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The notion that in order for equities to rise, the dollar must be falling and vice versa, is actually a total myth. As the chart below shows, over the past 6 years, equities and the dollar actually moved in tandem half the time and move inversely half the time. They can both move in the same direction whether both are going up or heading down.
Between 1995 and mid-2000, the dollar and equities moved up and down together like they were joined at the hip. Mostly up. It was a different world back then. At that time, the US economy was truly growing on its own merits as opposed to today when growth is due primarily due credit expansion. Where is the once- gigantic American manufacturing base? Offshore, that's where. So the solid link between equities and the dollar that had them running solidly in tandem was broken for good back in 2000. Ever since then it has been a hit an miss affair. Is it any wonder that year 2000 also marks the huge systemic change that occurred when money flows began to accelerate into commodities rather than into stocks? Not at all, since year 2000 also marked the beginning of a dozen straight years of incredible credit expansion (dollar destruction). As detailed in this article on the CRX, the commodities stocks started on a run that saw them rise 100 times as much as the broader S&P did over the next 12 years. It's no coincidence that the same type of study that compares the price of oil to equities shows the exact same phenomenon surrounding the year 2000. It is no coincidence... year 2000 was a turning point in global economic history. That is the year that truly marked the beginning of our current long term cycle phase lower, not 2007.
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| USD MONTHLY - notice the dollar and equities rising together for 6 straight years, ending that solid relationship in 2000. Obviously this chart doesn't move much but you're welcome to check out the live version. |
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AR, what a coincidence. A posting about the correlation between stocks and the US dollar. Right what I was working on today.
ReplyDeleteToday at around 3PM (NY time) I tried to post a few charts with my brand new developed TrendCorrelation study on Daneric's site. Due to problems with Disqus (yes indeed!) my posting was public only for a few minutes. I noticed you were active on Disqus, so perhaps you did see it, perhaps not. After those few minutes I had to do an edit and all disappeared into some sort of blackhole. I also added charts (SPX against USD, EUR/USD, AUD/USD, TLT and VIX (inverted) with the correlation indicator below. But those got wiped too in some peculiar way.
Anyway, I will try to post again tomorrow or Friday. For now I have the SPX against US Dollar correlation study posted on my blog in the comments section on Jan 8. See:
http://indexswingtrader.blogspot.com/2012/01/us-dollar-looks-fatigued-stocks-ready.html#disqus_thread.
I don't have the time right now to compare your conclusions, but will do soon. My guess is, you had to eyeball the periods of tandem cq non-tandem. "Trendcorrelation" does this by taking "measurements" to get results as precise as possible. At least that's the whole idea of the indicator.
It's too bad, I can't post the chart(s) here. It would really be most appropriate.
Hey JW. Yeah, that is pretty ironic isn't it? Yes, I did see your post in which you mentioned that you had had some Disqus issues. I was having Disqus problems too... right at the time I read your comment. Some of my comments were vanishing off Danno's site as has happened way, way too often in the past for my liking. It all started when some troll started "flagging" my perfectly good posts. Posts that I had put considerable effort into most of the time and contained links to charts. In some cases, charts that I had drawn up specifically for that particular comment. Very aggravating to say the least.
ReplyDeleteYes, I simply drew vertical lines and eyeballed the correlations. Certainly good enough to reveal to yours truly what was going on. If one is a proponent of the deflationary outcome, as I am, then there can really be no other way than for liquidity to dry up like humanity has never before witnessed. If I'm right (and I may not be), then the correlation between equities and the dollar is already a known, lol.
Unfortunately I haven't gotten even close to being able to put together a piece on that ratio we spoke about. I have some charts ready but I haven't really dived into them yet. And I'm off for another week of evenings work tomorrow, so I don't know when I'm going to find the time to write much more for now. I really have to struggle to find the time to do it.
In any event, I look forward to your post regarding the dollar/equities correlation. I see we're at the total opposite ends of the spectrum regarding our expectations for the dollar itself, so it might be a good while before we're in sync. In any case, I think that come the end of January we'll have a much clearer picture of what lies ahead. My mind is always open as well. There's no point in having a closed mind in a field where we're trying to make money, lol.
AR, finally posted my thoughts on the subject on my blog and on Daneric's update of yesterday. I took the liberty to refer the interested reader to your posting for long term implications.
DeleteI think we had different goals/angles in writing our pieces. In the end you certainly could and probably will be right, just like Bob Prechter who shares your view on deflation.
Have a nice weekend!
