The Globe and Mail, Report on Business
Published November 26, 2010

By Tom Bradley

In investing, it’s easy to mistake a transient trend for an eternal verity.

Right now, for instance, many investors are tacitly assuming that China will grow at 10 per cent forever. Same goes for the notion that we’re running out of oil, that gold is the best store of value, that Japan will never grow again, and that the U.S. dollar has nowhere to go but down.

But are these facts to be counted on, or risks to be continuously assessed?

The latter, I think. Persistent trends are not investment truths, although the longer they go on, the more likely people are to treat them as truths, at least temporarily. With every year that goes by, current trends get more entrenched in our minds as evidence accumulates in their favour, and alternative outcomes move beyond the limits of our memory.

In today’s market, all of the trends mentioned above are moving toward what I call “truthdom” – a situation in which people accept recent market movements as enduring truths. Last week, for instance, during a trip to Arizona, I encountered firsthand the overwhelming pessimism surrounding the outlook for the U.S. dollar – it’s now a generally accepted truth that the greenback must weaken.

That is part of the wider pessimism regarding the United States. I won’t pretend to have garnered any profound insights on the golf course or in the basketball arena, but a few things did scream out at me. I learned that, at 36, Steve Nash is still amazing (a new son, a divorce and two wins while I was there). I also learned firsthand that the U.S. economy is as bad as we hear it is. Our neighbours have got a long way to go to get back on the growth track.

But most striking of all was the in-your-face proof that the U.S. is unbelievably cheap, and it’s not just real estate. Wine, food, clothing, green fees – and did I mention wine? – are bargains from a Canadian perspective. I’m not much of a shopper, but I had to buy a few things at Safeway just to satisfy the value investor in me.

It was a huge contrast from just a few years ago. In my usual winter hangout, Whistler, the economic force back then was the Microsoft millionaires. Our U.S. friends from Seattle and beyond were using their strong dollars to buy condos and build palatial lodges. Even the most expensive spot in Canada was a bargain for them. Now, the situation is reversed.

My southern experience confirms what the economic numbers are already saying. After a significant decline, the U.S. dollar has moved into undervalued territory. The standard measure for valuing currencies is purchasing power parity or PPP, which measures the point at which different currencies have the same buying power in each country. PPP is now suggesting the loonie should be trading in the range of 81 to 84 cents (U.S.).

In the context of truths and trends, what can we take away from this?

In the short term, not much. The U.S. dollar could continue weakening for a while longer. Currencies can trade significantly above or below PPP for many years. Certainly the greenback’s valuation reflects a lot of the bad economic news, but it is by no means extreme.

In the long run, however, the risk of making a bet against the U.S. dollar has gone up. If the PPP figures are right, the U.S. dollar has more upside than the negative sentiment around it would indicate. If the greenback were to decline further, it would have to do so from an already undervalued situation.

The U.S. is still the world’s safe haven and therefore a good diversifier in times of crisis. Those who say the dollar has nowhere to go but down need to be reminded of what happened in 2008 when the banking crisis hit – the greenback shot up, pushing the loonie below 80 cents.

Investors should treat the noise around the currency wars and quantitative easing as a sideshow, and instead start thinking about what the loonie will buy. Opportunities to purchase hard assets in the recession-ravaged U.S. are at hand. As a result, I recommend you follow my lead and do a little southern sleuthing this winter.