Stock Market Rally or Dollar Devaluation?
August 21st, 2009By David Goldman
The chart below shows the SPX (vertical scale) vs the dollar bullish ETF UUP (horizontal scale) for the year to date:
Fully 80% of the movement in the S&P can be explained by the movement in the dollar index.
Statistical analysis confirms the visual impression that the two variables are moving in lockstep. In the chart below we see the rolling three-month correlation between daily returns to SPX and the dollar bullish ETF UUP, which mimics the dollar index DXY.
Something ominous is at work here. Typically, a stronger dollar goes together with a stronger stock market. That is what we observe prior to the bank bailout last fall. Starting in the third quarter of 2008 and going to the present, the correlation turns sharply and persistently negative. A cheaper dollar means higher stock prices, as US assets are marked down for global investors.
What we have is not a stock market rally but an adjustment to global market prices. Fully 80% of the movement in the S&P can be explained by the movement in the dollar index.
That is a profile well known to emerging market investors. Whenever the Brazilians would pull another currency devaluation, stock prices rose to compensate, as tradeable assets floated up to world market prices. The bank bailout has made Americans poorer relative to the rest of the world and created the illusion of a stock market recovery.
That does not necessarily mean that inflation will return to the US, as some analysts believe. Foreign investors are not likely to buy homes in Cleveland (although the dollar devaluation certainly should help real estate prices in New York or San Francisco). And the combination of high unemployment and deferred retirement (greeter jobs at Wal-Mart will be in great demand) will keep wages down. The price of international tradeables, though, will affect US inflation, which is why I continue to recommend classic commodity hedges (including gold and oil) rather than TIPS.
August 24th, 2009 at 7:05 am
Of course, stock are not going to recover in real terms for years to come. Buy oil, metals, guns and arable land. Or relocate yourself to Scandinavia. The Golden times have gone. There´s just not enough resources for nearly seven billion people(and rising) on this planet. Unless some really big discovery happens.
August 24th, 2009 at 9:36 pm
Kaiten, I will be all too happy to buy your house when you move to Sweden! Chip PS, Dodger will throw you a farewell party, too.
August 25th, 2009 at 5:32 am
Thank you Chipster for validating my post. I do appreciate it. Getting rid of something/someone, I dont agree with is not really a progressive way of thinking. So I was right after all. US has its golden times behind and is going backwards.
Anyway, I only accept hard currency, like euro, swiss franc, norwegian krone etc. No banana dollars, no california pesos.
Cheers.
August 25th, 2009 at 7:45 am
Ha — yes, I will be happy to throw that party. My gift to Kaiten will be Bruce Bawer’s book, “While Europe Slept.”
August 25th, 2009 at 8:28 am
Oh, thanks, Dodger. Appreciate it. I see you know me already. Excellent choice. I do love sciencie-fiction packed in comedy genre. I´ll have a lot of fun reading it. Now, what shoud I give to you? … mhmm… let me see … oh, I know already. My gift will be a historic map of Mexico from early 18th century. Dont worry, you can update it easily. You only need to rewrite 18th century for 21th century and it´s going to be the actual map just within a few decades.
Until then, you can continue mastering your Spanish.
Hasta Mańana
September 1st, 2009 at 7:18 pm
Question for Mr. Goldman,
With the recent election of a pan-Asian government in Japan, do you think this is an indication of Japan’s shift from reliance on the US to China? It seems that China lacks the industrial efficiency and management techniques that Japan is renowned for, and that Japan will be lacking the stable supply of workers that China readily provides. If China opens up the financial market, it seems the Japanese have the most to gain, as their industries are in the best position from a cultural to geological standpoint to integrate operations with Chinese industries to compete against Western firms. I read your fantastic article “Road to recover for the US runs through Beijing”, and my opinion is that it applies even more to Japan than it does the US.
September 2nd, 2009 at 1:04 pm
I think it was 5 or 6 years ago the Economist ( I’m pretty sure it was the Economist but I am not a paid subscriber to do a real search) ran an article about manufacturing and China. The points I remember are that Japan still has the brand names and that China is just a labor center that, in theory, could be replaced buy the next country with ultra cheap labor. I think this is why I like the analysis in Mr. Friedman’s (Stratfor) book. Japan still has the quality label and can use the labor from the Chinese coast or anywhere else in Asia that meets the cheap labor/good political stability mix.
September 10th, 2009 at 6:26 am
Observer,
Japan will never find China a substitute for the US because the Chinese will never quite trust the Japanese. There is still bad blood over World War II. That’s why the German car companies do better in China than the Japanese. China will loom larger in everyone’s export profile, to be sure, but Japan is far from being able to reduce dependency on the US market.