Diary of a Financier

Stop Talking about Historic Dollar/Stocks Inverse Relationship

In Economics on Wed 22 Jun 2011 at 10:29
  • Overlay of USD v. SPX shows a couple segments of inverse dollar v. stocks relationship.
  • The late ’90s are one exception, when USD & stocks were strong due to real, organic growth.
  • How many times can I say it: we need an organic driver like Alt Energy to lift us from this structural recession.

Heard Melissa Lee mention “the historic US Dollar to stocks inverse relationship.” I immediately thought, ‘that’s wasn’t always the case.’

I knew that the 1990s had a strengthening US Dollar (DXY) alongside a strong stock market. So, I turned to an overlay chart of DXY v. SPX, and I have to say I’m surprised at how frequently the inverse correlation governs:

20110622-103759.jpg

Therein, notice the highlighted segments 1985-95 & 2002-present, the periods of an inverse DXY/SPX correlation. Most notable to me was the 1995-1999 segment, where the stock market continued to strengthen along with the backdrop of a surging USD. That’s a time of organic growth in the US (innovation & technology). That’s during the Clinton budget surplus, during the baby-boom crest, during the www. wonder, before the .com bust, before the Y2K overstimulation, before the Barney Frank housing push. I cannot emphasize more the structural nature of this Great Recession. Low capacity utilization and high unemployment are persistent structural realities. The hard-wrought solution is a new organic driver. This all meshes well with my recent comments about prolonged, anti-inertial Fed Funds Rate interventions begetting crisis.

In the absence of favorable demographics, I continue to insist on Alternative Energy as that driver. Yea, some Nat Gas can fit into the portfolio of solutions, but the federal government needs to take initiative. Tax credits are the wrong approach since the federal budget is a wreck. Instead, encourage the use of practical solar solutions by making the approval of all new building permits (after 2012) subject to the inclusion of solar energy sources. (The State of Massachusetts doesn’t provide building permits without the inclusion of handicapped access routes, for example.) Solar panels on the roofs of homes/buildings, thin film on the windows. Excess energy generation can be sold back to the grid. Better yet, an approach like that isn’t a tax credit that subtracts from the federal budget.

That’s just the beginning, but somebody needs to start talking about something different NOW.

–Romeo

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  1. […] had such innovation was the technology boom between 1995-1999. Coincidentally, that was a period of strong Dollar/strong stocks correlation–a rare feat which we should see replicated throughout the coming […]

  2. […] in June, I discussed the 1990s’ rare period of positive DXY/SPX correlation: [N]otice… 1985-95 & […]

  3. […] sure a strong USD necessarily works against SPX like most investors would expect. In fact, I once noted the strong Dollar/strong equity performance from the late 1990s as a sign of organic growth.  At […]

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