The one thing I wanted to take a look at today is the dollar since the market collapsed back in October:
As you can see above, the dollar has pretty much collapsed since the market started rallying in March. I find this to be an interesting phenomenon.
Traditional thinking would tell you that this makes no sense:
Back when the world made sense, a strong currency was the base of any country with a strong economy. This makes the recent rise in equities even more suspect in terms of fundamentals in my view. If things are so rosy then why isn't the dollar strengthening?
Supposedly Europe is in much worse shape then we are. If this is the case then why the COLLAPSE in the dollar versus the Euro?
What does this all mean? The way I see it, the world is slowly getting away from the dollar and diversifying into other assets like gold, oil, and other commodities.
The deflationist's have been calling for $800 gold for months now and it hasn't happened. Gold continues to rally on any pullback.
In my view, the reason this keep happening is the Fed's policies are hell bent on destroying the dollar. In fact, I think the Fed behind closed doors is praying that the dollar gets devalued because it allows us to inflate out of our debts more easily. They would never admit this of course.
The Bottom Line
No economy ever flourishes with a collapsing currency. The Fed continues to spend like a drunken sailor as they bail out anything and everything that's about to fail. This continues to put relentless pressure on the US Dollar.
Until the "bezzle and the bailouts" are cleared from the system, I expect the dollar to continue to trend downward. Let's be honest here, no sane FCB wants to own the currency of a country that has both a weak economy and is trillions of dollars in debt.
The only thing that's saved the dollar thus far is the FCB's have continued to store the majority of their reserves into treasury holdings . They essentially blow themselves up if they bail on the dollar because of their treasury exposure.
What we need to start realizing is this doesn't HAVE to be the case. China appears to be gobbling up hard assets all over the place. Other FCB's continue to demand alternatives to the US dollar. I am not sure we will ever find one, but that doesn't mean the dollar can't collapse as the world diversifies its assets.
You need to ask yourself the following:
Why is oil rallying when there are tankers upon tankers filled with oil with nowhere to go as a result of no demand? Why is gold not collapsing in price like other hard assets like housing?
Lets take it a little further: Why is the DOW rallying like mad as the economy continues to struggle?
Could the market possibly be starting to price in inflation or possible hyperinflation in the near future? Three months ago I would have thought this idea was crazy.
However, after seeing the report on the $24 trillion in potential debt that the Fed's spending programs could cost us, I am not so sure anymore. Anything is possible at this point.
Historical P/E ratio's and technical analysis have become less and less relevant as we enter this new economic reality IMO.
The global financial system is morphing into something very different that I don't think anyone really understands, and I don't think anyone can predict how this all plays out.
The world is a changing folks, and traditional investing will most likely not be the answer.