worthless. Given that something like ninety percent of all options expire worthless, you would reasonably wonder why anyone would trade them.

Momentum is why. The market price of an option contract at any time prior to expiration has four components: the actual price of the underlying security, the time remaining to expiration, investor sentiment, and momentum. To a trader like Dick, momentum is the most important factor. A couple of times a year, Dick’s momentum studies get to an oversold extreme sufficient to give him a buy signal.

The options he trades will be both depressed in price and compressed in terms of the market’s momentum. Buying the options at a time like that gives him the opportunity to get a violent ride up as the momentum compression of the market releases and shoots the options up in price as though they were propelled by a slingshot.

“Options are just vehicles,” says Dick. They may have two or more months to expiration, but he will only own them for a few exciting days during which they may double or triple from a deeply depressed price back to something close to their intrinsic value. Whether they expire worthless or not is of little interest to him because he will have liquidated them long before expiration.

The US Dollar behaves somewhat like an option contract in that it loses purchasing power, albeit over a much longer time horizon. By some measures, $10,000 today would have the purchasing power of $348 in 1900 dollars, a loss of 96%. So I hold dollars, apparently a dangerous thing. But I am not going to hold them until they go to zero, the way all fiat currencies must ultimately go. My studies indicate that the dollar is in the early stages of a counter-trend advance against its long term downtrend:
dollar sep 2013
While the advance in the dollar is underway, I expect the US stock market to roll over into a decline:
dow sep 2013
So, my bet is that what I hold, the dollar, is oversold enough to go up over the next couple of years while the market, which is grossly overbought, comes down in a big way. My position is based on the long term studies of Elliott Wave International.

I have no argument with hard money guys who hate the dollar. Long term, they’ll be right, but short term–between now and the major cycle lows of 2016–the cyclic pressure is on leveraged assets. As the hard down phase of the depression gets underway, debt burdened owners of stocks, bonds, commodities, real estate and gold will be scrambling for dollars to meet their margin calls. I want to take the slingshot ride up in the dollar while stocks, the asset I really want to own, get hammered into extreme giveaways for me to buy.

Today, most investors are fully invested in stocks, etc. They may be right in the long term. It’s just that I don’t think they have any idea what long term really means in this instance.

Cheers,

Rod

No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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