Alexander Green (Investment U):

We all know why the dollar is in the cellar right now. We also know why it’s expected to continue right through to the basement floor:

• Massive budget and trade deficits.
• Ultra-low interest rates. (Zero on the short end.)
• $59 trillion in unfunded liabilities for Social Security, Medicare and Medicaid.
• Bernanke conjuring extra trillions out of thin air to buy Treasuries and mortgage-back securities and patch various holes in the U.S. economy.

There is no reason to believe any of these problems will vanish in the months ahead. Yet the dollar will soar in 2010. Here’s why…

Two Reasons for a Dollar Rebound

There are two main forces that could drive the dollar higher:

• All the problems mentioned above are already well recognized and priced into the greenback.

• Dollar psychology is overwhelmingly bearish. Just as 10 years ago, investors couldn’t imagine Internet stocks doing anything but soaring higher. Five years ago, they couldn’t imagine real estate doing anything but barreling down the same one-way street. Record lows for the dollar are coinciding with enormous confidence that the dollar has nowhere to go but down.

When extreme valuations are accompanied by unbridled optimism or abject pessimism, it virtually always marks a turning point – and an opportunity. This is no exception.

Commentators seem to forget that all currency values are contingent. You can’t just look at fundamentals in the United States. You have to look at them abroad, too.

And there isn’t much out there right now that’s terribly positive…

Click here for the rest of Mr. Green’s analysis at Investment U.

Who’s back? Harry Dent, the self-styled “economic futurist,” who presumes to tell us about the great economic booms and busts that lie ahead.

How can he possibly know these things?

According to Dent, an analysis of the “highly predictable” nature of consumer spending based on demographic trends – increasing spending during child-rearing years, peak spending as the kids leave home and slower spending during late work and retirement – reveals what lies ahead for the economy and the stock market…

Harry Dent: Dow 44,000 & Other Flimsy Forecasts

Harry Dent is a man worth listening to. After all, he has a near perfect track record – as a contrary indicator…

For example:

• With less than auspicious timing, Dent brought out The Roaring 2000s Investor in 1999, confidently predicting that the Dow would hit 44,000 by 2008. With the luxury of hindsight, we now know he was off by 30,000 points or so.
• At the time, Dent also argued forcefully for NASDAQ stocks, predicting, “The technology revolution will favor Internet-oriented companies.” Within three years, the NASDAQ lost three quarters of its value and the leading index of Internet stocks plummeted 89%.

And Dent didn’t confine his market predictions to the U.S. He further forecast that Argentina would see “moderate growth until 2015 and then stronger growth into 2025.”

No, Argentina would suffer a currency collapse and financial crisis followed by rioting, social unrest and years of economic stagnation.

It’s obvious now just how wrong Dent was. But 10 years ago, plenty of brokers and investors agreed with him. He sold hundreds of thousands of books and raked in millions as an advisor to top Wall Street firms, including Morgan Stanley (NYSE: MS).

Harry Dent’s Next Bold Prediction: The Great Depression Ahead

Five years later, bloodied but unbroken, and using his same demographic trends theory, Dent published The Next Great Bubble Boom: How to Profit from the Greatest Boom in History: 2006-2010.

Well, no. That period encapsulated the biggest bust since the Great Depression. As for his revised forecast of Dow 40,000 in 2009, it looks like he’s off by 30,000 or so points again.

With a track record like this, you might imagine Mr. Dent would shy away from economic prognostication.

Yet he’s promoting a new book. And if you’re looking for a reason to be optimistic about the market, you’ll find it in his chosen title: The Great Depression Ahead.

Within weeks of the book’s publication, the Dow began a 48% ascent, one of the six biggest rallies in the last 100 years.

Look, I’m not entirely unsympathetic to Mr. Dent. Anyone in the investment prophecy business needs the skin of a rhino and a Ph.D. in humility. No one gets it right all the time.

Moreover, Mr. Dent has made hundreds of predictions in his long career, so I’m sure he can point to a few successes. (Of course, so can an orangutan heaving darts at the stock pages.)

It’s just that Dent has made millions in book sales and investment advisory fees peddling this mumbo-jumbo.

(Poor advice does have its consequences, however. His AIM Dent Demographic Trends fund severely underperformed the market and was quickly folded into another fund. His name was quietly dropped.)

Yet Mr. Dent is still out there, offering dubious investment advice based on faulty premises.

