You can’t really make a long-term bullish case for the buck right now. Sure, the dollar has had a strong rally recently, but that doesn’t change the fundamentals. We’re still looking at no interest rate hikes, a fiscal deficit that continues to grow, and weak consumption, thanks to an historic credit squeeze and real estate deflation.

And yet the buck has been getting a lot of love since early August – rallying nearly 8% against a basket of major currencies. What gives? Do global investors see positive factors we don’t? Hardly. Overseas investors are simply taking advantage of cheap dollar-based assets and 2009 growth prospects for the U.S. economy that are more compelling than for other major economies.

In short, almost certainly, what we’re looking at right now is not a new dollar bull market, but a cyclical bear market rally. That’s exactly what happened in 2005 as the dollar rallied 12.8% versus the euro and other currencies. But back then the Fed was raising short-term interest rates and the U.S. economy was still firing on all cylinders.

It’s quite a different story now.

In fact, the only thing that could keep the dollar rally going is a continued deterioration of other major economies while U.S. growth accelerates.

No More Passive Investing:
It’s Time to Short and Make the Real Profits

When the bulls rule, it’s pretty easy to make money in the stock market. That was the case from 2003 until mid-2007. But when the bears come out of hibernation, it’s a very different ballgame.

Since stocks peaked last October global markets have plunged more than 20%. Some bourses in the emerging markets are down more than a third. Chinese stocks have crashed 53% from their best levels last fall, Indian shares are down a third and Russian stocks more than 25%.

In short, it’s been almost impossible to make money in this market unless you’re a skilled short seller or capable of managing a portfolio of long/short equities. In this world, that’s a rare breed of money-manager.

Over the next several years, possibly longer, global investors will probably earn a higher rate of return by employing skill-based long/short equity hedge funds compared to index funds or exchange traded funds.

The long/short equity hedge fund is a rare breed. Investors must be careful because the majority of hedge funds coined “long/short” don’t even short! It’s almost a crime that these hedge funds get away with charging a 20% profit fee for lagging the index.

The fact is most long/short hedge funds don’t know how to short altogether and trail the markets’ long-term return. It’s a great business for the sponsors but horrible for investors. Be highly selective if you’re looking at these funds.

Meanwhile, avoid the growing universe of long/short equity funds available to retail investors in the United States. They stink. These products have posted poor results - mostly negative returns - while levying hefty management fees. Again, these guys have no idea how to protect a portfolio of stocks.

The era of passive investing with no market hedges is over. The next several years will be rough for global investors. Learn how to embrace short selling and hedging to protect your portfolio.