Categorize this as you don't need to ever have an original thought to understand the market.
A reader who I presume chooses to be anonymous passed along a photocopy from a text book that showed the German stock market going up dramatically during the beginning of its hyper inflation-mark devaluation days of the Weimar Republic of the 1920's.
The theory behind this was that stock prices had to go up a lot just to stay even, so to speak. I am in no way implying the US dollar will have that type of devaluation but the notion of a weaker dollar forcing stocks up just to stay even is a possibility. If it plays out this way, the extent to which the dollar does weaken would shape the details of how long this type of rally would last.
I could see the dollar going down by 10-15% and under this little theory, perhaps stocks rally short term by a similar amount before correcting. It would make sense for the resultant correction to go down further than the bottom of the recent trading range. In eyeballing a chart a move to below 1150 on the S&P 500 but not below 1100 might be a reasonable guess.
This would be unpleasant but not calamitous. I just can't buy into an everyone in the bunker scenario but a rougher recession than we've had over the last couple of decades does not seem impossible.
Remember, this is a theory.
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11 comments:
If the dollar does go down 10 -15%, I would expect rates on the 10-year Treasury to rise by a similar amount. I could certainly be wrong, but it seems to me that it would be hard for stocks to mount a 10% rally in the face of that type of bond market action.
your comment is intuitively correct but there are plenty of instances in history of rising rates and rising stock prices.
this may turn out to hold no water but a three-six month rally with rates rising does not seem like an absurd stretch.
The argument the Fed is expanding the money supply to prop up the stock market is getting more of my attention. The scenario is they are trying to avoid having stocks correcting at the same time the RE bubble bursts. They conveniently will no longer report M3 money supply.
With the huge defecits and imbalances looming, and massive unfunded liabilities, the game seems to be to repay the money due with cheaper dollars. Hiding the actual rate of inflation by using the rediculous core CPI numbers is another tactic.
The problem is it's just a taller house of cards that puts us at extreme economic risk when the buyers of our debt (China and Japan especially) no longer want to play the game. I'd encourage anyone to take a cursory look at this web site:
http://www.gillespieresearch.com/cgi-bin/bgn/
This game can only end badly, with interest rates taking a huge jump, crushing both the housing market and stock market far worse than they would have been without the Fed's meddling. I expect to see gold and commodities continue to do well and bonds to take a big hit. I'm in the early stages of a rotation to an extremely defensive posture. But even knowing how to be defensive in this environment is not straightforward, when dollar denominated holdings are not in favor.
GULP, I hope the magnitude is wrong.
Is the converse true? The dollar strengthened for years at a time during the nineties. If this theory is right, shouldn't the stock market have gone down?
i don't think the converse has to be universally true. My theory would only be that a rally lasts for a couple or a few months.
This is net a negative.
I guess it all depends on what the market is focusing on at that particular moment. In one comment, someone mentioned the dollar clibed in the 90's, and so did the market. The dollar climbed because the market was climbing. Everyone in the world wanted in on the equity rally. Only one way to participate if you live overseas.
I can't remember a time in the past 11 years that I've been a currency trader that there was an instance where the equities market rallied because of the dollar movements to the downside. Back to my original thought, if we were in a state of hyper-inflation, then that might happen. That would be the market focus at the time.
glad to see this whipped up some chatter.
Thanks David
This is becoming the longest cyclical bull market in history. A correction will happen eventually. 10-20%.
If interest rates are raised even higher than some banking event (hedge fund blow up or whatever will happen).
This plays out time and time again. I don't know why don't see it coming.
The fed intentionally overshoots. It's easier to overshoot and then start cutting rates again.
I think the next correction could be more than 20% because:
1) we're really close to setting a record for longest cyclical bull market ever. we've gone too long without even a modest 10% correction. The longer we wait, the more downside there could be because of people panicking.
2) the fed will overshoot wich generally leads to a correction anyway.
These 2 issues compounded could give us (who are more long term focused) a great buying oppurtunity.
I'm very diversified abroad - would be nice to bring some of that back home where I'm more familiar with things.
Pete
Pete I agree with you that a correction is overdue. But what puzzles me is this:
We have almost no inflationary pressure, neither in the US nor overseas. The Chinese Premier Wen Jiabao rejected an outward revaluation of the Yuan a couple of days ago. So, despite stunning growth rates and sky high import prices for commodities even the Chinese do not seem to concerned about inflationary pressure right now.
And as China and India are exporting deflation they need to export inflation (read: need to face inflation at home) for the US$ to tumble and US interest rates to raise. That will be the catalyst for a stock market crash.
At some point that will happen I believe but I have no idea at all about the timing.
The low inflation rates worldwide (even in Turkey, where I live and where inflation used to be in the 40-70 percents over the last decade) are the real power behind the bull markets over all assets and regions.
We are currently consuming the fruits of globalisation. So I would watch closely the retail prices at Wal Mart. If they start to increase their prices that could be the beginning of the endgame.
Halil (Antalya, Turkey)
I don't see why rates go up 10% as the dollar goes down 10%. If rates go up, the dollar stops falling. I think the government printing presses are going to continue in overheat mode. That means more money which means higher stock prices, and higher inflation but not higher interest rates. Interest rates go up when money is scarce.
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