Don’t Be Fooled By The Dollar’s Recent Rise – It’s Still Going Down Much More

The U.S. Dollar has been on a tear over the last few weeks. And many mainstream pundits are calling for the renewal of a dollar bull market.

But I don’t think that’s going to happen – here’s why. . .

To start, there’s an economic theory coined by George Soros called ‘Reflexivity’ and it’s actually pretty useful.

The gist is that perceptions drive reality – which in turn creates a feedback loop. Think about it as a self-fulfilling prophecy. 

The perceptions you have to make can make you act in a certain way which will change the fundamentals of things.

For example, if everyone thinks there will be inflation, they will sell their dollars and buy hard assets. Which in turn pushes commodity prices higher and yields higher – thereby creating the very inflation they’re worried about. 

Financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. This is the principle of fallibility. The degree of distortion may vary from time to time.Sometimes it’s quite insignificant, at other times it’s quite pronounced…

…Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced.” – Geroge Soros

Sometimes peoples perceptions lag reality – like when people think inflation is going to be worse than it really is and over-react.

More importantly – perceptions are fickle. The crowd’s view of things can change in a blink of an eye.

Reflexivity is known as a difficult theory – so don’t worry if it seems too much right now. The point is, peoples opinions can change their reality temporarily until they can’t justify it any longer.

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Disclaimer: The piece is from my original write-up at All ideas expressed and charts are my own.

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