Heresy and the U.S. Dollar

When confidence in one's viewpoint is high, it's wise to seek out contrarian counsel to determine if your convictions are guilty of any blind spots. Since we (and an increasing number of others) foresee a coming currency crisis caused by more central bank money printing, we've asked our recently-announced contributing editor Charles Hugh Smith to argue the other side of the table.

There is only one word to describe the opinion that the U.S. dollar is in a multi-year uptrend: heresy. Understanding why this is so may well be critical to understanding market action in the 2011-2016 timeframe.

Embracing the contrarian viewpoint offers little joy, because heretics are constantly being hounded by devotees of orthodoxy seeking their conversion to the one true faith or their crucifixion as mortal threats to the orthodoxy.

Why is this so? For two simple but profound reasons. The human mind strongly prefers certainty to uncertainty and simple, fixed explanations over complex, contingent explanations.

The human mind has a second, superglue-like quality: Once a viewpoint has been plucked from the swirling chaos of beliefs and explanations, then the mind quickly solidifies that view, resisting any future modification. Very little energy is devoted to questioning the position, while enormous energy is devoted to defending it.

This reality is expressed via “confirmation bias,” the term used to describe our tendency to focus on data that supports our pre-selected view and ignore data which challenges it.

Orthodoxy—fixed positions that are articles of faith to be defended against all challenges—is thus a psychological safe haven in a risky, dynamic world. Having a belief system or global explanation not only offers us the comforts of certainty, it also enables us to make forecasts based on that explanation. Those forecasts become part of the orthodoxy which must be defended.

Being a trader makes one a heretic, because traders see orthodoxy not as a safe haven but as a mortal danger. This is the root of trader expressions such as “Marry your spouse, not your portfolio.” From painful personal experience, traders learn that trading based on orthodoxy eventually leads to crushing losses.

Why is this so? There is a difference between being “right” and making money. The devotee of orthodoxy is committed to being “right” in a global sense; i.e., confirming that the orthodoxy’s forecast will be proven correct. The trader is only interested in being “right” in a much narrower definition: Did the trade gain value or lose value? The market is the only arbiter of “right” and “wrong” to the trader, and all of the ceaseless debates and arguments between the believers of various orthodoxies are viewed as potentially dangerous distractions.

The trader recognizes multiple timeframes and grasps that a trade has to align with the market action of a specific phase to be successful; i.e., gain in value. A trade may be successful in a three-day timeframe, but  unsuccessful in a three-week timeframe, and ultimately successful in a three-year timeframe.

The problem with orthodoxy is that adherents believe it must be correct in all phases and timeframes. Thus the Bull is wiped out in Bear markets and the Bear is wiped out in Bull markets, trend followers are wiped out in volatile phases, and those trading volatility churn away their capital in non-volatile trending markets.

This partly explains why the number of traders/money-managers who outperform index funds in the long run over both Bull and Bear markets is essentially statistical noise. The appeals of orthodoxy are that powerful.

Traders are heretics for another reason: They reject the illusion that there are “investments.” To a trader, the word “investment” is simply a marketing ploy of the financial Status Quo, a word designed to evince a plummy, wood-paneled security from risk. This reflects the core article of faith of the financial Status Quo orthodoxy, which is that risk can be massaged away.

Traders understand that risk cannot be massaged away, and that capital put into any market at any time is always at risk. Every investment is a trade, and every trade is a speculation. Thus there is no “investment,” there is only speculation, and the slightly sweaty, unpleasant proximity of speculation to risk is not masked with the heavy perfumes of PR, it is embraced as the one true lodestone.

Traders understand that suppressing risk simply guarantees a greater eruption of volatility in the future.

Traders are anathema to orthodoxy on multiple fronts. Devotees of orthodoxy understand the devotion of others in opposing camps, and even as they argue they feel comfortable with their shared worldview. But devotees distrust traders because they reject orthodoxy as the “solution;” it offends devotees that traders either change camps constantly or are studiously unattached to all camps.  

