The Dollar Tailwind Is Here

The Dollar Index is literally collapsing right in front of our eyes. And just as we predicted, it’s turning into a massive tailwind — particularly for some pockets of the market.

Now, we’ve got a new accelerator: the US Treasury itself.

With long-end yields pushing to multi-year highs, the Treasury has effectively stepped into the market in an attempt to control the yield curve — especially at the long end — in order to keep a lid on borrowing costs.

In our view, this is one of the biggest developments in monetary policy we’ve seen in a very long time.

Of course, that only adds to the forces weighing on the US dollar, and when you combine that with the fact that so many market participants are still heavily long US Dollar Futures, we can only come to one conclusion: The path of least resistance for the greenback still looks firmly to the downside.

While the Dollar was acting as a major headwind for risk assets throughout June and July, we decided it was time to say goodbye to our overweight Semiconductor position in early July. Since then, we’ve shifted toward areas of the market that had been left behind — areas that were increasingly neglected, beaten down, and frankly, just not very exciting to most investors.

And so far, that has been the right decision. Since then:

• Semis have declined and underperformed the S&P 500

• All of our new tactical trades are in the green and have outperformed Semis

• With the exception of one position, all of our new trades have also outperformed the index

We’re not saying this to victory lap. The bigger point here is that virtually all of these trades were anything but consensus when we entered them — and, in many cases, they still aren’t today.

The same was true when we recently argued that the Dollar Index looked increasingly prone to a reversal, even as Wall Street was pounding the table that the US dollar was ripe for a major move higher. We were looking in a different direction because, well, everyone was already max long the greenback.

And that reminds us of one of our favorite investing principles, courtesy of Jim Grant: successful investing is about having everyone agree with you… later!

That’s essentially what we’re trying to do. Find the opportunities before everyone else does, get positioned, and then wait for the consensus to catch up. And that last part is still missing from most of the trades we’re currently in, despite many of them already starting to build momentum. That’s obviously a good thing. It means there’s still plenty of room to run before everyone is sitting in the same boat again.