The foolish allure of conventional wisdom.

"Another sentiment indicator is the media because they are invariably focused on what just has spectacularly happened (because that is what makes a good story) rather than what is about to happen. For years Business Week cover stories have been wonderful contrary indicators, and in fact, one friend of mine subscribes to the magazine for just that mason and has a cover collection. The rest of the print and TV business press also are notorious pilers on. A classic case was during 1979 to 1981 as oil prices and inflation surged. Numerous books were published by experts forecasting hyperinflation, depression, and a collapse of the dollar. At one point, seven out of the top ten books on the bestseller list were about inflation and how to survive it. Even wise investors like John Templeton gave speeches saying 7 percent to 8 percent inflation was inevitable. Of course, decades of disinflation, not inflation, were about to occur, during which both stocks and bonds would soar.

The most recent example was in December 2004 when the dollar was at its low. The Economist, probably the most respected business magazine in the world, ran a cover titled "The Disappearing Dollar." Shortly thereafter, Newsweek had a cover, "The Incredible Shrinking Dollar." There were numerous articles about how Warren Buffett was short the dollar in huge size, and another famous investor said being short was "a slam dunk." Wall Street economists ranted and raved about the twin deficits, a bearish book by the highly regarded Pete Peterson entitled Running on Empty was a best seller, and hedge funds were a record short the greenback.

I confess I succumbed to the madness and was short the dollar as well. So what happened? The dollar bottomed in the midst of the frenzy and began a powerful rally that elevated the DXY index almost 10 percent. Leveraged speculators were crushed. Of course, now that the dollar is up, everyone has figured out all the reasons it should stay strong. Euroland is splintering politically, U.S. short rates are higher than euro bloc and Japanese short rates. U.S. growth is stronger, the Fed is still tightening, and the twin deficits are beginning to shrink. In late spring 2005. the new media craze is the alleged housing bubble and how soon it will bust with God-awful consequences. All the same, suspects are warning of imminent disaster because real estate is a gold rush and a gigantic bubble. The cover story of the April 11, 2005, issue of good old reliable Business Week was "After the Housing Boom: What the Coming Slowdown Means for the Economy and You." Fortune, Worth. The Economist. and the New York Times have all joined the chorus. I wonder."

--from Hedgehogging by Barton Biggs (John Wiley & Sons, 2006)