JW
I just read your offering over at Danerik's JW, and I replied to it. What an outstanding piece of work. Wow! Thanks so much for offering that to the community. The fact that it doesn't make me look like an idiot doesn't hurt either, lol. Yes, I certainly noticed that you'd mentioned my post on that topic. It's an honor that you recognize it as worth of reading. Thanks bud. Keep up the great work... you're an asset that's for sure :-)
DeleteJW, it seems that the Disqus Disaster just continues at Danerik's for some reason. It has published, then deleted, then re-published, then re-deleted my reply to you so many times that I'll just post it here:
Delete===========
Fantastic post JW. That's very interesting work. Thanks for posting it.
Clearly it's not only me who had been claiming for a long time that the "inverse" or "tandem" relationship between equities and the dollar for all intents and purposes doesn't even exist, but it appears the results of your study would prove it more scientifically. At first, when I first started making that claim on the blogs of other TA guys, I was expecting to get booed right out of the stadium. But much to my surprise, I discovered that Michael Eckert was fully aware of it and agreed with me totally, as did Pretzel. In fact here's what Pretzel said just a few days ago: "Very aware of this, which is why I warn people that market correllations work -- right up until they don't. They de-couple and re-couple (seemingly) at random". He's bang on the money.
Just in case any readers think this revelation is suddenly some reason to be worried about your market postions, whether they be bearish or bullish, don't worry about it. This isn't some sort of sudden development. it's just an observation of what's been going on for years anyway. However, what I "did" say in the piece that JW refers to, is that I think that if anything, the relationship is going to remain "inverse" for years to come. The study above by TrendXplorer suggests that maybe I'm wrong... that maybe the relationship going forward will continue to be non-existent, just as it hasn't really existed at all in the past. Generally speaking though, I still 'do' think that the dollar rises over the next couple of years and that equities go the other direction. Awesome piece of work JW. Thanks again :-)
Alberta, you might be interested in these articles
ReplyDeleteon the dollar vs S&P.
He's wordy
and has the worst charts in the industry
but his viewpoint is intelligent.
February 18, 2011
http://www.zealllc.com/2011/spxusdralpf.htm
June 25, 2010
http://www.zealllc.com/2010/spxusdx.htm
AR, as usual a very interesting and provocative piece! I am trying to hold all of these concepts in my head at the same time. The value of the dollar has been eroded by credit expansion - including government borrow and spend, the borrow and spend of home equity (which did not exist) and TARP, QE1 and QE2. Pretty sure credit card debt had something to do with it too.
ReplyDeleteNow the dollar is going to gain strength against other currencies because of what? Other countries are going to print and spend faster than we are? (that is probably not true as our printing presses seem to have much more capacity than those elsewhere and we have operators who are very good at what they consider their job :-0)
If commodity values begin to unwind (and I expect they will) won't all currencies face similar demand for repaying debt? I'm guessing that your "priced in dollars" clause has something to do with this, but I must be missing some important information needed to understand currency value fluctuations.
I agree with you that the dollar is about to surge. However, I also believe that the government will halt that surge in its tracks by some policy change. I am just not sure why they think that would be the thing to do (probably has something to do with taking money from me and you and giving it to the bankers).
Again, thanks for putting this great article together. I really have to do some reading on currencies! - and it is your fault!
Alberta, you might be interested in these articles
ReplyDeleteon the dollar vs S&P.
He's wordy
and has the worst charts in the industry
but his viewpoint is intelligent.
February 18, 2011
http://www.zealllc.com/2011/spxusdralpf.htm
June 25, 2010
http://www.zealllc.com/2010/spxusdx.htm
Hi AR ... This is a test.
ReplyDeleteThis is also a test: When they correlate, positively or negatively, is there a predictable duration when they stay that way?
Thanks,
Dust Devil
Thanks BrightFire, more homework for me to do, lol.
ReplyDeleteFor sure, Adam Hamilton got rather wordy in that fine report, but who am I to complain when I tend to be that way myself? The biggest difference though, no doubt, is that he spends most of his time describing in words, what we're seeing visually on the chart. I'd rather explain the overall concept and just let the readers' eyes do the majority of the talking. There's no need to explain to readers which direction a chart went in June of 2008 when they can literally "see it". Unless of course, there was a sudden change or something like that.
