The Next Scapegoats

That's precisely the concept behind the "magazine cover indicator" and other traditional gauges of herd-related activity. By the time a market story is accepted enough to be published on the cover of a general-interest news magazine, or, in today's media world, the message board, web site or business cable show, the real move has already been made.

Yet that's likely what's happening in the currency market, where the weak dollar, which we predicted one year ago would be the "Hottest Trade of 2006," has virtually plummeted lately, falling to a 15-year low against the pound and multimonth lows against most other major currencies.

If the average American is even aware of the trend, most of them don't show it, mostly because it has yet to receive the widespread coverage that other market events — most notably, rising energy prices — have received in recent years. I believe we're now in the midst of the short period that exists before the mainstream media decides to actually make it front-page news.

It goes without saying that market news first happens in the market, meaning that those of us who follow prices tend to know about trends long before the business press. A trend develops and it's ignored. It persists and will merit a short mention below the fold. Eventually it develops into an obvious (and easily explainable) headline and receives ample coverage in the general press. By that time, it's usually too late to make real money.

We've often written about how, more than any other asset, Americans are long dollars. The greenback is a source of national pride. We take it for granted that our currency is liquid, widely accepted and a desired store of value on the world's stage. As that value declines, the media will begin looking for scapegoats. Who do you think they'll find?

Given that so many hate capitalism, I predict that just as hedge funds and other opportunistic investors were blamed for causing the dramatic rise in energy prices in recent years, they will become the new national scapegoat for a plummeting U.S. dollar.

The speculators, they will say, are the ones who are purposefully driving down the value of our currency for their own greedy benefit. Anti-capitalists like the populist Bill O'Reilly or hotheaded Mark Cuban, both of whom chastised energy speculators, will call for limits on hedge funds' trading in currencies. The CFTC's Commitments of Traders reports will be scoured, and large speculators found holding huge percentages of CME foreign currency contracts will be brought in to testify in front of Congress, explaining "outlandish" profits made on the backs of Ma and Pa Kettle.

It will be spun just as the energy bull market was spun: Capitalists screwing the little guy. It will be portrayed as being unpatriotic and anti-American to sell short the buck. Money managers who admit to participating in the trade will be vilified as traitors actively working against the public good. With the 2008 election in the wings, grandstanding politicians will fall over themselves with outrage, calling for greater position limits, disclosure and regulatory oversight in order to prevent "manipulation" of the currency by Wall Street fat cats. As usual, speculators will be the most convenient scapegoats.

Of course, in a post-Enron, Sarbanes-Oxley-cursed country, capitalists are blamed for everything from high gas prices to insurance rates, from prescription drug prices to unemployment. If the market or a stock such as Overstock.com (OSTK) drops, it must be because of unscrupulous short-sellers and other aggressive charlatans.

Who won't be blamed? Not the politicians, who squander public funds on entitlement programs and worthless pork-barrel waste. Not the Federal Reserve which creates uncertainty and hinders free market trade. Not the regulators who stifle productivity, raise costs and encourage capital to flee offshore.

Nope — in today's increasingly socialist environment, they'll be portrayed as the white knights, riding in on horseback to save the helpless public from the Wall Street shysters out to trash the currency and ruin the little guy. That's the story we'll be hearing this time next year. You wait and see. You read it here first.