Financial Sense Blog

Are there any dollar bulls left? Inflationists across the web are crying ‘victory’ as the dollar sinks and certain asset prices (especially oil prices, food prices, and the gold price) mushroom higher. To the level headed, you should exercise extreme caution against assumed fixed correlations like “weak dollar” means “asset price increases.” Correlations can quickly change.

U.S. retail gasoline demand fell last week following sharp increases in prices at the pump, MasterCard Advisors' SpendingPulse report noted earlier this week. Average gasoline demand dropped 1.8 percent week-over-week and 3.0 percent year-on-year according to MasterCard, declining for the sixth straight week. Pricing levels, according to the report, is having an impact on US gasoline demand.

Over the past few weeks Gold has traded at or near record highs. It has yet to embark on a sustained breakout but that is not because Gold is a crowded trade. In recent months money has moved into equities, Oil and Silver. As a result, some hot money and speculative money has moved out of Gold, leaving the market in a healthier state.

This coming May 16, the U.S. Federal government debt ceiling will be breached; that is, the national credit card—currently topped at $14,294,000,000,000—will be maxed out. (Yeah, I know: It’s one thing to read “$14 trillion” and quite another to see the actual number, written out with all those zeroes.)

We believe that continued U.S. dollar weakness may be a consequence of the diverging monetary approaches central banks are taking around the globe. While many international central banks have been on a tightening path, raising rates (i.e. central banks of: Australia, Brazil, Canada, China, India, Norway, Sweden, to name but a few), the U.S. Federal Reserve (Fed) has been conspicuous in its continued easing monetary policy stance. Indeed, while other central banks have been shrinking the size of their balance sheets, the U.S. Fed’s balance sheet continues to expand on the back of ongoing quantitative easing policies.

As the June 30 end of QE 2 approaches, the Markets are "Nervous". All but the Purblind recognize that The Fed’s QE has been The Primary Force inflating Equities and Commodities Prices for the past two years.

Modern Portfolio Theory, despite its popularity, is based on the faulty theory of preparing investors for the past - not the future.

Economic recessions have differences and similarities. In terms of the duration and depth of a recession, the most recent downswing in economic activity is a close cousin of the 1981-82 recession, which lasted 16 months. During this recession, real GDP fell 2.6% from peak to trough and the unemployment rate shot up to 10.8% by December 1982. The most recent recession is 18 months long, real GDP has dropped 4.1% from peak to trough, and the unemployment rate hit a high of 10.1% in October 2009.

How long it will take the markets to wake up to this simple progression is anybody's guess. Here we must fall back on a simple maxim that has served us well: anything that is unsustainable will someday stop.

I was asked recently for our official opinion on the topic of stock market valuations. My answer, in short, was, “yes.” Yes, the topic of stock valuation can become complicated and/or heated. Yes, stocks are clearly overvalued by some measures. Yes, stocks are only moderately priced by other measures. And finally, yes, they are even undervalued by others still. Thus, I’m of the opinion that this topic tends to be used by those analysts looking to either make headlines or to justify their positions.