It's All About The Dollar - Revisited
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, April 7th, 2011.
Most people just don't get it. They don't get the fact that nominal pricing of equities within a fiat currency economy suffering from increasing inflation will rise simply as a function of the decreasing value of currency units, and that this is exactly why stocks for example, are able to continue crawling higher despite worsening fundamentals and news. What's more, because the dollar ($) is the world's reserve fiat currency, and still the largest source of hegemony in the world, it's fate affects equity (including commodities and especially precious metals) prices not just in $ terms, but also in euros, yen, etc, given the impact is muted with offsetting differentials. Still though, now that people around the world realize this is a global affair, commodity and precious metal prices are rising faster than currency differentials against the $, netting real gains across the gambit as foreign central banks attempt to both keep up to the Fed's efforts and inflate away their own troubles (deficits and debt), all in the supposed interest of keeping economies running.
So again ladies and gentlemen, and to reaffirm this understanding, one would do well to understand it's all about the $ still in the financial markets today; and, that this condition will become even more acute as the $ loses it's reserve currency status, possibly as early as this year. The history of fiat currency life cycles suggest the $ should begin to have increasing trouble this year being 40 years now since Nixon went off the gold standard. And it's happening. And as you will see below, it will most likely continue as well, where on the most profound level, acceleration in this regard will occur when like periphery economies within the Western alliance, investors begin to reject sovereign US debt, a topic that was well covered in our last commentary. You would never know anything is wrong listening to our self-serving bankers however - you know - the guys we are supposed to trust with the fate of our currencies. For the $, all the double talk, ignoring the problem, and pathetic rationalizations will not help as increasing numbers realize they are holding a dangerously depreciating asset and attempt to get out of it.
And eventually this will grow into a panic. You should know and understand this as planning your portfolios effectively moving forward will depend on proper perspective, where although corrections will take place, deflation is not in the cards, which will surprise some pretty heavy thinkers. No, if anything stagflation will at a minimum worsen; and then conditions could possibly advance into shades of hyperinflation if a real panic out of the $ occurs. Therein, maybe prices will not be increasing 50% per month, which is the conventional definition of hyperinflation, but that won't matter because most people would be financially destroyed at 10% given present debt levels and what such an outcome would do to the cost of money.
Moving onto the charts now, and as alluded to above, technicals associated with the $ have now caught up to the fundamentals in this most auspicious year, where as annotations below point out, it's now in a position to collapse. This first chart gives us a shorter duration snapshot of the $ that shows the lower degree count, expected price path (down to 74 and then up to 81), and gold / SPX pricing, which is of course the mirror on the wall as the currency devaluation continues / accelerates. Also, it should be noted the corrective zigzag (denoted in red) that started in early 2009 is completed, making way for the $ to continue down to a more profound level. (See Figure 1)
In answering the question - how profound? - we offer this next chart spanning a much longer duration, pointing out the Fibonacci resonance related target off a neckline of 80 is 30, which would encapsulate the definition of collapse concerning the $ for most people. Here to, one should notice the matching a - b - c corrective zigzag now completed in red, along with the observation the $ has broken below triangle support, opening the door to those profound loses discussed above. Again, this is why any weakness in the equity complex in coming days will not be primary, but only cyclical and corrective in nature. (See Figure 2)
This is why both Dave and I are now talking about new highs in the stock market next year (believe it or not), purely as a function of the $. What's more, and evident in recent price action, even though sentiment conditions will be a factor at times, it should be understood this makes our put / call ratio analysis far less important moving forward, where as long as the $ is declining, like now, growing optimism towards stocks (any equity) will act only as an inhibitor, not a stopper. Thus, the most important thing to do moving forward will be to pay attention to the $ -- and hence - the title of our analysis today - it's all about the dollar.
I published this piece today, even though it's a month old because it's still timely, and also because it contains a very important message about the stock market moving into next year all should heed.
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Good investing all.