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What Happens If (When) The Dollar Rises?

Tyler Durden's picture




 

There has been lots of speculation as to  what may happen once Europe and the rest of the world wakes up and realizes they have been had by Bernanke. A useful regression analysis demonstrates the increasing risk to stocks at the moment when/if the DXY rises. While the straight red line is the simple regression, the orange line indicates beta changes only on postive or negative moves. The variation in slopes demonstrates that DXY moves up have a disproportionately higher impact to SPX moves down than vice versa. Another way of saying this is that to push the market higher purely as a function of its dollar correlation, the dollar needs to devalue more and more for a measurable impact, alternatively when the dollar rises, the drop in the market is more pronounced than on dollar down days.

 

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Thu, 10/08/2009 - 12:53 | 92976 Assetman
Assetman's picture

So... what happens if the world loses faith and the dollar collapses?

Thu, 10/08/2009 - 12:57 | 92987 Deficient Market
Deficient Market's picture

Yoggi Bear says "Deja-vu 1987 all over again!"

Thu, 10/08/2009 - 13:54 | 93082 Sam Malone
Sam Malone's picture

Answering a hypothetical with another hypothetical...talk about a degenerating discussion.

Thu, 10/08/2009 - 12:56 | 92983 Gilgamesh
Gilgamesh's picture

And we have a new 52-week low print on the DXY.  This is going to end so well.

Thu, 10/08/2009 - 12:57 | 92984 phaesed
phaesed's picture

I have so much to say on this it's ridiculous. I will be submitting an article on the dollar this weekend because I can't take the infectious misunderstanding. Intra-day DXY/S&P correlation has hit over -0.8 several times, but historical precedent of this is easily obtained if you dig far enough back in time, look to 1909, 1929, 1879 for immediate examples. It goes back further, you can see it in 1837 and even in the 1720 crash... too many of today's students have no clue how far back our troubles have gone. The shame of this is that it's the failing of our teachers exponentially transmitting the failures of their teachers. The truth goes further back than Keynes or Hayek. Look to Jevons and Cournet.

Thu, 10/08/2009 - 13:03 | 92999 Anonymous
Anonymous's picture

No matter when the catalysts were conceived, it's happening now.

Thu, 10/08/2009 - 13:10 | 93007 andrew123
andrew123's picture

Phaesed, so what is your bottom line?

Thu, 10/08/2009 - 14:40 | 93192 phaesed
phaesed's picture

Look out debtors, the real weight of your burden will be immense if you are in non cash assets at the time of the reversal.

Thu, 10/08/2009 - 15:56 | 93336 SWRichmond
SWRichmond's picture

I'd love to know what you think about sovereign default, and the value of fiat "cash" under such circumstances.

Thu, 10/08/2009 - 13:11 | 93012 nope-1004
nope-1004's picture

Then how about stating your position clearly and concisely so we can all understand where the hell you are coming from.

Thu, 10/08/2009 - 14:37 | 93185 phaesed
phaesed's picture

deflation due to deposit/currency ratio mismanagement.

Thu, 10/08/2009 - 13:35 | 93046 AR
AR's picture

Phaesed:  Please make sure, that when you submit your article this weekend, you clearly explain and define the "history" behind your theory so readers are able to understand your analysis, perspective, and position. And, be nice about it, since you know as well as we do, that there are very few true market historians out there. We'll look forward to your article as we're sure you'll have something valuable to add to this very important "modern day" topic. Thanks...  BTW: The analysis above has merit in the relative appropriate timeframe.

Thu, 10/08/2009 - 14:42 | 93199 phaesed
phaesed's picture

Will do.

Thu, 10/08/2009 - 13:45 | 93062 Dayton Ohio
Dayton Ohio's picture

what are you going to use for the data set since DXY started in '73.

 

http://en.wikipedia.org/wiki/U.S._Dollar_Index

 

 

Thu, 10/08/2009 - 14:39 | 93189 phaesed
phaesed's picture

I only have data from 93, please post any data sources from 73 (thank you in advance)... the majority of my analysis is from 1929 - 1932, 1913 - 1922, 1900 - 1909, the 1870's and the 1830's.

Fri, 10/09/2009 - 14:00 | 94223 Anonymous
Anonymous's picture

I will look forward to that, and maybe even share my Chart of Charts perspective.

Tue, 10/13/2009 - 07:16 | 97365 Anonymous
Anonymous's picture

Where can I read the article? Thanks.