The truth, of course, is this…

Forget Harry Dent… Listen to This Advice Instead

While anyone can make a good call from time to time, no one can consistently predict the economy or the stock market.

If you don’t accept this – a fundamental investment tenet with great investors from Benjamin Graham and Warren Buffett, to Peter Lynch and John Templeton – your chances of long-term success are slim.

Yet Mr. Dent clings to his demographic theories and economic futurism. And that’s unfortunate.

Someone really ought to let him in on one of the great secrets of investing: Your only real mistakes are the ones you don’t learn from.

Good investing,

Alex

Source: Harry Dent: Bold Predictions of the Great Depression Ahead

Psychological studies confirm that we all have biases. Yet we’re generally unaware of them.

When it comes to investing, few of them do more harm than “recency bias.” This is the tendency of investors to extrapolate recent events into the future indefinitely.

The Recency Bias Creates a “New Era” of Growth

When technology and Internet stocks were hot in the late 90s, for example, investors began talking of a “New Era” of limitless technological growth. The truth, of course, is that technological innovation does steadily increase. Alas, the same cannot be said of technology stocks.

Years of sharply rising prices lulled investors into a false sense of complacency. Investors didn’t just plan to hold Lucent (NYSE: ALU) and JDS Uniphase (Nasdaq: JDSU) long term. Many began calling them “legacy stocks,” companies that were so exceptional that they would pass them on to their children and grandchildren.

Yet someone less obsessed with recent performance and more familiar with the lessons of history might have recollected that behind every bull market is a growling bear market. From the peak in March 2000 to the bottom in October 2002, the Nasdaq (.IXIC) lost more than three quarters of its value.

Most of your children and grandchildren would have been better off with a passbook savings account or the use of a trailing stop.

Of course, recency bias works the other way, too. Last year the S&P 500 (.INX) dived 38%, its worst performance since 1931.

Now the galloping herd is convinced that stocks have nowhere to go but down. Mutual fund flow figures show investors yanked tens of billions of dollars out of equity funds in the fourth quarter alone.

Much of that money is piling into bank accounts and money market funds. Yes, they’re super safe, but they pay a national average of less than 1%.

The Recency Bias: Teaching Investors That Nothing Is Better Than Something

Still, recency bias convinces them that earning next to nothing is better than losing something.

Once again, they’re rationalizing. Sure, stocks may continue down for a while, but look beyond this week’s headlines and you may see opportunity and not just risk.

Today there is more money available to buy shares than at any time in almost two decades. The $8.85 trillion held in cash, bank deposits and money market funds is equal to 74% of the market value of U.S. companies, the highest ratio since 1990 according to the Federal Reserve.

What has happened in the past when cash reached these levels?

• In September 1974, cash on hand reached $604.5 billion, representing a record 1.21 times U.S. stock market capitalization. That preceded a 31% gain in equities between October 1974 and March 1975.
• In July 1982, just as a 20-month bear market was ending, cash as a percentage of the U.S. stock market’s value rose to 95%. The S&P 500 began a six-month, 36% advance.

According to Bloomberg, the eight previous times that cash peaked compared with the market’s capitalization the S&P 500 rose an average 24% in six months.

There are no guarantees, of course, but this is a very positive near-term signal for the market.

Smart investors – even bearish ones – understand the significance of high cash levels. For example, Leuthold Group, whose Grizzly Short Fund returned 83% in 2008 thanks to bets against equities, recently put out a bulletin calling stocks “one of the great buying opportunities of your lifetime.”

The report pointed out that the ratio of cash on hand to U.S. market capitalization jumped 86% in the first 11 months of last year. That’s the biggest increase since the Fed began keeping records in 1959.

When Will Investors Wake Up From This Recency Bias?

Some day soon, millions of investors will wake up to this recency bias and the fact that their cash is earning a negative return after taxes and inflation. And when they do, money will start migrating back to the market.

One good reason? In addition to capital gains potential, stocks currently yield three times as much as cash.

However, investors suffering from recency bias will not be persuaded by facts, figures, historical parallels or rational arguments. Unbeknownst to many of them, emotions are dictating their actions, not reason.

If history is any guide, they won’t leave the safety of cash until a rising market – and a whole new round of recency bias – convinces them that it’s safe to own equities again.

And they wonder why they don’t buy low and sell high.

Source: The Recency Bias: Why Your Subconscious Is Wreaking Havoc On Your Investment Portfolio