Expectations for the Future Are Already Here

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

There is a lot of consensus building in the investment community about inflation, interest rates, the dollar and even the potential for the stock market to rollover again in the bottom half of 2010. The one thing that can happen when there is so much of a consensus is that something totally unexpected can come out of left field and derail the most thoughtful of expectations. Another financial crisis could develop at home or overseas. Government economic policies can move pretty fast when political tides change. Even geopolitical events can sideswipe the capital markets. That’s why I’m so uneasy about the beginning of the next decade.

The best way to play capital markets in 2010 is with a good defense. The stock market’s last hurrah is upon us and, over the coming quarters, anything could happen.

I’m not totally convinced that the dollar is as vulnerable as investors think it is. First, the U.S. dollar Index (which measures the U.S. dollar against a basket of the world’s most important currencies) has already dropped substantially since February this year. In fact, the drop has been tremendous and is the main reason why gold hit new records and the price of oil has stayed overly strong given its fundamentals. Sometimes, the markets get ahead of themselves and they move so quickly to discount the current fundamentals that expectations for the future too quickly become the reality of today.

In my mind, the U.S. dollar has already corrected against world currencies. All the news is already in the marketplace. This includes high government spending, high government and personal debt, a big increase to the money supply, etc. Like I say, the bad news is already in the market.

I remember during the Reagan era when many on Wall Street were predicting the collapse of the dollar, because government spending was out of control and so was the debt. While the dollar was under pressure, the collapse didn’t happen. It didn’t happen for the simple reason that there was still no other large country where the global marketplace could park its reserves. The same story is true today. Even though U.S. Treasuries don’t pay much in the way of interest, there isn’t another stable, mature place in which to invest.

Countries might consider investing in such fast-growing countries as China and India, but investment risk is just too high. Take China, for example. That country currently has an almost fixed currency pegged to the U.S. dollar, but is under increasing pressure to float it like other mature countries. This is a huge investment risk that prevents the renminbi from becoming a reserve currency. And, let’s not forget that it is a communist regime after all. As an investor in China, anything could happen to your money with the swipe of a pen in Beijing. At the end of the day, investment risk is just too high for countries to consider anything other than the U.S. dollar as their reserve currency. This won’t change for a very long time.

So, from my perspective, most expectations for the future in capital markets are already here. This means that 2010 is going to be a really wacky year. I’m certain of it.