A Headline

Yesterday was not a good day for stocks.  At the time I began writing this the market was down more than a percent for the day but one headline really caught my attention, "Noted earlier that the Dollar Index was flirting with its 50 ema/sma near midday.  The Dollar paused allowing for a midday reprieve in equities but new highs in the Dollar in recent trade has led to fresh session lows for the major indices.  If the Dollar Index can't hold above these averages (75.24/75.28) it could relieve some of the downside pressure on stocks."

So what does that mean? The Dollar strengthened causing it to rise up to the 50 day moving average line.  This line is merely a summation of the previous 50 days of the index divided by 50.  The line represents a technical indicator and something that market technicians watch and use to determine the strength or weakness of the market.  In this case the Dollar had been getting pounded and was finally bouncing off its lows.  This rise in the Dollar was the cause of the correction in the stock market.

The part that is disturbing is that the headline called for a continued crash in the Dollar in order to support stocks by saying that "if the Dollar Index can't hold above these averages (75.24/75.28) it could relieve some of the downside pressure on stocks."  Essentially the stock market rise is a factor of the Dollar weakness.  Now I do not disagree with this statement in the least, in fact I agree that the weak Dollar caused by the Federal Reserve policies and money printing has benefited the stock market.  If and when the money printing stops the market will crater.  The sad part to the article is that market participants filled with greed and fear are hoping that this line in the sand (the 50 day moving average) holds and pushes the Dollar down again so that they can temporarily benefit from a continued rise in the price of their stocks.

This is about as short sighted as I have ever witnessed and highlights the fickleness of human nature.  We are wired to win regardless of the consequences.  Small short-term victories with serious long-term consequences are more desirable than short-term pain with a long-term outcome that is very favorable.  This is highlighted by this headline.  Let the Dollar burn so that we can make a few more bucks! The long-term consequences of this strategy are dire.

Inflation is already here and is starting to feed into even the Federal Reserve's measure of inflation the core inflation rate which strips out the increase in the price of food and energy.  A continued decline in the Dollar will continue to feed the inflation level and this will result in pain at the household level.  Already spending on retail items is falling as consumers cut spending on discretionary items in order to pay for groceries and gasoline.  Driving the Dollar lower will raise these prices even more and will cut consumer spending further. 

It is impossible to have a recovery in housing until the consumer can save, get out of debt and get a loan.  They need jobs and a low rate of inflation to be able to acquire these assets and the current policies are making it all but impossible.  The consumer is madly trying to pay off excess debt, save, get a job, find financing and earn enough money to keep up with the rise in prices.  All in all the short-term vision of propping up the stock market at the expense of everything else is going to end in far more pain than letting the market correct now.

Stop the printing, work on the actual problem of getting people employed by creating a fundamentally strong economy with a strong currency.  Earn the trust of the world again by running an austere government with a fiscally responsible and independent reserve bank that looks upon the strength of the Dollar as part of its policy rather than as the scape goat.  Change these policies and I believe that we can once again have a strong economy with long-term prosperity.  Implementing this would come at the cost of severe pain in the stock market as the security blanket of money printing has to be removed however, right now we have the ability to remove it ourselves in a controlled manner.  If we continue the current policies at some point in the not too distant future the market will loose its footing and will crater on its own in an uncontrolled manner creating far more havoc than what we have had to deal with up to now.

As it is almost guaranteed that there will not be a change in these policies until the inevitable happens, protect your investments with put option or sell your winners but whatever you do add some level of caution to your investments.  For those of you with cash looking for great rates of return with minimal risk give me a call or review our website on www.fixedratedeposits.com.