To the true believers of one investment orthodoxy or another, traders are renegades profiting where they “shouldn’t”--being short as the market declines, for example. In other words, the “right” way to “invest” is to choose an orthodoxy and cling to it through thick and thin until proven “right.”

To the trader, this approach is equivalent to lighting one’s capital afire and watching it burn. The trader thinks in terms of probabilities, not certainties, and looks to charts as reflections of human behavior. A forecast is simply an assessment of probability, a snapshot taken in the present of multiple dynamics and timeframes.

The trader also offends orthodoxy, not just by refusing to place his faith in one camp or another, but in rejecting the entire notion that “big” global forecasts have any meaning in terms of making money in the here and now. The trader is aware of the various dynamics of hyperinflation, deflation, stagflation, biflation, “muddle-through” sideways markets, “stocks are cheap,” “don’t fight the Fed,” the potential collapse of advanced civilization, and so on, but doesn’t base trades on these dynamics.

Traders understand that the market, and indeed, human history, is fundamentally a highly complex non-linear system. Change the parameters or the inputs, and even small fluctuations can trigger outsized consequences.

As a result, forecasts of future events become less predictable the farther out in time we extend the forecast. Traders understand that X and Y might well occur in five years, but it’s difficult to distill that potentiality down to a money-making trade in the near term.

We all like being right and making money trading the markets, but the two are not identical. The adherent of orthodoxy finds the markets confounding when they don’t conform to the orthodoxy’s forecasts and explanations, and this frustration finds expression in confirmation bias; i.e., seeking data that supports the position and downplaying whatever doesn’t, arguing vociferously on the basis of financial fundamentals, and seeking external explanations for the failure of the forecast (manipulation, seasonal trends, and so on).

The one phrase you will rarely hear issuing from orthodoxy is “I was wrong and I’m radically changing my view.” It’s painful to be wrong; our human pride is wounded when our convictions turn out to be misplaced. It’s also painful to lose money in a losing trade, but when given a choice between the two, adherents of orthodoxy prefer to lose money rather than surrender their convictions.

Traders view convictions as a potentially deadly trap, and have trained themselves to find comfort in uncertainty and permanent contingency. It’s easier to jettison a trade than a conviction.

As a thought experiment, look at this chart and decide if it is bullish or not.

Does your view change if it is a chart of a commodity? What if it is a chart of a mining company, or a tech stock?

What if it is a chart of the U.S. dollar index, the DXY? Well, it is. How resistant do you find yourself to viewing this chart as unambiguously bullish? Do you find yourself seeking evidence that it isn’t really that bullish, evidence that “this looks ready to roll over and decline?”

In certain camps, it is an article of faith that the U.S. dollar is deservedly doomed to extinction. The trader accepts this as a future possibility, but does not see any tradable evidence of this possibility in this chart/snapshot of the past two years.

As traders, we are well-served by a willingness to seek evidence which undermines or challenges our positions, as this habit counteracts confirmation bias. As traders, we see probabilities for advance and decline in all charts, and the assessment isn’t about being “right” or “wrong” but about the higher and lower probabilities implicit in the chart.

Anything, including a bullish dollar, can become an article of faith in an orthodoxy, just as anything can become heresy.

If this chart is bullish, what does that suggest about the probabilities of future price action in the US dollar (i.e., the DXY)? In Part II: The Technical Argument for a Stronger Dollar, we use technical analysis to explore the case for a possible multi-year advance of the dollar from here. A key question for investors (especially gold bugs) to ask here is this: Whatever the probability, what impact would a sustained rise in the dollar have on your current portfolio?

Click here to access Part II of this report (free executive summary, enrollment required for full access). 

This is a companion discussion topic for the original entry at

[Moderator’s Note: Comment hidden]

 chris, please provide a response to automatic earth!!

A stronger dollar?
Repent or perish, Mr. Smith. I suppose next you will be talking trash to the goldbugs and peak-heads.

I’m feeling a little insecure in my role around here, lol.



