USD - "Inverse" About To Become The Norm

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[This particular article has been the most popular on this blog since Jan. 11, 2012 when it was first published.  More recently it has been viewed on a remarkably steady basis at approximately 1000 times per week.  Over the past 6 months it has been visited approximately 32,000 times for a total that at last count was heading toward 56,000.]

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.

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.

So going forward, what should we expect from the dollar as it relates to equities?  Would it be likely that as the dollar takes off in the coming weeks and months (perhaps years), that stocks should hitch a ride and soar along with the USD?.  Not a chance.  Not this time.  When the dollar takes off upward in this next, and what is sure to be a long and protracted ride, it will be for far different reasons than it has ever risen before.  This time around when the dollar takes off it will be due to the unwinding of at least 3 decades of ever-accelerating rates of dollar destruction.  Particularly the past 12 years worth.  The great unwind is about to begin and this time cash is going to become so scarce due to the necessity of buying every dollar in sight just in order to pay down debt, that it will be sucked out of almost everything priced in dollars.  The first victims will be the same things that were the prime beneficiaries of dollar destruction in the first place... the "risk on" beneficiaries... commodities and equities. 

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