It’s all about the dollar
Posted by Ray on October 27, 2009 under Main | 
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The market has not been able to hold a rally as the dollar strengthens which shows that the 60% rally we witnessed was purely liquidity driven. Essentially, the Fed, in their infinite wisdom, decided to drive investors out of less risky assets into high risk assets in order to re-inflate the asset bubble. While the Fed was busy pumping money into everyone’s pocket, except for the peoples, it has cost the dollar much of its value, or so you think.
Actually, the dollar is not near its lows of 2008 yet, but when the DXY was at 89 and it fell to 75 it felt like it plunged in value and had me concerned. I am still very concerned on a long-term basis, as I see a runaway government with deficits as far as the eye can see, but since everyone and their grandmother was short the USD, it was a given it was going to go up. Since this rally was a liquidity weak dollar rally a strong dollar will drive equities down along with commodities, which I wrote about on Sunday night I believe. As predicted, we had a super rally in the dollar and stocks got clobbered along with commodities and I suspect that will continue for a little while as the dollar rally will soon turn into a fear driven rally.
Whether I or you like the dollar long or short-term is irrelevant as the US government guarantees return of principal. This explains why at one point in time people were paying negative interest rates to the US government to buy short-term treasuries during the crisis. It was worth it for the comfort to know you were going to limit your losses because at that time you did not know if your bank was going to open its doors the next day. Do any of you remember that? Anyhow, this strength in the dollar will create selling in equities, just like a weak dollar drove the risk trade.
This explains why I stopped buying gold and this explains why I got short the market well over a week ago. It is not that I am perfect or a psychic it is just that things change, quickly. The dollar is not going to go in one direction forever and stocks do not always go up. It is also clear to anyone who is paying attention to fundamentals that the market is so far ahead of itself it is bordering on insanity. Valuations do matter and we are at a point where the valuations are just way out of whack with what is real and people are setting themselves up for real pain by not realizing this now.
If you do not pay attention to the things that are happening on the fringe of the markets, like the dollar, then you will miss the things that matter the most and impact your portfolios the most. Long-term the dollar will decline unless Washington gets their act together, but they won’t, so be bearish on the dollar long-term until proven differently, by the way that long-term bearish dollar outlook is also bearish on US equities as well. However, a short-term outlook is completely different and driven by the here and now so don’t confuse the two. I could be wrong about what I think is going to happen, but so far, I am right on the money and I think we are headed for more downside pain in the very near-term.
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