Thursday, October 14, 2010

A word about the dollar and the stock market

I normally don't talk about economic considerations on this blog. But the current situation calls for a few words.

Six months ago there was hope that fiscal policy - government spending - would pull the U.S. (and the world) out of the recession. At the time various Federal Reserve governors were giving speeches which indicated that the Fed would soon start contracting its balance sheet and withdraw liquidity from the U. S. and world economies.

But now it seems clear that there is no hope of any more government "stimulus" either in the U.S. or abroad. Partly for this reason the Fed Governors have started talking about adopting a price level of nominal GDP target instead of an interest rate target to guide their policies. This sort of change would mean a lot more quantitative easing ahead, liquidity injections that would continue until economic growth resumed and unemployment dropped.

More liquidity in the U.S. economy means a lower dollar and a higher - much higher- stock market. You may not agree with the Fed policy, but if it is implemented you can expect to see the dollar index at 66 (currently 77) and the S&P at 1500 (currently 1170) within the next 9 months.


Kishore said...

No matter how much Ben Banker of the Central Bank prints, it is only going to his criminal bankster buddies.

With the criminal banksters soon behind bars, there will be no more buyers in the market.

Agreed that the Ben will soon be printing only toilet paper, it is quite possible the inverse correlation of toilet paper with the stock market will reverse.

There can be no inflation without increase in demand from the American consumer. The demand is crashing because of the aging boomers. Moreover, the supply of goods will keep increasing because of improved technology and globalization of capital and labor. The US labor will have no money to buy anything and the bankster pigs can only eat so much!

Printing by Ben cannot reverse the underlying macro trends that only spell deflation for the US.

Moreover, why side with the criminals, and put your own money at risk, for fighting the fundamentals that are totally against the stock market?

extrader said...


I totally agree with you on this point, and today if you look at the USD DX it is sitting right at support meaning it will prolly have a bounce or two and today the market is down... so from what i see and agree with ur point.... when the market is higher the dollar is down or vice versa!


Jack said...

Carl, How does this new Fed GDP approach (QE2-plus) portend for bonds? Thanks.

Kishore said...

Now that the criminal banksters have been pushed against the wall, the US can expect some black-mailing by these experienced and hardened criminals, just in time for the Nov. 2 elections.

Flash crash coming?

Carl Futia said...


Interest rates will go up a lot as the economy improves.

Kishore said...

Carl, "economy improves"? How?

The aging boomers will get younger? Productivity will go down with technological reversals? US labor will not have to compete with global labor? US congress will no longer be corrupt and create some real job programs? Lobbying will no longer benefit special interests at the cost of the country? US business will bring investment back into the US?

What is the basis for your unbridled "optimism"?

Shawn said...

Carl, please stick to your TA charts.

If you want, let's look at Japan. After 2 decades of printing and QE 5 + currency interventions 11 + 200% GDP debt to do all these, where is Yen?

Is it in toilet?
Is it Hyper-inflation?
Is Nikkei index now back over 33,000?
Is Japan economy booming?

Think .....

turtle said...

Interest rates that go up a lot will be a big problem down the road for the stock market ...

Carl Futia said...

My dear Shawn:

The dollar-yen is trading at 82, near its 1996 low of 78. This means that the yen is STRONG against the dollar, not weak. It takes fewer yen to buy a dollar than it did when the dollar-yen was at 124 a couple of years ago.

This is why the Japanese central bank sold a lot of yen against the dollar in mid-September.They wanted to drive the yen down against the dollar to help their economy - and this pushed the dollar-yen rate UP to 86 or so.

You, sir, don't know what you are talking about.

The Japanese central bank has emphatically NOT pursued a policy of quantitative easing. To the contrary, they are pursuing a deflationary policy and are happy to have a strong yen in the bargain. Why?

The Japanese population is aging - old people have a lot of political power in Japan - and old people are creditors,not debtors. The LIKE deflation.

janet said...

I totally appreciate Carl's thoughts on the economy and I'm offended that some jerk would tell him to stick to TA. Thanks Carl for all your thoughts and analysis.

Adsense said...

hey janet
dont be offended by a non offensive statemnet , carl your point on deflation is something i dont think many people realy think through . japan was a creditor nation as is china today as was the united states was back in 1929-1930's today we are a debtor nation . taking politics asside though and looking at the market
im still seeing the ealy november period as a pivot point in terms of time , and even though there is a bullish case to be made which is valid this market is in need of a pause , from my own work this market shiuld be turning to the downside and i find many cycles pointing towards mid feb to may 3rd 2011 as cycle lows not highs . gold apears to be coming into trend line resistance near the 1400 level and the rally from the 2008 looks to be a monthly 5 wave move .
i do realise gold can extend as can stocks but to be honest i dont like to fight my own work which is exactly what im doing if i take a bullish bias at this junture
all that said , the market is always right ,we all just try to call the swings and weather right or wrong the market is right always . the political spin i suppose given the early nov timing point would imply the republicans give the impression that they will actually cut spending .
bottom line i want to be bullish but at this moment have a hard time justifying it

Jack said...

Carl, I like alot. I hope the Republican don't try and fix things.
The markets will slow and trading will become much harder.
Yeah, for high interest rates and big price swings!

springheel_jack said...

Hi Carl,

Love your blog by the way.

I'm a bit confused by your comments about USDJPY. I have the low in 1995 at about 79.7:

Digger said...

Any positive effect on the market will probably come from misinformed inflation expectations since QE is inherently deflationary as it deprives the non-government sector of interest income.

Ben Bernanke continues with his flawed neoclassical policy responses like lowering interest rates and QE because he has not yet understood that the so-called money multiplier model is inaccurate and that we do not have a fiat money or fractional reserve system but a credit money one. If he did understand he would be telling Congress they need to increase spending and/or cut taxes and start hiring until employment hits desired targets. See Steve Keen's Roving Cavaliers of Credit and L. Randall Wray's The Endogenous Money Approach for more detail.

Keynes understood that in a credit money system, the willingness of the non-government sector to borrow limits the amount of money a central bank can put into circulation. What Keynes mostly ignored was the devaluation (or inflation if you prefer the bankers' euphemism) caused by paying interest on the constantly rolling over debt.

If you have a US dollar in your pocket or financial account it is ultimately because the Federal government deficit spent a dollar more into existence than it destroyed by taxation. The only other source of money is banks loaning money into existence but that money disappears when the loan is paid back. This new tool may help see the effect of different actions:

If you want to help the economy, do not vote for anyone that wants to balance the Federal budget, as they are lagging reality by at least 39 years and clearly do not understand the monetary system.

Do you really think it is a coincidence that the Federal budget surpluses from 1997-2001 were the largest and longest since 1927-1930?

Counter Insurgency, Deficit Terrorist Unit

kcounty said...

Carl - is this what your were referring too:

Digger said...

More commentary on QE from one of the few that understands monetary operations.