Thu, 10/08/2009 - 12:59 | 92988 AN0NYM0US
AN0NYM0US's picture

I thought Timmy and Nouriel were pals:

October 8 (Reuters) US housing market not bottomed-economist Roubini
http://www.reuters.com/article/marketsNews/idUSN0852707920091008

October 8 (Bloomberg) Geithner Sees ‘Broad Signs’ Housing Markets Getting Better
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a0VZEj.oK9Wg

Thu, 10/08/2009 - 13:06 | 93004 Deficient Market
Deficient Market's picture

This doesn't really mean they're not pals, Nouriel could be looking at the real economy, while Timmay looks at bank's balance sheets, in which case both are right. If you note the last two paragraphs in the Nouriel article, he is still in the U-shaped recovery camp, which would contradict his view on housing, unless he believes that what Timmay looks at will never reflect it. Considering how he's now one of the big boys, he's probably right.

Thu, 10/08/2009 - 14:57 | 93225 Anonymous
Anonymous's picture

timmy's basing his sight on the increased amount of people showing up at his open house in westchester.

what timmy doesn't realize that most people are just showing up just to see that ugly bathroom for themselves.

timmy's about to learn a lesson in car crash rubberneck sociology.

Thu, 10/08/2009 - 21:28 | 93695 mitack
mitack's picture

Roubini has the "right" agenda- as accurate analysis as possible.

Timmy, on the other hand, has political agenda. And the best if not the only thing politicians do ? Lie.

 

Thu, 10/08/2009 - 13:01 | 92997 tradertim
tradertim's picture

What Happens If (When) The Dollar Rises?

ask *Monty* the $500/hr psychic.

Thu, 10/08/2009 - 13:03 | 92998 Anonymous
Anonymous's picture

"Another way of saying this is that to push the market higher purely as a function of its dollar correlation, the dollar needs to devalue more and more for a measurable impact."

This quote supports that chart you posted a while back on S&P 500 divided by Fed by sum of domestic reserves and foreign custodial holdings.

Has anyone else noticed that the Nov., Dec., and March calls on the UUP have a higher implied volatility than the puts. Higher call volatility than put volatility is definitely not a normal thing.

Thu, 10/08/2009 - 13:06 | 93002 Anonymous
Anonymous's picture

your screenshot shows regression of DXY on SPX instead of SPX on DXY

Thu, 10/08/2009 - 13:07 | 93005 TumblingDice
TumblingDice's picture

Bad things happen. Except on the long term, where if the process is allowed to play itself out, a strong dollar provides a good foundation for future growth. But thats just a pipe dream.

Thu, 10/08/2009 - 14:18 | 93148 Steak
Steak's picture

HA...strong dollar as a "good foundation for future growth."  You're just upset that you don't have access to 0% Fed fiatcos.  If you did you would stop worrying and learn to love the US Peso.

Thu, 10/08/2009 - 13:10 | 93010 Anonymous
Anonymous's picture

Look at the R^2 value - the regression line doesn't tell us anything meaningful.....oh, and AssetMan, do you sit on ZeroHedge all day waiting to be the first respondent to new posts?

Thu, 10/08/2009 - 13:35 | 93048 Assetman
Assetman's picture

Yes... check all the other postings.  I'm the very first to those as well...

Thu, 10/08/2009 - 13:18 | 93020 mdtrader
mdtrader's picture

The problem is the world is awash with dollars, and there is not enough buyers for all the supply. I have been looking for a dollar rally, but the sheer weight of the freshly printed supply makes it difficult.

The powers that be want a weaker dollar and they have a printing press too. Betting against that is a bit like starting an argument with a man who is holding a gun!

Thu, 10/08/2009 - 13:47 | 93066 Anonymous
Anonymous's picture

it's not the quantity, it's the interest rate

Thu, 10/08/2009 - 15:38 | 93294 Carina
Carina's picture

" The problem is the world is awash with dollars, and there is not enough buyers for all the supply..."

With all due respect, the dollar supply and money supply are shrinking.  The Fed can't print enough dollars to keep up with the ones disappearing as loans are defaulted upon.

 

From Philstockworld.com:

"Notice on the above chart, the dollar supply has acutally been CONTRACTING this year, not expanding, as $500Bn worth of US credit has been paid down - that’s 23% in the OPPOSITE direction of the Euro’s runaway currency growth but the myth of the weak dollar persists, promoted by commodity pushers and their media lackeys. The reason money is flying into US treasuries from overseas is NOT because people want to take advantage of the 3% interest rates - it’s because investors are buying DOLLARS at what they know to be ridiculous lows and those 3% notes will appreciate another 20% if the dollar gets back just to this year’s high.  

