I've been saying something along these lines for quite a while. What initially inspired me was Martin Armstrong (unofficial site here) and his description of capital flows in his writing. Of critical importance was the observation that currencies and markets show distinct signals when they rise and fall. This is most pertinent in this article. Fascinating stuff...
"The real kiss of death for the stock market is when the stocks and the
U.S. Dollar decline simultaneously. Remember when the dollar declines
the stock markets are supposed to inflate and trade higher. Therefore,
if the U.S. Dollar and the major stock market indexes decline together
that is telling us a much larger problem is taking place. The major
problem would be deflation to the highest degree. During the 2009 rally
the saving grace for the stock market and the leading catalyst was that
the declining U.S. Dollar. As the dollar dropped most stocks and
commodities inflated much higher. Just look at how the leading
commodity stocks such as Freeport McMoRan Copper & Gold INC
(NYSE:FCX), United States Steel Corp (NYSE:X), and Rio Tinto plc
(NYSE:RTP) traded in 2009. These stocks soared on the back of the
weaker U.S. Dollar. Since the dollar rally in 2010 these leading
companies have struggled greatly.
When the major stock market indexes decline with the dollar and gold
use caution because this is a signal that cannot easily be fixed.
Deflation is a very powerful force that few understand. Over the past
100 years in the stock markets it has been inflation that has propped
the stock markets, housing markets and the price of a movie theater
ticket higher. When the market can no longer inflate on the back of the
weaker U.S. Dollar beware."
The Real Kiss of Death - FocalEquity
right on, rati. I was just reading binve this weekend, and he says the same thing.
ReplyDelete(http://marketthoughtsandanalysis.blogspot.com/2010/07/us-dollar-count-updates.html)
one of my bugaboos is the correlation thing. when someone says, 'well, x is going up so y is going to go up/down' it always makes me a little nervous. they can be right for periods of time, long or short, but it still makes me nervous. we're entering a period where a lot of things people are used to will begin to break down, and that could start at absolutely any time.
btw, the next four weeks or so might be absolutely insane in a number of markets. the recent swings were just a warm up!
--dark