This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Tyler Mordy, president and chief investment officer of Toronto-based Forstrong Global.
German philosopher Arthur Schopenhauer once observed that every truth passes through three stages before it is recognized: “In the first it is ridiculed; in the second it is opposed; in the third it is regarded as self-evident.”
Bull markets follow a similar evolution. In the early phase, nonconsensus ideas are swiftly dismissed as fringe-dwelling lunacy. But, slowly over time, roots grow on tiny seeds of skepticism, scale along a trellis of complacency and, finally, bloom into full-scale, radiant bull markets. Suddenly, investors wake up to discover the world has changed.
The Healthy Dollar
Consider the U.S. dollar’s recent path. Those not prone to revisionist history will marvel at the transformation in popular perception.
In the aftermath of the global financial crisis, it was almost universally believed that the largesse of central bank responses (with the Fed as the leading monetary polluter) would create high and sustained inflation, simultaneously hammering the value of the dollar. A persistent flood of ink was spilled warning of the coming “death of the dollar.”
While investors luxuriated in the polemics of many well-known bears, money poured into commodity products (not least, resource-tracking ETFs) and other inflation-fighting assets. Clearly, that was not a winning strategy. Inflation has remained stubbornly low and the dollar has been on an unstoppable seven-year rise.
The Dollar’s ‘Self-Evident’ Stage
But all of that is history. Now, perceptions of the U.S. dollar are firmly in Schopenhauer’s third, “self-evident” stage. Being long dollars has become an extremely comfortable consensus.
We, too, have been in this cozy camp. Since 2008, we have argued that post-financial crisis periods typically produce a chronically strong senior currency (in today’s world, the U.S. remains the monetary hegemon). Investors, still carrying crisis-made scar tissue, tend to cling close to shore.
Endless financial crisis fears prevail. And each time volatility erupts, capital quickly flows back to the perceived safety of the U.S., creating a persistently conservative posturing.
An Aging 7-Year Bull Market
Where to next? This is where financial markets depart from Schopenhauerian theory. Truths are universal and, importantly, durable. Their permanency doesn’t fade. Conversely, financial markets—much to the chagrin of those still carrying the torch for the efficient market hypothesis—are driven by ephemeral opinions.
“True” financial value is itself a suspect notion. What’s right in one regime will be wrong in the next.
Looking ahead, it is the consensus view that the U.S. Fed will finally hike rates in December. It is also consensus that the chief beneficiary of the long-awaited liftoff will be the U.S. dollar. What is not obvious is if the consensus is right about all of this.
We recently wrote about factors driving currency returns. A critical component of successful analysis involves investor sentiment. Anytime a strongly unified consensus surfaces, investors should take notice, as there may be an opportunity to position differently and outperform.