Just when I thought I traded correctly by using my excess cash to buy gold, I now know I must sell all of my gold to trade into dollars.  Damn! 

The Right brain experiences the here-and-now. It passes this information over to the Left brain for analysis and model makeing. The Left brain then passes the model it creates back to the Right brain for Insight.
Well, that is how it is supposed to work.

Unfortuneatly, in the modern western mind the Left thinks that the Model Is reality, and refuses to hand it over to the Right brain. The right brain gets frustrated and in severe cases starts verbalising, leading the Left to hear voices, and giving pharmaceutical companies a chance to make money.

This is the result of education which aims to create models in young minds which it insists are the truth. Mandelbrodt, who is famous in the Chaos field of mathematics had very little education.

This is why we cling to our models of reality which should be as disposable as your previous exhalation.

Perhaps the ability to distinguish the difference between a model and reality will be sorted out in the next iteration of evolution.

The trader thinks in terms of probabilities, not certainties, and looks to charts as reflections of human behavior. A forecast is simply an assessment of probability, a snapshot taken in the present of multiple dynamics and timeframes.
I am very fond of this description.  Unfortunately I find too many in both inflation and deflation camps becoming too rigid in their expectations.  It's fine to be in one camp or another at any given time, but to carry a belief that prevents reconsideration or switching camps based on new information or emerging possibilities seems dangerous to me.  That's why both Peter Schiff and Stoneleigh tend to lose me at times... they both seem so convinced of their respective positions as certainties that I feel compelled to back away a bit. 

And while we’re talking about possibilities and probabilities for DXY… as others have mentioned in the forums before the DXY can easily see a ‘bull run’ and yet still lose purchasing power during that run.  All that has to happen is for the dollar to lose purchasing power at a slower rate than other currencies in the index…

  • Nickbert

Interestingly, Mr. Smith can be right about a stronger dollar as measured by DXY, & gold can go up.  The DXY is basically a measure of the USD against the yen, the euro & the pound.  Gold is simply v. the USD.  The DXY has been rallying for 2 reasons: 

  1. technical reasons (as investors/financial institutions unwind positions, they need to buy back dollars to payback dollar borrowings, which are effectively dollar shorts.)  this is b/c the USD is the reserve currency of the world.
    2)  The USD, in both the short & long term (IMO), is the healthiest horse in the glue factory.  In the short term, its b/c UK & Euro banks are worse off than ours.  In the long term, it’s b/c of the yen, euro & pound, the US is in by far the best shape as it relates to domestically sourced natural resources & military & sovereign strength (we have the best military & two giant oceans on either side of us.)
    However, if you read any history book on the great historic inflations, they never chart the price of goods in fiat…it is always the price of fiat in gold.  Even the Weimar Germany hyperinflation, where the charts are all measured against USD’s?  Remember the USD was backed by gold then…so that was the German paper mark v. the gold US dollar.
    So it is entirely possible, & in fact I would argue likely, that over time, the DXY rises and gold rises as energy supplies become more scarce (DXY b/c you want to bet on the guy with the most domestic oil & biggest guns in a scarcity, & gold b/c you want real currency in your hand the day the bond market figures out what peak oil means - that the world’s central banks are going to have to print every last dollar that’s been lent out to buy those bonds, b/c the energy to earn the capital to pay back the debt is NOT going to be there, per Dr. Martenson’s ongoing point.)

A Euro breakup would lead to a much stronger dollar, stronger gold in all but dollars and an oil price crash.  (X)Euro member countries would be forced to buy gold and dollars for settlement and to (re)establish their new curriencies.  They would be competing with panicing business and investors worldwide.  Europeon demand would plummet, triggering a sharp drop in oil demand there and in China. 
The strong dollar could lead to massive USA unemployment increases, domestic deflation and unrest, and then to massive dollar printing beyond that needed to (re)bailout shaky multinational banks.  Most governments and bankers lose in this scenario, so i doubt they will allow it to play out.  It is one way to ease the path for a world currency though, so who knows?

