An irrational market’s dangerous celebration
Today's Financial News - Posted November 10, 2009
The dollar is moving the markets. A 2% surge in the Dow may look like good news, yet it is only a matter of time until the foundation breaks and it all comes crumbling down.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): Do not be fooled by a market that rallies on a weakening dollar. The law of conservation of energy proves all is not well.
If you remember your high school physics classes, you are familiar with the concept, or at least you once were. It is the law that says a total amount of energy remains constant in a closed system.
While the global financial system is not entirely closed, it is close enough for our analysis, especially given the market action these days.
Instead of waxing and waning on future income stream possibilities, many stocks are moving in correlation with the rising and falling dollar. Because the fluctuations are based on currency exchanges instead of changes in actual worth or value, we can look at the situation no differently than those silver, swinging balls on any executive’s desk.
One ball moves another.
The dollar weakens, the Dow moves to capture the change.
Yesterday’s big move in the equities market was not due to word of a sudden new spurt in consumer spending, banking liquidity, rising interest rates or even predictions of new growth.
It came because the dollar, the true indicator of America’s economic superiority, made a massive decline. Companies that export their goods or services will see a top-line benefit, but at what cost?
The conservation of energy says when one “mass” goes up, another must go down in equal proportion.
While so many investors are turning bullish because of the increased revenue potential at the nation’s exporters, it is important to remember we import far more than we export. The difference was $677 billion in 2008.
Turning it around
There is no doubt in my mind the markets have overdone their exuberance, considering the dollar’s decline.
A greatly weakened dollar will be detrimental to the nation’s financial health. It may not be obvious today or tomorrow, but give it time and the problems will begin stacking up.
Granted, a stock market that is focused on an inflationary economy will rise, but not nearly fast enough to eliminate the great pain caused as the price of everything rises.
But besides the usual inflation debate, a government that supports a weakening dollar, especially one that depends on foreigners buying its debt, opens itself to a host of dilemmas.
The first is obvious. Who wants to lend anybody money, if they are going to get less money in return? If the dollar continues to weaken at its current clip, we will be paying China back in worthless dollars in no time.
Once China gets spooked, hold onto your hats. The downward spiral will start.
And what about all of those foreign companies that want to set up shop in the States and take advantage of our technology and well-educated workforce. A weak dollar makes a move financially crippling.
Here’s my point. An equities market that soars solely on a dwindling dollar is far from good news. It does not signal growth or security. It is a sign that major trouble is brewing.
Diversify internationally before it is too late.
Next Article: TFN eNews 11/10/2009: I’m glad we didn’t take gains last week!
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