On November 5, 2007, it was reported that Gisele Bundchen, the world’s richest super model, told Bloomberg News that she would no longer accept payment for her modeling gigs in U.S. Dollars – she was only taking Euros. It was said Ms. Bundchen, who was 27 years old at the time, earns about $30 million a year peddling products like Pantene shampoo for the likes of Procter & Gamble and perfume for Dolce & Gabanna. The headline at Bloomberg was Supermodel Bundchen Joins Hedge Funds Dumping Dollars.
A few days later Gisele’s manager said she had never made any such comments. But the story sparked a furry of negative comments about the old Greenback and brought a story mostly confined to the financial media into the mainstream. That same month, a popular rapper named Jay-Z flashed Euros in his new video. The basic drift was Dollar days were over and it was time to make way for a new world order. From government officials to currency traders, from economists to academics – America was over. Back in those days, everyone was a real estate mogul and hedge funds were the smart money. We now know that the real estate boom was a bubble built on poor lending standards and too much leverage, some high profile hedge funds have closed their doors after severe losses, and one of the biggest and most exclusive hedge funds was just a Ponzi Scheme.
When financial news becomes general news, it can often mark an important turning point. Negative dollar sentiment climaxed right at the end of a long decline (-42%) in the U.S. Dollar Index. The Dollar peaked in 2001 after a long rally (+51%) that began in early 1995. Five months after Gisele’s comments, the Euro Index ($XEU) peaked and then declined (-23%) into the October 2008 lows. The Dollar Index ($USD) bottomed around that time and rallied (+27%) through March of 2009.
One method of investing, called ‘contrarian investing’, means doing the opposite of the herd. For instance, when every other commercial on TV is an infomercial for buying real estate it is probably not the best time to be buying real estate. This analysis can also apply to market bottoms. A couple of months ago, I was getting calls from people who said they had heard the Dow Jones Industrial Average (DJIA), an index made up of the 30 largest companies in the U.S., was going to 5000, maybe even 4000. The DJIA peaked just over 14000 in March of 2007. These calls were coming in March of 2009 when the index was under 7000. Contrary to general sentiment, the market went 2000 points in the other direction.
There is an old saying on Wall Street that ‘When the market goes on sale nobody wants to buy.’ It is a natural human behavior to be afraid when we sense danger. But a contrarian investor understands that the fear factor creates opportunity. Now I am just waiting for Gisele to say she will no longer be contributing to her 401K because the stock market and economy are so bad. That could be a good contrarian sign.
Written by Jason McMillen, Chief Investment Strategist, PPWM
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