Courtesy of Lee Adler of the Wall Street Examiner
They say you can’t predict the future. Except, if you’re paying attention, you sometimes can, at least in the short run. I wrote the following for subscribers of the Wall Street Examiner Professional Edition Fed Report on October 2.
I want to interject a few thoughts about the new bull market in the US dollar. I normally don’t bother with theorizing, but in this case I had a few thoughts, that, if correct, could be important.
I see two reasons behind the dollar rally. First, the Fed is printing less and less dollars, and relatively less dollars than other central banks are printing or trying to print.
Second, there’s a greater need for dollars which are suddenly in short supply. When US investors bought overseas stocks and commodities priced in dollars they exchanged dollars for those purchases. If they were foreign stocks, the dollars were used to purchase the currencies in which the stocks were priced, causing the relative values of Euro, Yen, Pounds etc to rise against the dollar. In many cases the sellers of commodities also converted the dollars to their local currencies. That was then.
Now, those markets have in many cases entered bear markets. Money printing or lack thereof has failed to stimulate those markets because all roads ultimately lead to the Last Ponzi Games Standing, the US Treasury market and US stock market. US investors are dumping those foreign assets and commodities, and when they do, they exchange them for dollars. The buyers must often raise dollars in a market where there are not enough dollars to meet the demand, hence a massive short squeeze.
Investors are now demanding dollars in greater numbers than available to meet these transactional requirements, forcing their value up relative to the local currencies for which they must be exchanged. The problem is partly the false belief in the US as a haven from the economic problems of the rest of the world. While it may appear true in the short run, in the long run it is not. But presently it causes panic capital flight into US assets.
Theoretically—and I must warn here that in theory there’s no difference between theory and practice but in practice there is [Yogi Berra]—this could be bullish for US stocks. That idea seems crazy given the recent selloff.
But keep this thought in mind just in case US stocks reverse and resume a rally and Treasuries continue to rally from here. There’s a theoretical case for it.
