Posted on 11/05/2009 5:45:23 AM PST by blam
When The U.S. Dollar Rallies, The Stock Market Will Crash
Currencies / US Dollar
Nov 04, 2009 - 07:03 PM
By: Mike_Whitney
Interest rates. The Fed does not need slinky women in plunging necklines to peddle money. All it needs is low interest rates. When rates are pushed lower than the rate of inflation, the Fed provides a subsidy for borrowing. This is not as hard to grasp as it sounds. If I offered to give you $1.00 for very 90 cents you gave me in return, you would buy as many dollars from me as you could.
The Fed operates the same way. It generates market activity by creating incentives for borrowing. Borrowing leads to speculation, and speculation leads to steadily rising asset prices. This is how the game is played.
The Fed is not an unbiased observer of free market activity. The Fed drives the market. It fuels speculation and controls behavior by fixing interest rates.
When Lehman Bros flopped last year, markets went into freefall. A sharp correction turned into a full-blown panic. The bubble burst and trillions of dollars in credit vanished in a flash. Trading in exotic debt-instruments stopped overnight. A global sell-off ensued. Markets crashed. For a while, it looked like the whole system might collapse.
The Fed's emergency intervention pulled the system back from the brink, but the economy is still wracked with deflation. Billions in toxic waste now clog the Fed's balance sheet. The dollar has fallen like a stone.
[snip]
I remember the gold prices of the late 70’s. The bubble will burst!
Hmmmmm, perhaps I should pay more attention to those ads for gold I see on TV.
Gold is one of the asset bubbles that’s likely going to burst soon as well. I think gold is vastly over priced right now and far too many people are staking their future on gold.
The bottom line: You can’t eat Krugerrands, and the gold markets are capable of collapsing so quickly that most people won’t be able to react in time to save themselves.
Excellent analysis. The Fed is the market.
The moment the Fed stops finding ways to buy treasuries from itself, it must put up the interest rate (or no-one else will buy them).
Then the dollar will go up: and the market will crash. Not ‘correct’, but crash. There will be no orderly sell-off - we are living under the shadow of the most immense dollar carry trade of all time. The S&P will ignore technical support until it gets to the March lows.
When? Don’t know. The Feds seem to be committed to staying at the same rates until next summer. And politically they will try to hang on until the 2010 elections are past.
But reality will strike before then. I’m hoping for a crash this month but that’s probably optimistic.
By Rocky Vega
11/04/09 Stockholm, Sweden – A rumble is brewing between Quantum Fund co-founder Jim Rogers and New York University Professor Nouriel Roubini on the important topic of where gold’s headed. Roubini argued just last month that investors are using cheap borrowed dollars to create “huge” bubbles “not justified by the fundamentals” in assets like emerging market equities, oil, and gold.
Rogers, when confronted with the view, replied, “What bubble?” He went on, “it’s clear Mr. Roubini hasn’t done his homework, yet again.” Rogers believes the price of gold will easily increase to “the old high, back in 1980 adjusted for inflation…over $2000…some time in the next decade.”
Although Roubini and Rogers agree that the weak dollar is prompting more commodity and asset investing, they disagree on a bubble in emerging markets. According to Rogers, “they’re certainly all up a lot, maybe they’re too high, but being too high is not a bubble for anyone who knows financial markets.”
[snip]
We’re doomed. Wonder which Hedge fund he is invested in?
“...for anyone who knows financial markets.”
That’s exactly what worries me about gold. Watch TV these days and you will see any number of different commercial pushing actual gold bullion on “investors”. The one that just slays me shows a family holding a baby in their living room, unwrapping a box that just came in the mail that’s full of silver ingots and gold coins.
Great investment under the right circumstances, but how fast can you get all of that bullion together and hustle it back to Roslin Capitol when the market finally craps the bed and gold prices collapse along with it?? I’m sure it must feel nice to have 30 or 40 Krugeraands stashed in the closet, but whatcha gonna do when you’re stuck in traffic and hear on the radio that the price of the gold you just bought at $1000 an ounce (on the advice of G. Gordon Liddy himself, no less...) is falling through $500..??
Interesting comparison:
January 21, 2009 (Obama’s inauguration):
DJIA at 8000
DJIA at 6160 in Euros
November 5th, 2009:
DJIA at 9800 (up 20%!)
DJIA at 6300 in Euros (up 2%, about equal to inflation)
The ENTIRE increase in the DJIA this year has been not from the increase in the value of the stocks comprising the DJIA; they’re still priced the same in EUR, GBP, or JPY. The increase in the DJIA is simply from the decrease in the buying power of the USD. It simply takes more USD to buy shares of these multinationals.
It’s like the Zimbabwe stock market; right now, that index would probably be worth 1.3 USD. But in Zimbabwe dollars it’s worth trillions - TRILLIONS! Mugabe’s done a wonderful thing, the Zimbabwe stock market has shot up millions of percent under him, as long as you measure it in ZBDs which have dropped by billions of percent...
Don’t you think that the 200 tons of gold that India just bought from the IMF at (about) $1,000.00 an ounce puts support under these high prices?
Yup, and as a FREEPER posted a while back (point of this analysis) all the liquidity the FED pumped into the market was not lent or invested in small business (job creators), but found its way into the Market. Is it any wonder the the Zero Administration wants to use the second half of TARP and get it into small business?
First order is to expand SBA credit limits and lower credit standards. I hate this idea, but the Federal Government's initial reaction to the bad economy was to tighten SBA credit, the exact opposite of what they should have done. The Congress should allocate TARPP money for TAX breaks and credits to companies that make loans to small businesses. They should also pull back TARPP money for FI that are not expanding small business loans.
Moreover, China will buy on the dips. I doubt Gold will go permanently south of 900 dollars/oz while China still has money.
Support from the Rupee?? It’s probably in better shape than the Dollar so you may have a point there blam...
I told my buddy (we're both 66) last night that we probably wouldn't see gold below $900.00(US) an ounce for the rest of our lives. He didn't disagree.
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