At the risk of offending all market technicians, most of what I hear from any of them is so filled with caveats ("if; but; however; of course; perhaps") that it seems like snake oil marketing.  A little common sense will inform anyone with a modicum of awareness that the dollar will go up as the Euro goes down.  Plus, if/when the Euro fails, there will be a liquidity crisis just like we saw in Oct 2008 leading to more dollar demand and (probably) more selling of PMs.
Of course, common sense predicting is only effective in the short-term, or the time frame that is likely to embody change as a result of current and/or immediately foreseeable actions or events.  Anyone who tells you they can accurately forecast the economy or markets further out than that is deluded or a scam artist.  It’s just too complex.

In our modern age of reliance upon the wonders of tecnology we often forget how to simply observe, analyze and conclude.   Predicting the weather is a perfect example.  One can easily observe the actions of a barometer and speed/direction of the wind to forecast changes in the weather with a reasonable amount of accuracy.  If the wind is increasing and the barometer is dropping rapidly, one had better batten down the hatches.  However, reliance upon technology can sometimes cause us to miss the obvious.  Forecasters used models to predict how hurricane Irene might produce wind and surge damage along the East Coast, but how many "modelers" predicted the inland flooding that resulted in so much of the total damage until it was already well underway?  Very few…because technicians were focused upon models rather than common sense.

My approach: Pay attention to the larger forces at work in the world, have a plan for dealing with them, then be sure to have a little something extra set aside for dealing with black swans.

Outcast 19

The money equation is "M * V = P * T" where M is Money Level, V is transaction velocity, P is Price level (the differential of which is Inflation) and T is aggregate real trade value indexed.   So we can see that Velocity is the unknown.  This variable has a lot hidden behavior in it as it is itself dependent for on the "Expectation of Inflation".  This is truly non-linear as it is an internal feedback mechanism with wacky behavior.

Mr. Robey, you gave me quite the chuckle. laughed out loud in fact. So I looked up at my world map hanging above my desk and applied your technique. Left side of my brain seen Canada in a recession, United States, recession, South America, commodity driven contraction, North Africa, Middle East, all trouble spots with the energy of the world at risk,  Australia, commodity driven cotraction, Japan is literally gone nuclear, Europe has the economies of the world holding their collective breath, and China with inflation, using lower than realty numbers and a housing bubble ready to burst. Then the transfer of all this information to my right side made me remember that Mr. Crapper invented the toilet. I kid you not, this was my very first thought. Gotta go. Tigers got the Yankees in 20 minutes. Thank you Lord for that. Good stuff your posting, I enjoyed it. BOB

Let me start by saying that I did not pour over nor understand all the details of the article. What I am struck by in most of these discussions though is the weighing in of the human factor. It looks mostly like a search for where "I" will find profit and security from the current situation. It asks which scenario will lead to my financial security.  But I wonder, where will this all leave humanity? I am asking:  Where will this end for all of us?  How can we take care of each other?  How little can I do with and how do I provide for myself and my neighbors. 
Maybe I am missing something in all of this. Please let me know. I find it all very discouraging. When I first watched the Crash Course I thought there would be more discussion on the future of the natural world and humans as a group, not how to profit from the demise.

I don’t mean to be so negative but watching the trader being interviewed by BBC the other day, I wondered where his emotions and caring had gone.


I think that worrying about money and tweaking capitalism/govt is far easier than building community and devining really a model for sustainable humanity.  We dont have a sucessful model for an sustainable human ( well really we do have a model that was sustainable for hundreds of thousands of years … … A small hunter/gather society), but we are going to resist that one for a long time, I feel.
In a world where markets are perceived as holding the truth, the BBC trader is in many eyes, doing what he should be doing.  THe fact is, it may be easier to short and long the market down the drain, than perform the radical change that might fix it.

He is correct, unless we see further QE. I´ve been saying this for two months now. We are going into stag-deflation. We all know what this means for gold.

right on target, it is obvious what will happen.Thanks you, it is comforting to find kindred souls.