But I find it interesting that Mr. Hamilton points out that the US dollar lost a whopping 41% of its value at the same time that the equities markets surged. He's basically getting at the same thing I've been pointing out, that the equities markets illusion is just that. In fact, in a different article I pointed out that since the beginning of 1999, the S&P 500 (even at today's prices) has lost 87.5% of it's value relative to oil.
But he's also focused on the time zone of between April, '08 and June, '09, a very short window that lies more or less in the middle of my considerably wider time frame for reference. So it appears that he is drawing the conclusion that the relationship between equities and the dollar is inverse at all times. Which of course is totally incorrect. However, going forward I 'do' believe that's the relationship we're going to be seeing. In fact I'm nearly certain of it. Because if the banking orcs win at their destructive game and inflation begins to take off again in a big way, the dollar is doomed. Stocks could soar further yet, but people will be losing money by owning them. If the deflationary scenario is what unfolds, then the dollar soars because dollars will literally be disappearing off the face of the planet. Stocks crumble. Either way, the relationship will be inverse going forward. It 'has to' be that way, provided of course that Goldman Sachs permits logic to exist as it once did. Like I said in the article, "the world was totally different back in the 1990s".
Thanks for the links bud, although as of this moment I can't even find the time to read the second one. And yes, the charts in that article drive me nuts. If I'm not mistaken we usually find those on Market Oracle. Thanks again for your contribution. It's always nice to see you here.
Alberta, I totally agree.
DeleteThe chart sends the message.
In his article
I don't think he's saying "the dollar is inverse at all times".
As I understand him,
he agrees with you,
and is saying,
that that inverse relationship holds
in soaring or plunging markets.
Awaiting the Disqus format.
Sorry BF... I admit that I read his article (scanned I guess, for highlights) in a bit of a hurry. But as you said, he's rather wordy. I was looking for nuggets but if they were there, they were buried so deep under the verbal recap of what the chart was already showing that I guess I didn't really give him a fair shake. I misinterpreted what he was saying. But it's nice to know he's agreeing with me at least. Thanks for the clarification partner. I can go to bed tonight now feeling kinda dumb, lol.
DeleteI'm curious about something. For some reason Blogger is all of a sudden threading my replies to you. I don't even know how this particular reply is going to look once I post it. If it turns out that it's all of a sudden threading comments the way we like them, then I might not even bother with the Disqus thing. But if not, then I'll install it. Sometime, when I get into the right mindset to do something like that. Hopefully real soon. Anyway, we'll find out as soon as I click on this Publish butt........
Seems to have started threading
Deleteand adding a Horizontal Line
between threads.
Fine format if this continues.
So I wonder what happens when a third party wants to join in this discussion between the two of us? I've just been too busy or too lazy to get the Disqus thing done but I think I should do it regardless.
DeleteHey there Dust Devil. Nice to see you drop in here. I think your test worked, lol. On second thought, maybe I shouldn't say that because for all I know you are trying to get avatar working or something. In any case... welcome.
ReplyDeleteYou know, I hate to put it this way, but in answer to your question I think the only honest response is "NO". I'm sure that by now you've experienced what we all have... a complete deke out thrown at us by action in the markets that we simply were not expecting, or that seemed so flat out illogical. That's what seems to have happened so many times between July of '06 and present, at least in the context of the relationship between the dollar and equities. We just never seem to know when that relationship will be switched, nor will we know why it happened. In recent years, that's part of the picture that has been so confusing. Purposely so, no doubt.
But going forward, as I mentioned to BrightFire above, I have little doubt that once the relationship reverts back to inverse, it's going to stay that way (generally speaking) for years to come. If you don't mind, maybe you can just scan up to my response to BrightFire and read the paragraph second from the bottom. I could darned near copy and paste that paragraph right here. So I hope that answers your question in a round about sort of way... once the relationship clearly becomes inverse, I think it stays inverse no matter whether the S&P goes to 500 or 2500.
Drop in any time you like. When I get the time (and the proper attitude to do it), I'm going to be switching over the comments handling on this blog to the Disqus style that you (and my other friends from other places) are so used to. This blog turned one month old yesterday, so I still have a lot of work to do ;-)
Hi Joela, nice to see your smiley face again. Yes, I know it's my fault, lol.
ReplyDeleteThe questions you're asking are absolutely terrific ones, because they point directly at the heart of the biggest debate on the planet right now, and that is: "Is the world going to go through an inflationary (or even hyper-inflationary) explosion in prices (including equities)? Or is the deflation genie going to escape from the bottle?"
