US Dollar Weakness Outweighs US Stock Market Gains

Checking is not as easy as reading the headlines. The problem is that everything floats. It is like trying to give the precise location of a cork, bobbing in the North Atlantic. The wind blows it. The currents carry it along. The next thing you know, it’s in Cape Town.

So, when the Dow hit a new record high on Monday...we had to ask: relative to what?

In dollar terms, the Dow has never been higher. Stock market players feel pretty good. The major Wall Street firms are telling clients that the good times are still ahead. Even Alan Greenspan says the credit crunch is easing off.

Now that the Fed is handing out more money...happy days are here again! Not only is the Dow up, but commodities are down! Oil is still over US$80...but lower than it was a few days ago. The euro is still over US$1.41, but lower than it was last week. And gold got whacked on Monday...but wait, it is still a lot higher than it was a year ago, or the year before that, or the year before that...

What makes stocks valuable is that you can sell them and use the money for things that you want. You can’t eat a share certificate. You can’t live in one. You can’t drive one to work. All that really matters (apart from dividends) is how much you can sell them for, and what you can do with the money.

Well, five years ago – at the very bottom of the correction – you could have bought more oil with your share proceeds than you could today...about twice as much.

And wheat? Yes, more of that too – a lot more.

And gold too, of course. Taking the Dow from its peak in 2000...to its new peak in 2007...you still cannot buy as much gold with your Dow shares as you could have seven years ago. In fact, sell your shares today, even at higher prices, and you’ll get only half as much gold.

Stocks may be going up...but the currency they’re quoted in is going down even more.

And now Bill Gross, head of the biggest bond fund in the world, says he thinks the Fed’s cuts are just beginning. He believes the housing problem will not go away anytime soon...and that the Fed will be forced to take another percentage point off the fed funds rate in response.

Good news for stocks? Many people think so. Lower interest rates are usually good for equities. And many think a lower dollar will be good for US exporters too. US prices are cheap and getting cheaper. Soon, America will be an export-led economic powerhouse – like Japan or China! Soon, people will be buying US-made cars...our perfumes...our liquor...our computers...our gadgets. American business profits will rise. Wages in the United States will finally go up. And stocks will rise too, as earnings skyrocket.

Anything is possible. But our guess is that the dollar will go down faster than America’s stocks will go up...if they go up at all.

Nor do we imagine that all those other little corks bobbing around in world markets are going to sit still while trillions of dollars’ worth of dollar-based assets get wiped out by inflation. More than likely, they’ll dump dollars...recycling their own money into their own economies...

...forcing up real US interest rates...even as US financial authorities try to hold down nominal ones...sending the United States into a severe slump!

Bill Bonner
The Daily Reckoning Australia

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