Do the economic rules still apply?

Today I am providing you with a little different post than you might expect. Normally I am discussing and writing about purely ecological issues, and I guess the eco-conscious economy fits into that space. One of the goals we are aiming towards is a change in attitude towards more environmental sensitivity.

With the current economic and financial crisis we can’t close our eyes and just think the green revolution will take care of everything, especially when the new president will use funding for alternative energy projects and environmental causes to create millions of new jobs.

If we have learned one thing in the last few years, and in this crisis particularly, its that the world is interconnected, and an exploding housing bubble in the US can and does harm all economies around the globe.

When we look at what happens with all these bailouts, Wallstreet rescue packages, and stimulus initiatives, someone like me begins to ask:

“Where is all the money coming from and what will the effects be?”

We do a significant amount of international business at AMC. Because of that fact, we are always aware of the exchange rate between our US Dollar and other currencies. If you haven‘t looked lately or postponed your planned vacation to Europe, you might not have seen that the Dollar actually climbed significantly against most other currencies in the last few months.

Normally you would think that announcing hundreds of billions (with a B) Dollars of new money spend on banks, auto manufacturers, mortgage companies, etc. would casue teh Dollar to loose value. Instead the opposite happened. I couldn’t understand it.

Today, Jeff Clark send me a letter explaining what is going on and what he thinks will happen in the near future. I want to bring you his writing because I believe it is important for everybody to know. It might also make a difference for anybody planning to ask for cash for Christmas instead of gifts, especially if the cash comes from relatives living in places outside of the US with different currencies.

Jeff Clark wrote: “It’s all about the dollar.

One look at the following charts tells the whole story of the past three months…

The Dollar Movement

Soch Market Decline

You can see the tremendous inverse correlation between the U.S. dollar and the stock market. As the dollar has rallied 15% in just over two months, the S&P 500 has lost 33%.

The stock market isn’t the only victim. Commodities have collapsed, too. Oil is down 50%. Gold is off 12%. And the Reuters Commodities Index (CRB) has lost almost 40%.

The strength in the dollar seems irrational. After all, the U.S. Treasury has committed to printing trillions more dollars in an effort to bail out corporate America and salvage what’s left of the housing and banking industries. This action should be inflationary and it should depress the value of the greenback.
But there’s a stronger force at work right now… the need for liquidity.

Investors and institutions are dumping stocks and commodities and buying dollars with the proceeds. This supply/demand equation is pressuring asset values and propping up the value of the dollar.

But it’s temporary.

Just as oil prices rallied during the summer even as inventory levels swelled, the dollar has so far defied the laws of economy. It’s an aberration, though. Oil prices eventually fell to reflect market conditions. And at some point, the dollar will fall.
According to the chart pattern, we may reach that point soon.
Here’s another look at it…

Dollar Support

You can see the negative divergence that formed on the MACD indicator (below the chart) during the most recent rally in the dollar. This indicates the momentum behind the rally is weak.
A falling dollar is obviously bullish for commodities. So gold and oil should appreciate nicely in this environment.
To the extent that a rallying dollar has depressed stock prices over the past several weeks, a declining dollar should cause stocks to rally, too.

So keep an eye on the action in the dollar. Once it starts to fall, it should usher in the rally we’ve all been looking for.”

I will keep an eye out because it’s not just a matter of foreign gifts in cash, but it will be a matter of us paying higher prices when the dollar begins to fall. Oil will get more expensive again, and many of the products we import will increase in price. At least now I have some idea what is happening. Enjoy the low price for gas for now and be aware that it will not be long before it’s going to be back up.

Please tell anybody beginning to think that buying a large SUV or truck might again be an option that the  current gas prices will not remain as low as they are, and that the fact  that such a purchase is bad for the environment we all share remains to be intact, even when gas is less than $4/gallon.

Axel Meierhoefer