If it's the latter, the FED, the ECB, the IMF and any other banking institution on the planet (even the invisible ones if they exist) will find themselves in a position where there is absolutely nothing they can do to stop it. That's why the FED is so horrified of deflation, it is the "one thing" they cannot control once it escapes the bottle.
The argument goes something like this: What we're looking at is at least 3 decades of mind-boggling amounts of borrowing. The world has come to the point that even at near-zero interest rates, countries are literally broke. What's going to happen if interest rates pop higher by as little as 1%. They'll be crucified and immediately, that genie comes roaring out of that bottle with his hair on fire and and a smug look on his face. He's going to have his day. Make that his decade. If that happens, the amount of money printing that we've seen from the FED and the ECB over the past couple of years would represent no more than a single drop of water in a wheelbarrow. The total amount of debt on record right now is reported to be 1000 trillion dollars worth. The vast majority of that is in incredibly dangerous and levered derivatives markets. JP Morgan alone is holding something like 90 trillion of that. If those markets start to unravel, there aren't enough electronic money printing machines in the world that could even put a dent in that amount without totally collapsing every economy on the planet. At least that's the deflationists' argument. Rightly or wrongly, it is also my argument.
I think the greatest favour I could do for you would be to direct you to two videos that will totally change your understanding of the whole large picture. The first is called the Crash Course by Chris Martenson. It is 3 and a half hours long but I Chris was recently able to produce a 45 minute version that still gets the point across. If you'd like to watch the full version, just click his 'home' button.
The second video called The Secret of Oz is a bit more 'entertaining' to watch (if I dare use that word), but it too provides a tremendously good explanation of what exactly has happened, and who it is who rules the world. When Alessio Rastani recently said "the governments doesn't rule the world, Goldman Sachs rules the world", he wasn't kidding.
I strongly urge you to watch at least one of these videos. Everybody needs to, but so few will.
Thanks for asking some terrific questions. Now, if only half the people in the developed world would read my answer, and watch those videos, we'd be well on our way to cheering on President Paul.
I once read the Dollar and US stock indices rising together was a reflection of a healthy real economy. I suppose many could argue about exactly how healthy in the late 90s with the at times seemingly irrational internet boom and Y2K inspired fears affecting business decisions. But it's still hard to disagree with the idea that in relative terms the economy today is much less 'real' and almost totally a product of counterfeit credit (which I was just reading about this morning in a nice piece over at Acting Man - link provided). I like the stability masking instability hypotheses and I think we are seeing its' fruits (nasty rotten ones at that) starting to drop from the tree in sufficient numbers to create a stink. Eventually a tipping point will be reached where enough people quit the game, pick up their marbles (if they still have any) and go home. The empirical evidence with respect to money flows out of equities during the last few years is undeniable. Unfortunately most analysts conflate this with a version of rationality I simply cannot fathom. Ie. that most financial actors are moving deck chairs from stocks to bonds to PMs to commodities and so on. I see this instead as large numbers of now unemployed/underemployed or otherwise credit constrained essentially consuming savings while these 'assets' still have any 'value.' The majority of people selling now are not going into bonds or gold; they are liquidating to survive because for them, the rainy day is here with a vengeance. Because the lead up to this colossal financial cock-up was predicated upon shorting the Dollar (borrowing in Dollars) to go long everything else, the unwind is so patently predictable and obvious that, like the story about the Emperor's New Clothes, nobody can see it. Funny how a story written 180 years ago is still so relevant. Funny also how guys like H.C. Andersen and Charles MacKay could write cogently about things in the same time period that are as relevant today as then. Anyway I'm now a rubber necker to this train wreck, having gone into low power or sleep mode when it comes to anything resembling participation in this rigged casino. Kind of the like the heart of a black bear (pun intended) in hibernation.
ReplyDeleteHere's that link:
http://www.acting-man.com/?p=13115
Hello Hettygreen. I'm glad you found your way over here. Now I think I remember where I ran into you! Was it at Pebblewriter's blog? In any case, hello again :-)
DeleteThanks for the link. The author, Keith Weiner, knows exactly what he's talking about. He said: "I don’t know if a decent suit cost $20 (i.e. one ounce of gold) in 1911. Today, one can certainly get a decent suit for far less than $1600 (i.e. one ounce), and one could pay 3 or 4 ounces too for a high-end suit." About a year ago I wrote a rather lengthy comment on somebody's blog where I addressed that very issue, arguing that one oz. of gold would have purchased a gladiator's suit of armor back in the days of Russell Crowe (lol), or a nice shiny suit of armor a thousand years later for Sir Nigel the Drunkard or whatever his name was, or a fine gentleman's suit in 1929. So I can verify that Mr. Weiner's suspicion was right... back in 1900 and 1929 one ounce of gold did equate to one man's suit. Just as it did 2000 years ago. And Ben Bernanke had the audacity to declare that gold had "no intrinsic value"? Gold is the epitome of intrinsic value.
