Times are changing. Since when does Jim Rogers like the U.S. dollar? For those of you who aren’t familiar with Rogers, he is a former business partner of George Soros, as well as a long-term commodity bull.
If Rogers is correct about the U.S. dollar appreciating, then commodities will take a further hit. This will not be a positive for emerging markets. It will have the biggest impact on emerging markets, including Brazil, Russia, India and China. If that list looks familiar it’s because it makes up the BRIC nations, which for investors was a great place to park money for many years. If you look at that list now, Brazil and Russia are in recession, India is holding its own but susceptible to contagion and China is slowing. (For more, see: The Pros & Cons of a Strong Dollar.)
A lot of investors will point to domestic government numbers showing signs of economic health, but there are two concerns here. One, we now live in a global economy. That being the case, if one major economy falters, it impacts other major economies. Two, as Rogers pointed out, instead of looking at government numbers you should look at the real numbers, which includes payroll tax figures. And payroll tax figures are currently flat, indicating no income growth for consumers.
The idea of contagion and payroll tax figures makes sense. But why does Rogers suddenly like the U.S. dollar?
U.S. Dollar
The simplest way to explain why Rogers likes the U.S. dollar is because he believes there will be a 100% chance of recession over the next year, and that there will be a flight to safety - the U.S. dollar. The next question: Why does Rogers see the U.S. dollar as a flight to safety?
The U.S. dollar is the safest currency in the world on a relative basis. We have added a lot of liquidity to our economic system, but not as much as the European Central Bank (ECB) and Bank of Japan (BOJ). Rogers is selling the Japanese yen and going long on the U.S. dollar. The Japanese yen used to be known as a safe haven, but the BOJ has been expanding its balance sheet to incredible levels. This weakens the value of the Japanese yen. A similar situation has played out in Europe, where the ECB keeps printing. (For more, see: Get to Know the Major Central Banks.)
Even if the Federal Reserve doesn’t move at all, it’s not as dovish as its peers. This is bullish for the U.S. dollar. In regards to the potential for negative interest rates (which would hurt the U.S. dollar), the idea has been absolutely torched by economists, billionaire investors, Alan Greenspan and even some within the Federal Reserve. The thinking here is simple: If it hasn’t worked for five other central banks and their economies, why would it work here?
Then you have to factor in deleveraging. When massive debts are paid off it reduces the supply of U.S. dollars, which then increases their value. And if Rogers is wrong and the economy improves on a sustainable basis with the Federal Reserve hitting its dual mandate of full employment and 2% inflation, then the Fed will hike rates. This is also bullish for the U.S. dollar. Rogers thinks that the U.S. dollar trade can become so powerful that it has the potential to lead to a bubble in the currency.
Recession Call
Rogers recently pointed out that we usually have a recession an average every 4-7 years and that there hasn’t been a recession in the past eight. This would mean that the economy is stronger than at most times throughout history, which would be a laughable assessment. What’s really taking place is that the Federal Reserve pumped money into the system, which led to excessive debts and artificial growth.
One quote Rogers made on Bloomberg TV is particularly interesting: “There is going to be so much turmoil in the world over the next couple of years, people are going to flee to what they think is a safe haven. This always happens when there’s turmoil.” (For more, see: Will Recession Become Reality in 2016?)
What’s the first thing that comes to mind when you read “safe haven?” If you’re like most people, it’s gold. But if Rogers is correct about the U.S. dollar, then gold will not be a safe haven. In fact, gold demand is consistently waning in India (the largest consumers of gold) and China. And a gold tax that was expected to be lifted in India remained intact. Furthermore, gold has never appreciated in a deflationary environment (we have deflation without central bank intervention). The risk is large because if this theory is correct and scores of investors rush to gold, then their safe haven will turn to dust. For disclosure purposes, I’m shorting gold miners.
The Bottom Line
Rogers is not optimistic about an economic recovery. Instead, he sees a 100% chance of a recession within the next year. He has also moved away from commodities and switched to long on the U.S. dollar, seeing it as the ultimate safe haven for relative reasons. If he’s correct, then gold is not the safe haven that many perceive it to be. And gold is certainly not strong on a fundamental basis. It also means the real safe haven will be the U.S. dollar.
