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How the stock market is able to remain elevated at, or above, all time highs (depending on which index is being considered) is simply beyond me. Massive flows of liquidity are blasting into the stock market from somewhere, somehow. Meanwhile, back at the ranch, the US press was, as usual, furiously trying to soft-pedal the now worrisome weakness in the US dollar. Here’s the spin Business Week applied to the ugliness:
Don’t worry! Europe isn’t! That seems to be the opinion of this particular Business Week writer and his editors. Meanwhile, this is how it was being played over in the UK press:
It could just be me but I think I can detect a slight difference between the two articles. So let’s take another look at that USD chart we viewed last week and decide for ourselves how Old Uncle Buckie is doing. When viewing the chart below keep in mind that ‘everybody’ was expecting the dollar to rebound after that horrible 2-day slide from Thanksgiving week. It did not. Things got worse. [note: This is a daily chart so each bar, or candle, is a day. Last week is represented by the last five bars, two white and three red]
Ugly. That’s some bad action right there. No recovery at all. We’re still a couple of points away from the ‘danger zone’ at 80.50 but this past week did nothing but confirm that the dollar is under severe strain. What we don’t know, out here in the cheap seats, is what’s really driving this decline. The US news does its best to ‘explain’ such movements by linking the dollar movements to recent happenings like weak US manufacturing data or weak holiday sales but in my experience such news has nearly zero predictive power for actual movements in the US dollar. For example, it is not uncommon for the US press to report that the dollar went down because of weakness in some reported data set one month, only to state the opposite the next month. The point is that the US press feels an obligation to provide ‘an explanation’ but usually never does. I believe that for the past several years the US dollar has gone up or down for one primary reason and one reason only; foreign central bank activity. Which foreign central bank is number one on that list? That’s right, China. And have there been any recent news reports that might help us understand why the dollar has been stumbling? I’m glad you asked:
Monday you say? You mean this Monday after two weeks of dollar hell? Geez, it’s not like the US is planning to approach its largest creditor with a huge list of demands that might cause that creditor to ‘send a little message’ in advance of that meeting, right? What? That is the case? That doesn’t seem too smart:
When I read the above, I think about the US hemorrhaging in every possible way in a dreadful Middle East conflict, a debtor nation without parallel that has squandered massive amounts of international prestige but now sees fit to ‘pre-sell’ a trip to it’s largest creditor trading partner with an exhaustive, if not petulant, list of demands. Search though you might, you will not find a corresponding list from the Chinese side. Why? Because that would be bad diplomacy and the Chinese are careful diplomats. I can only imagine how steamed they are over there right now. Oh to be a fly on the wall at those negotiations. In the face of all of this, the stock markets continue to trundle along as if there wasn’t a care in the world. One area the stock market has allegedly drawn some comfort from is the government inflation data, which shows inflation backing off pretty sharply. The twisted logic of the stock market today is this; lower inflation will lead the Fed to reduce interest rates, which will translate into cheaper borrowing costs, which will lead to even more consumer borrowing which is ultimately good for the stock market. It’s a logic train that only Rube Goldberg could love, but that’s what we’ve become as a nation…everything hinges on our ability to borrow ever more at ever cheaper rates. However, as you know I am a huge critic of the way that our government collects and reports inflation numbers and I think the stock market is making a huge mistake in believing the ‘official inflation numbers’. For example, in the most recent GDP announcement it was reported that food costs are up 2.4% over the past year. Hmmmm. Could they have forgotten to include the cost of orange juice which is up not 2.8%, not 3.9% not even a horrendous 9.2% but rather 66.0%(!!) over the past year?
In fact, this is not an isolated example. The following links to charts of all the major grain types reveals similar patterns. I wonder how food costs can be said to be up 2.4% when the actual price increases are up over 15 to 30 times that amount? A fair question, to be sure. Continuing into other basic materials I cannot find any that even remotely correspond to the government’s numbers These charts show, in frightening and graphic detail, that inflation is running at anything but the ~3.3% that the government recently reported. The bottom line to these charts is that inflation is actually raging along quite nicely, thank you very much, and I sincerely doubt that the Fed is going to be able to reduce interest rates because of low inflation. Instead the Fed may be forced to combat a severe economic slump initiated by a housing crash by slashing interest rates but that would then cause the dollar to decline even more sharply (since high interest rates support a stronger dollar and vice versa). Hence the Fed is stuck between the proverbial rock and a hard place. Lower interest rates risk a severe dollar decline, but higher interest rates assure a recession with American citizens as poorly positioned for a recession as they can possibly be. What to do…what to do? I predict the Fed will display their stupendous bureaucratic sclerosis and employ the vaunted ‘deer in the headlights’ strategy, which will manifest as a non-decision at their next meeting. Interest rates will remain unchanged. As for stocks…look out below!
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