You mentioned that "the Dollar and US stock indices rising together was a reflection of a healthy real economy. I suppose many could argue about exactly how healthy in the late 90s with the at times seemingly irrational internet boom and Y2K inspired fears affecting business decisions". Although I have said in various articles that the reason the dollar and equities were rising together between 1995 and 2000 was because the "economy was truly growing on its own merits", in truth I think you are right. I guess I was speaking in relative terms. Perhaps I should have said: "compared with today's gong show, back in the mid and late 90's the economy was truly booming thanks to oodles and gobs of 'lending money into existence' so that consumers could buy up outrageously priced tech gadgets and tech stocks. But at least the underlying tech companies and the entire economy were booming." Compared to today's gong show that is, because in spite of an incredible amount of fresh panic credit creation over the past 2+ years, barely a penny of that money has found its way into the economy. What a world of difference between those two eras! And to think, the late mid to late 90s were only 15 years ago. It might as well have been 100 years ago because there is no similarity at all.
In fact, several separate and independent studies I have done all pointed to the same thing... something that I was not expecting to uncover. Something of enormous magnitude happened in 1999-2000. Most of the ratio charts I have put together show that a major, major shift occurred back then when money suddenly actually started to abandon the stock markets, relative to "real things". things like food, fuel, real estate, commodities. When we consider that between 1999 and today, oil has risen 787% of what the S&P 500 has, it's a bit easier to realize that participants in the equities markets are getting ripped off worse than chumps who take a chance at 3 Card Monty.
For sure, it sure seems logical doesn't it, that the great unwind just has to happen. Admittedly, my confidence in that theory gets shaken from time to time when the great Orcs of New York pull yet another giant green rabbit out of their ass, but I'm stickin' to my guns on this one.
It was nice to see you again and I wish you nothing but the best for the new year.
Terrific work, AR, as usual. The picture's worth a thousand words, as they say. The divergence on the inverse relationship since 2010 makes me wonder what the dollar knows that stocks don't. Glad to see your blog picking up steam -- good contributors, too.
ReplyDeleteThanks pardner. It's nice to see you drop in. Yeah, the blog is picking up steam a bit. But I'm not doing the same thing as so many of you are doing. People like yourself and Chartrambler seem to post updates and new charts throughout the day. I guess my style is just kind of post something when I feel like I've got something I want to post. So my inputs here are not necessarily happening every day and they are generally not predictions about wave counts or wave patterns. I think that's what a lot of people want to see. I'm more interested in figuring out the macro picture although I'm obviously in the market most of the time. So I don't really expect this blog to grow beyond a few friends. I don't have an agenda to grow it, I just wanted to get away from the god damned trolls. Shot one the other day by the way. Man, did that feel good! I couldn't believe he had the audacity to follow me to this blog, give me his email address, and invited me to contact him for a verbal fight. As if I'm going to give a destructive bastard like that my email address? BOOM! RIGHT IN THE FACE!
DeleteHe'd even discovered that I'm very well known at Seeking Alpha, so he came onto my blog over there as well, disguised as a different person, who then proceeded to speak quite highly of himself. I just can't believe that guy. BOOM! RIGHT IN THE FACE AGAIN!
Anyway, enough of that. This is just my quiet place. I've got a nice little pub goin' on here as well. It's just a place to drop a general "hi" message or anything like that. I'm also most likely going to install the Disqus comment handling platform since I think most people like that threading method much better. I do as well. So... as soon as I can find the inspiration, I'll do it.
Great to see you bud... as always. Keep up the great work. I love the way you think man.
wow. what did i miss????
ReplyDeleteyes, your first sentence. that is what i always thought to be true and it SHOULD be true. But because of the expanded balance sheet and all of our debt we cannot HAVE a strong dollar. too expensive to pay off the debt. which makes ya wonder....will there ever BE a strong dollar again or will it just be devalued to nothing? we'd have to have a quadruple booming economy to pay off debt and have a strong dollar. i don't see that happening in my time on this floating rock. i don't want to be right on that, but the way things stand now and what i see in the future, we'll be in YENSville one day.
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