In a world gone mad - in a world gone broke - in a world ruled by the insane - in a world completely disconnected from its foundation - the stock market is now driven by currency valuation. A stock rally must have a weakening currency. A stock selloff must have a stronger currency. Thus, stocks have now become pure inflation puppets. The Dow Jones Industrial average must have a weak US dollar to stoke a rally. Nothing else matters.
For this week, I again bring back my favorite chart (below). It is an 8-year picture of the USD (US dollar) in green and the FXE (euro currency) in black. Please review it below.
Why is this so important? Because it looks like the dollar wants to strengthen and thus the Dow will continue to weaken. That is, of course, absent another miracle ‘end of the month PPT rally to make investor statements look better’. The US dollar and the euro are on a collision course. The dollar is at present rising and the euro is falling. I drew in a green line to approximate the expected top in the dollar appreciation. The black line shows the approximate level of the expected euro fall. For investors in the US, it looks like the dollar can rise at least another 5% or so. This will surely produce an 8% or better drop in the Dow. That would put the Dow in the mid-10,000 level where Bernanke and the boys jolted the Dow higher by 400 points in 45 minutes on October 4. If that level is to hold, the dollar (as represented by USD) must terminate its ascension at $84 or so. Otherwise, the rising dollar will function as stock market kryptonite and a bear market will no doubt surprise investors who believe government economic propaganda.
In the chart below, I also drew in three vertical red lines. All three red lines are approximately equal in length. Their purpose is to show that the USD and the FXE generally only move a certain distance apart before they have a reunion criss-cross. We can all see where we are in the cycle. The USD and FXE look destined to cross again very soon. Again, the ramification is the rising dollar will act as stock market kryptonite.
Aside from the obvious chart, we can all offer an opinion as to why the USD and FXE chart trends will intersect.
One, the european politicians are insane if they think the euro can survive without trillions of euros in sovereign debt bailout money. They continue to establish facilities to make this happen but none of the created facilities have the funding or the legal rights to offer trillions in bailout money. The ECB, the EFSF, and the recent IMF addition are all guns without bullets. The EU must follow the lead of the US and ignore established laws and legal rights so they can restore banker capital through the impoverishment of the citizens. The longer they wait, the weaker goes the euro and the stronger goes the US dollar. This is not good for stock markets. Only when the stock markets of the world looked poised to fall into the abyss will central banks act.
Two, which has a better chance of survival - the euro or the federal reserve note? I think we all know that our boy Bernanke has a nuclear powered printing press and he is not afraid to use it. The EU is in a battle with the Germans over the expansion of the money supply due to the fear of inflation. Again, they should just follow the lead of the US and simply lie about inflation. The longer they wait, the stronger will be the dollar.
Three, let’s see. The two biggest economies in the world, the US and the EU, are both broke and hopelessly indebted by tens of trillions. Neither will ever be able to repay any of their debts and those debts will continue to balloon. The third and fourth biggest economies in the world, China and Japan, loaned a good chunk of that debt to the US and the EU. They stand no chance of ever getting repaid. If central banks choose to print money to rebate the capital depleted banks, we will all end up under one sovereign governance. It will be named, ‘Zimbabwe II’.
Four, there will be ebullient data released over the next week or so about increased ‘black Friday’ sales in the US. Consumer spending and consumer confidence will be heading in opposite directions as will consumer debt and incomes but nothing matters but the story. And that story will be that the consumer is in great shape, he/ she is shopping their brains out, and the US economy is once again rolling. Well, of course it is. This kind of ‘good’ news inadvertently could work to strengthen the dollar. I guess we can’t have everything.
In summary, the last few days of November will receive some ‘monthly investor statement’ repair but then it looks like shorting the markets might be the real growth strategy over time to take advantage of a strengthening dollar. However, investors following this strategy must be wary of central bank intervention by way of 1) end of the month (November) rally, 2) PPT manipulation, and 3) ECB bailout announcements. Otherwise, follow the USD - FXE criss-cross and be set to cover the shorts when the USD pushes $84. Of course, I could be wrong. Maybe the PPT doesn’t really manipulate the markets. Maybe the PPT is like Santa Claus. Maybe the USD and the FXE won’t ever cross again. Maybe a strong dollar isn’t really stock market kryptonite. Maybe I really can jump to the Moon and get a piece of green cheese!
Past 8 years - USD in green, FXE in black
Chart courtesy StockCharts.com
Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.