Stocks are bouncing this morning. As I noted in a note to private clients on Monday, we were at the 126-DMA, which has served as support many times before.
The bulls will attribute this move to market strength. The reality is that it has everything to do with the US Dollar and nothing to do with fundamentals.
There are over $9 trillion in borrowed US Dollars floating around the financial system and plunked into various asset classes. To put this number into perspective, it is larger than the GDPs of Germany and Japan combined.
As a result, the investment world reacts very strongly to any US Dollar move with US Dollar strength hammering “risk” including commodities (particularly Oil) and Emerging Markets.
The below chart shows an inverse of the US Dollar. So if the US Dollar strengthens, the black line falls. You’ll note how closely the Dollar’s movement is correlated to that of Oil (the red line) and Brazil’s stock market (the blue line).
US stocks simply react to whatever happens in these markets because the trading algorithms that dominate market action are focusing closely on Oil’s movements (for obvious reasons that Oil crashed last year).
With that in mind, the US Dollar is retreating today. But this weakness will not last for long. The US Dollar has broken out against every major currency at a pace not seen since the 2008 Crisis. Below is a chart showing the US Dollar/ Yen, US Dollar/ Euro, US Dollar/ Canadian Dollar, US Dollar/ Australian Dollar pairs.
As you can see, the price spikes that began in mid-2014 were the biggest since the financial system was in a free-fall. The current US Dollar weakness will not last for long. When the next leg up begins, risk in general, particularly stocks will fall HARD.
We believe that this is the beginning of the next Crisis… the Crisis to which 2008 was just the warm-up. Today, most investors are completely unaware of the risks to their wealth… just as they were in 2007.
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Best Regards
Phoenix Capital Research