Let’s also keep things in perspective. At the end of Clinton’s presidency, the dollar was .85 to the Euro, by the end of Bush’s Presidency, it cost $1.80 for a Euro - that’s a 100% decline in the buying power of the dollar vs. the Euro in just 8 years, so the people buying 10-year notes now for 3% interest are expecting that the dollars those notes are denominated in will rise fast enough to offset the very poor rates of interest that are offered. And who is buying all these notes? The same people (China, Russia and OPEC) who are talking down the dollar! They sell their goods and commodities for lots of cheap dollars and then put their money into treasuries where they’ll make a quick 10% on the smallest of dollar bounces and they can convert their notes at will in the World’s most liquid currency. That’s all this is!"


Thu, 10/08/2009 - 15:59 | 93340 SWRichmond
SWRichmond's picture

With all due respect, the dollar supply and money supply are shrinking.  The Fed can't print enough dollars to keep up with the ones disappearing as loans are defaulted upon.

You are conflating money and credit.

http://www.zerohedge.com/article/guest-post-sound-one-hand-clapping-what...

Thu, 10/08/2009 - 17:31 | 93488 Anonymous
Anonymous's picture

SWR,

with all due respect, there is no money. There is only credit/debt at this day and age. What is notionally called "money" are "promises to fulfill" backed by the CB (Fed Reserve). Phaesed's stance is technically correct.

Thu, 10/08/2009 - 19:44 | 93622 SWRichmond
SWRichmond's picture

...there is no money.

Which is one of the points of the post I linked to.  A major problem we encounter in having these discussions is one of definitions: what IS money?  What kind of money can be reliably used as capital?  When the system floated free in 1971, it lost its grounding in reality.  The concepts of money and capital don't mean anything anymore, and that's the only reason we have these inane debates about inflation and deflation.  We don't even know what money is.

Thu, 10/08/2009 - 13:52 | 93078 BM (not verified)
BM's picture

Bubblenanke's gonna kill himself.

imagine the disgrace of his total failure to succeed at such a simple task as printing money. what could be even more easier than that

Thu, 10/08/2009 - 14:04 | 93106 Anonymous
Anonymous's picture

I have to disagree, the intraday movements in the SPX seems to favor the dollar down much more than dollar up. Measure it with the EUR and you can see this.

Thu, 10/08/2009 - 14:05 | 93113 Anonymous
Anonymous's picture

If everything is so good, if AA earnings were great, if retail sales were so strong then why is the dollar selling off?

Thu, 10/08/2009 - 14:07 | 93118 Rama V
Rama V's picture

Like most statistical arguments adrift in a chaotic sea of data, this one also fails to land any causal, verifiable, testable, useful conclusions.

Thu, 10/08/2009 - 14:08 | 93124 Anonymous
Anonymous's picture

Compare this to the EUR and you notice that SPX moves up much more when EUR goes up, than moving down when EUR moves down.

Thu, 10/08/2009 - 14:12 | 93131 bugs_
bugs_'s picture

ZOMG we've been screwed since 1720???

Thu, 10/08/2009 - 14:16 | 93141 ghostfaceinvestah
ghostfaceinvestah's picture

this relationship looks a bit better, not sure why the difference.

 

http://blog.atimes.net/?p=1136

Thu, 10/08/2009 - 14:53 | 93215 ShankyS
ShankyS's picture

WTF - you actually explained a chart in plain english that we all can understand. WTF is going on? This post must have come from the Zurich office.

Thu, 10/08/2009 - 15:04 | 93235 Anonymous
Anonymous's picture

According to this, the Schiff analysis holds up. The US stock market, from an outside perspective, is constantly devaluing and has been doing so from at least 2001.

Thu, 10/08/2009 - 15:51 | 93321 Anonymous
Anonymous's picture

Check out UUP volume today.

Thu, 10/08/2009 - 21:44 | 93711 Gilgamesh
Gilgamesh's picture

Love how the DXY is up .2% afterhours, and the SPY futures are +5 to FV.  I guess the dollar correlation only applies now when the dollar is down.  Let's defer to Larry Kudlow for his insightful thoughts on this.

Sat, 10/10/2009 - 23:12 | 95630 rifek
rifek's picture

So let's see, about half of the current market run-up is attributable to the weakening dollar and disappears if SPX is measured in euros?

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