Monday, November 14, 2011

The Big Picture (aka the dollar as the key indicator)

Guest post: PonziFinance

It is the author’s firm view that currencies, especially the $ hold the key to all risk assets. It wasn’t always like this as the attached chart of the trade weighted dollar index (DXY) versus S&P 500 index (SPX) shows. DXY (as a proxy for the US Dollar) USD and S&P 500 moved in tandem from 1994 to about 2003 as the country’s fortunes rose and fell in sync with underlying rise and fall in economic growth and productivity. Following the 2002 NASDAQ (and stock market) crash, the Fed began engineering what I view as a “fake” recovery based on proactively weakening the US Dollar. This helped hide the underlying structural stagnation by building the foundations for a debt fueled recovery. As this process came to a head in the subprime debacle in 2008, the dollar rallied hard as risk assets crashed.
Since then, the Fed has tried to engineer the same “fake” recovery by printing countless trillions that have buoyed all risk assets since the “recovery” began in March 2009. It is my view that this is yet another “fake” recovery and therefore unsustainable. This theme will stay with us throughout my posts as we explore the ramifications of a weak $ recovery that the Fed tries to engineer (yet again!).

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