November 8, 2007

Jay-Z Calls The Next Market Move

That's a still from Jay-Z's video, "Blue Magic."  The significance of the shot should be obvious to anyone, whether or not they trade currencies.  Why it's not obvious is the real question.

1.  Friend of mine comes over Monday night and says, "hey, I know you own Google-- I'm thinking of buying it.  And what about Euros?"

2. Did you know 7 countries are considering abandoning the U.S. Dollar?

3.  11 out of 12 experts vehemently believe the dollar is headed for collapse, or at least much further fall.  None of them tempered their opinion, or qualified it.  “The dollar has further room to fall regardless of incoming US data.”  “The dollar will keep falling in the near term no matter what.”

4. and, of course, Jay-Z uses euros in his video.  And Gisele Bundchen wants to be paid in euros, not dollars. 

And everyone is convinced that if even Gisele and Jay-Z are converting to euros, then that's it for the dollar.

Well, not exactly.

I have never been in a room, on the side of a trade, or in an argument when everyone- everyone-- was in agreement about something, and that something turned out to be correct.  The more people convinced of a proposition, of a certain mindset, the greater the likelihood that they are wrong.

Why does anyone think that Jay-Z knows when it's time to covert to euros?  But, to a man, everyone commenting on the blog that discusses the Jay-Z/euro link is bearish on the dollar.  I defy you to find anyone who is bullish on the U.S. dollar.  Everyone thinks it goes lower. (Interestingly, except Alan Greenspan.

People like Jay-Z, and everyone else in a situation of unanimous agreement, are what is known as contrarian indicators. So are cover stories in magazines.  When Time puts the iphone on the cover, you sell Apple.

aapl chart.JPG

Not forever; just until they stop talking about it.

When my friend, who knows nothing beyond the basics about trading stocks, wants to buy GOOG, then you sell-- until he says, "no way am I touching GOOG."

Here's why contrarian indicators are so reliable.  Most people say it is because "by the time" Jay-Z knows about an economic trend, the trend is over.  Implying that he is not smart enough to perceive the trend early. That's not exactly correct.  It's not  that he is late to a trend; it is that he is the last money into a trend.  For whatever reason-- lack of knowledge, lack of motivation, resources (including opening a trading account, etc) he puts his money in later than others.  But once he puts his money in, then there is no more money to put in.  If everyone has bought-- and everyone agrees on the rightness of their position-- there's no more money to put in.  So the trend ends.

This is true about everything, not just money. When every psychiatrist "knows" an antiepileptic mood stabilizer is the first line for bipolar in the absence of any evidence for this primacy, then you know it soon won't be.  When everyone "knows" a girl is a slut; when everyone "knows" X policy will do Y things; all these things should be tells that the opposite will be true.

Not always because they were wrong, mind you, but because they cause it to be wrong.  That's the key. It's not that Jay-Z is wrong about the dollar; it's that by investing in euros he causes a top in the euro.

I'm on record: I call a bottom.

(long gold, long oils, brk and aapl-- and dollars.  And I'm not touching the euro.)