The above quote was said by Congressman Ackerman after Chrysler, Ford and General Motors executives went to capital hill with hat in hand to ask for a $25 billion bail out. While that in itself was not an issue at the time the problem was that they all showed up in their private jets!
Watching the dollar break out to the upside is similar in nature. The United States economy is hardly robust but when compared to the mess in Europe it looks like a great place to invest. The chart below shows how the dollar has recently surged to the upside and has broken through resistance. A longer tailed chart would show that it recently broke through its 50 week moving average for the first time since mid 2010 a significant achievement.
So what does all this mean to you and me? Well the first thing to realize is that a strong dollar normally points to a strong economy. This is not the case and this is troubling. In order for an economy to cure its ills it is normal for that country's currency to weaken thereby strengthening the export and local economy. The reason the local economy strengthens is that imports become more expensive making locally produced goods more affordable and with the added push of increased exports the economy recovers. This is a very basic analysis but for the purposes of this blog that will suffice.
As the dollar still remains the global currency of choice most commodities are traded in dollars. A strong dollar therefore makes the price of the underlying commodity weaken as it becomes more expensive in global terms thereby reducing demand for the commodity and forcing the price lower. A look at the chart below shows how the price of crude oil has recently rolled over (for those of you who read my last blog this will not be a surprise). A lower price of crude should result in a benefit to the United States economy as crude oil is one of the main drivers of inflation. Contain the price of crude and you have a good chance of containing the inflation rate.
Looking further it appears that the inflation and fear trade in terms of gold purchases has wained as depicted by the chart below. While gold serves as a gauge of fear it is also considered to be a hedge against inflation. Based on this chart and the one above it appears that the market is not anticipating inflation any time soon.
Typically in the situation as described above you would start to see a recovery in the United States however I do not believe that this is happening. Certainly all the pieces of the puzzle are there to ignite a recovery. You have low interest rates and limited chance of inflation in the near term as unemployment is high and there is masses of factory capacity. However the weakness in the United States persists due to a poor housing market that shows no sign of recovery for at least the next 12 months, a weak employment market, high levels of debt and a fragile global market. All a strengthening dollar is pointing to is that the United States is less weak than Europe not that it is recovering. In fact a strong dollar could be the final straw that breaks the back of the meager recovery that is in place.
The stock market is looking weak and any more poor news from Europe or China could derail that train in no time at all. Certainly not a place to be at present. Stay on the sidelines and if you must go into the market head for the large cap dividend players as they have the capacity to weather the impending storm. Furthermore with yields as low as they are (and I believe that they will remain low for far longer than anyone can imagine) you need to start to accept that your "safe" money will not earn anything north of one percent unless you are prepared to step outside the box. A number of you have turned to the fixed rate deposit investment that I have been touting for a year now but for those of you still thinking about it compare the rates at www.fixedratedeposits.com with what you can receive elsewhere and I think you will be very pleased at what you find.
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