Dollar Devaluation Brings Illusion Of Prosperity

Eric deCarbonnel
Market Skeptics
Friday, March 27, 2009

The Wall Street Journal reports that stocks’ momentum keeps building.

(emphasis mine) [my comment]

MARCH 26, 2009, 3:40 P.M. ET
Stocks’ Momentum Keeps Building
By PETER A. MCKAY, GEOFFREY ROGOW and ROB CURRANStocks gained as relief that government debt sold well offset a troubling weekly report on jobless claims and investors continued to debate whether the market and the economy were finding their feet. [In relations to dollars, stocks will rise. In relations to gold, stocks will fall another 50 percent]It briefly pushed into positive territory for the year earlier in the day but has since eased amid a broader easing of buying. The S&P 500 climbed 1.4%, led by gains in its tech, basic-materials and industrial sectors.

Stocks were helped, in part, by an auction of 7-year Treasury debt, which rekindled investors’ previously flagging confidence in the U.S. government’s ability to finance its efforts to rescue the economy.weak demand for five-year notes rattled investors in stock and bond markets on Wednesday. [Soon the US like the UK will begin to experience failed auctions for government bonds.]“This is a good sign that quantitative easing is working so far [Although the economy is rapidly worsening, the fed’s quantitative easing is expanding the monetary base even faster.],” said Art Hogan, chief market analyst at Jefferies & Co., alluding to the Federal Reserve’s plan to buy long-term debt to further boost the economy. He said that effort seemed to help demand in Thursday’s auction.

Also spurring an extension of nearly three weeks of gains for the stock market was a push from institutional investors to buy stocks most likely to benefit from an economic recovery.“We know there’s no magic bullet, but there is a lot of faith in what the government is doing here [I too have “faith” that the fed will push up stocks by destroying the dollar],” said Robert Weinstein, senior managing director for Lighthouse Financial Group. “Some of those hedge and other funds that went into cash at the end of last year are just starting to get back in now [The velocity of money is accelerating! For more on the velocity of money, see how deflation creates hyperinflation].”

Todd Leone, head of listed trading at Cowen & Co. in New York, said that the widely held belief on Wall Street that the market’s rally is a bear-market bounce [The market's rally isn’t a bear-market bounce. To believe stocks will be making new lows this year, you have to believe the dollar will maintain its value. That is a losing bet.] could, somewhat counterintuitively, provide fuel for it to continue longer than expected as new buyers gradually come off the sidelines.[The rally is being driven by the dollar's devaluation which makes it very real],” he said. “But it’s been acting well, with a lot of momentum.”News on the economy is far from upbeat [because the US economy is disintegrating]. On Thursday, the Labor Department said initial claims for state unemployment benefits climbed 8,000 to 652,000 last week and total claims rose to a record high over 5.5 million, suggesting that job losses are continuing at a rapid clip.

Separately, the government issued its final reading of fourth-quarter economic activity. U.S. gross domestic product shrank at a revised 6.3% annual rate in the October-December period [Ugly], a bit faster than the 6.2% rate in the last reading.

The reports ran counter to the more optimistic tone in recent readings on home sales and durable-goods orders [the “good news” about home sales and durable-goods orders was created by the dollar’s devaluation]. But some traders and analysts think the market is in a bear-market rally that could last at least through the upcoming earnings season, when red ink and glum forecasts by companies may spoil the party.

At 3:30 p.m., the Dow Jones Industrial Average rose about 141 points to 7890, led by strong gains for tech stocks such as Intel, up 6%, and Hewlett-Packard, which rose about 7% in recent trading. Both companies drew buyers after Best Buy posted a better-than-expected full-year outlook, showing that there are still buyers for technology products. Best Buy, which isn’t a Dow stock, rose 12%.

The Nasdaq Composite Index rose 2.8%.

The sale’s bid-to-cover ratio, an indication of demand, was 2.52 compared with 2.1 at the last seven-year sale, which took place in February. Indirect bidders — a category that includes key overseas instititions — accounted for a respectable 28% of the total purchases. The results came after

“A lot of people don’t believe in this rally

Wall Street is starting to look ahead to the coming earnings season, which is due to kick off on April 7 when aluminum maker Alcoa announces its results.

“We know the [market's] earnings are not going to be good,” said Mr. Hogan. “The main hope is that they’re better than the fourth quarter and that the market has done an adequate job of pricing in the expectations. That will be the major test of the rally that we’ve seen.”

According to the research firm Thomson Reuters, which tracks Wall Street’s earnings expectations, analysts expect earnings at S&P 500 companies to show a 36% decline for the first quarter, compared to a 67% slide in the fourth quarter of 2008, when crisis erupted on Wall Street.

