Markman: Dollar Daze

We can talk about earnings and Japan and the Fed and commodities until we are
blue in the face, but the primary reason that stocks have been going up over the
past eight months is that the dollar is going down. Its very simple, as you can
see in the chart below.  The clock starts running for this chart the day after
Federal Reserve chief Ben Bernanke announced his strategy to begin a second
round of quantitative easing in a speech in Wyoming. The dollar has crashed by
10% since, allowing big-cap stocks to soar by 27%. Heading into this week, most
commodities have done much better than that: Silver was up 140%, cotton was
up 121%, corn was up 58%, crude oil was up 53%, and energy-related sectors
like oilfield services were up 70% or more.  To believe that stocks are going
to keep rising, therefore, you pretty much need to believe that the dollar is
going to continue to fall. Its not a given, but its a good bet. So what would
lead to the dollar to keep collapsing?  The latest Philadelphia Fed report
showed east coast manufacturing plunged in the past month. I wont got into all
the math, but the decline puts in play the possibility that U.S. GDP growth will
clock in at 1.5% in the second quarter miles lower than President Obama and the
Bernanke are going to feel good about, and a long way from both the consensus
GDP estimates and a growth rate that will generate jobs. A deceleration in the
economy would take pressure off U.S. interest rates as there would be less
demand for money. That might occur just as other countries China, in particular
are raising rates. So you know what happens if there is more demand for Chinese
paper and less demand for U.S. paper, right? The demand for yuan rises and
demand for dollars falls. As a result of this very plausible and real scenario,
the CNY/USD cross Chinese Yuan vs. U.S. dollar is becoming the key one to
watch in the world. It kind of makes sense when you consider that foreign
exchange markets have been pricing in dollar weakness since last year, but this
is the one that could help the U.S. the most and potentially put a dent in
Chinas armor as a manufacturing haven. To the extent that it becomes marginally
more expensive to make stuff in China than in the U.S. manufacturing here would
benefit. The weakness of the Philly Fed might be just what the doctor ordered
Dr. Bernanke, that is because it will give him cover to keep up quantitative
easing after the current $600 billion allotment is done. If you think about it,
the Treasury wants the Fed to keep up its liquidity program as much as anyone
because it keeps down the interest rate the U.S. needs to pay to fund the
deficit. The bottom line is that underlying U.S. economic weakness could
actually help stocks if it leads the dollar to fall and quantitative easing to
continue. Putting it more simply, if the red line on the chart above,
representing the dollar, continues to go down and to the right, then you can
expect the black line in the chart, representing big-cap stocks, to keep moving
up and to the right and the same, but more so, for commodities and
commodity-related stocks. Oil, oilfield stocks, silver, gold, gold miners, you
get the picture.  The 1,400 to 1,430 level of the S&P 500? Sure, why not. Paper
securities would simply be keeping pace with the decline in the dollars buying
power. Its kind of a bummer to think of it this way, but its reality.