A contrarian is a person who prefers to take positions and views that are opposite of those in the majority. There is also a practice of some on the Street that when some event or person reaches the cover of a prominent national magazine, it is time to move on or to take a ‘contrarian’ view. This week’s cover of Time Magazine is just such a contrarian event.
Federal Reserve Chairman Ben Bernanke’s appearance as Time’s Person of the Year for 2009 stirs the contrarian in me. Not that I am always a contrarian, but in times past, it has helped me zig to my benefit while others have zagged to their detriment. So Big Ben’s portrait on the U.S. Dollar as opposed to George W’s (I mean Washington’s not Bush’s), is especially significant to me. Here’s my take on the contrarian’s view of the cover’s story:
The Federal Reserve and its present chairman have peaked in the public’s awareness of the Federal Reserve’s role in the U.S. financial crisis and the world economy. It most likely means that the days of crisis management are over. That there will be no more cries of “Hi Ho Silver” as the Fed rides to the rescue. It also means that the bottom we put in the markets in March of 2009 was the bottom.
I also think it marks the beginning of the end for historically low interest rates in this country. With an economic recovery, global growth and declining unemployment, interest rates on U.S. Treasury bonds will climb in the near future. This would be a natural next step and would better reflect a normal economic state in this country. Bill Gross, co-head of PIMCO, the biggest bond house in the world, must think so, too. Over the last quarter of 2009, he has reduced his position in U.S. Treasury bonds from 63% to 51%.
That’s not to say that you should run out and sell all your bonds tomorrow. The Fed is too smart to abruptly jack up rates and send us all back into the soup. This will be a gradual process occurring over time and probably won’t even start until the second quarter of next year. And some bonds will actually do well in the early days of rising rates. However, selling, as I’ve written before, is a process and one that should be started now in Treasuries.
Rising interest rates also have implications for the U.S. dollar. In a world where interest rates rise, a country’s currency usually follows the same trajectory over time. Over the last several months, the greenback has fallen considerably. Recently it has bounced, whether it has truly bottomed or is simply experiencing what is called “a dead cat bounce,” remains to be seen. Nevertheless, for much of the last few years we have been experiencing a weakening trend in the dollar.
I think that may be close to an end. If I’m right, in his second term as the Fed’s chairman, Bernanke will preside over a rise in rates and a strengthening dollar. So for me, his image on the dollar on Time’s cover is significant.
As for the markets, there is not much new to report. As I suspected, all three averages are still locked in a trading range as traders and investors alike have had enough for this year. Volume is super light. The next two weeks are traditionally the slowest in the year and no one wants to press their luck. Great gains have been made if you went back into the market in March or shortly thereafter. For those who didn’t, I suspect more data on the recovery will be required to entice that money from the sidelines. That information won’t come until next year. The release of fourth quarter earnings next month will provide some additional clues on whether the market is ‘priced to perfection’ as some claim, or still a ‘good deal’ In the meantime, enjoying the holidays without making new commitments is probably the wisest choice.