“We’re clearly still in a relief rally mode,” said Ed Yardeni, president of Yardeni Research. “It’s possible that the economy may be starting to fix itself, even without some of the policy moves we’ve seen recently. But we still need to see more signs to confirm that.”

One sector well outperforming the broader market was solar companies, which soared following a media report from Asian technology newspaper DigiTimes that the Chinese government is open to supporting the local development of solar energy in China. Companies such as Suntech Power, Yingli Green and LDK Solar all jumped more than 30% on the report.

My reaction: The current stock rally is being driven by dollar’s devaluation, which makes it very real.
B) US GDP shrank at 6.3% annual rate in the fourth quarter of 2008. readings on home sales and durable-goods orders as signs of economic recovery, when they are signs of a dollar collapse.“This is a good sign that quantitative easing is working so far,”“Some of those hedge and other funds that went into cash at the end of last year are just starting to get back in now.”
Conclusion: With the accelerating velocity of money, all the fed’s current and past money creation is beginning to reach the market. With the dollar’s devaluation driving up prices, stocks will rally even as the economy implodes.1) The market isn’t experiencing a bear-market bounce. Stocks will continue to rise in relations to devaluing dollars, while their real worth, as measured in gold, will fall.If you haven’t already, I read about The Nightmare German Inflation. In offers grim preview of what awaits the UK and US. It also illustrates the imaginary wealth created by a currency collapse.

1) The stock market has experienced nearly three weeks of gains, with the Nasdaq briefly pushing into positive territory for the year.

2) Weak demand for Wednesday’s auction of five-year treasuy notes rattled investors.

3) The US economy continues to disintegrate:

A) Job losses are continuing at a rapid clip, with claims for unemployment benefits rising to a record high of over 5.5 million.

4) Investors are misinterpreting the stock rally and “positive”

“We know there’s no magic bullet, but there is a lot of faith in what the government is doing here.”

5) With cash leaving the sideline, the velocity of money is accelerating

6) The DOW has probably seen its low in terms of dollars.

7) Looking at the one year chart shows that the VIX has begun to break down. The VIX (Chicago Board Options Exchange Volatility Index ) measures is the the implied volatility of S&P 500 index options and is a good proxy for investor fear in the market.

Looking at the eighty day chart of USO (United States Oil) shows how the dollar’s devaluation is causing energy prices to rally.

9) The chart of the US $ INDEX shows how the dollar is bouncing off its rising trend line. When this trend line breaks down, the dollar will soon begin making new lows.

2) Weak demand for five-year notes on Wednesday is a warning sign that the US, like Britain, is losing its ability to finance its spending (without printing cash). Expect failed treasury auctions within the month.

3) DO NOT SHORT THE MARKET. With the fed planning a 15-fold increase in us monetary base, being short the market is extremely dangerous.

The dollar’s devaluation is creating illusionary prosperity

Do not be fooled by the appearance of economic recovery created by the dollar’s fall! The onset of hyperinflation is often misinterpreted as economic recovery.

[This is an extract from a 1970 report on Weimar Germany's hyperinflation. I advise you to read the full version.]Inflation seemed to bring prosperity [stocks are up 20 percent]. In 1921, when the rest of the world was in a severe post-war recession, production indices in Germany rose sharply. Late in 1921 the mark stabilized temporarily, and business promptly weakened. By early 1922 the mark was sliding again, and business immediately revived [The illusion of prosperity]. People were buying goods as fast as they obtained money; companies rushed to expand plants and turn money into fixed investment [“positive” news about home sales and durable-goods orders is evidence that this rush into assets is beginning here in the US]. Germany was actually envied for its “prosperity” by many foreigners. [The US/UK will soon be enjoying the same "prosperity"]The mechanism of inflation was simple. The government issued paper promises to pay, and the Reichsbank issued money on the security of these promises. [US sells treasury bonds. The fed then buys these treasury bonds with printed cash. Simple no? Today this process is called quantitative easing.] When a government spends more than its income, it must borrow. If it merely borrows money from its citizens by selling them bonds, there need be no inflation. Instead of that money being spent or invested by the citizen, it is borrowed and spent by the government, but the total amount of money is not increased.When the government needs more money than its people are able or willing to lend it, it monetizes the debt. [This is the quantitative easing] That is what happens in this country when the government runs a big deficit. The Federal Reserve (our central bank) “buys” as many bonds as necessary to stabilize the market. It prints money on the security of these bonds. Despite the facade of the government supposedly “borrowing,” the net result is the creation of printing press money. (Actually these days the money is created in the form of new bank deposits–checkbook money–but the net result is exactly the same as if bills were printed.)

Hyperinflation is by far the most devastating economic disaster a country. While deflation, like the US experienced in the 1930, brings suffering, hyperinflation wipes out the middle class and destroys the very fabric of a nation’s society. In trying to “protect” America from deflation, the fed is steering the country towards a far worse fate.