Why is the stock market up so much?

[Rajiv]

From Karl Denninger - FedSpeak Translation - There Is No Recovery

So why is the stock market up so much?

More than happy to show 'ya.

Two charts should suffice:



That is an overlaid chart (as close as I can easily get them to register) on the dollar and The S&P 500 from the March lows to today.

Notice the near-perfect inverse correlation. The Dollar goes up, the market goes down. The Dollar goes down, the market goes up.

Now today, literally minute-by-minute:



Same correlation - near-perfect.

Folks, you don't have to engage in any sort of "conspiratorial" thinking on this whatsoever. You only need examine the facts.

The rally in the market has exactly nothing to do with the economy and the outlook for it. It is tied to one and only one thing - the decline in the dollar.
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The stock market has responded not to forward economic prospects, as is often claimed, but rather to the "hot money" flows of foreign and domestic speculators and a dollar-based carry trade engendered by The Fed's zero-percent interest rates.
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[cjppjc]

Re: Why is the stock market up so much?

It doesn't hurt that I got stopped out of half my minors, and went short QQQQ for Nov.:eek:

[Adeptus]

Re: Why is the stock market up so much?

That might explain the US stock market, but what about stock markets around the world? In Canada for instance, the stock market has gone up quite a bit (TSX - ~7,500 to ~11,400) and the Canadian dollar from ~77 cents USD to ~94 cents.

So would you also suggest that the rise in most foreign markets is mainly due to a US dollar decline as well?

Adeptus

[Rajiv]

Re: Why is the stock market up so much?

Look at how the "Dollar Carry Trade" works -- hopefully, that should explain it to your satisfaction.

One other reason to sell the dollar is interest rates. Why not borrow in dollars where interest rates are low and invest elsewhere where yields are high? This is what is known as the carry trade.

In the past decade, the Japanese yen and the Swiss franc were favorites for the carry trade because of their low yields. But now, the U.S. dollar presents the same opportunity due to the likelihood that rates will stay low for a long time to come.

The video below explains.

See also Is the Dollar Set to Become the New Yen? from Market Beat.

See also "New Deadly Dollar Carry Trade"

A powerful hidden engine existed for close to 20 years called the Yen Carry Trade. The engine produced tainted trillion$ for its priviliged participants, whose access to cheap money was assured and whose control of government policy was tight. The engine served two important purposes. It kept the Japanese Yen currency exchange rate low, sufficient for maintaining the export juggernaut that sent products around global supply routes with names like Toyota, Honda, Komatsu, Mitsubishi, Nikon, Toshiba, and Fuji for a string of years. It also supplied a torrent of funds to feed both the Japanese and Western (think US, UK, Europe) financial markets its most important channel in existence. The Yen Carry Trade was that important. The Bank of Japan and a host of Tokyo-based financial firms relied upon this carry trade for basically free money. This important money making machine required Japanese interest rates and currency to remain low, and USTreasury Bond yields and US$ currency to remain high. Those halcyon days are largely done, since the Yen is on a rising uptrend and the US$ is on the falling downtrend, even as US long-term rates are stuck below a defended steel bar. Nowadays, the insider firms are struggling to avoid a wrestling match with the Grim Reaper. They are falling like flies.

In the last two to three years, a significant portion of this carry trade has been unwound. In fact, when the US stock market went from Dow 14000 to Dow 7000, it was widely believed that the unwind of the Yen Carry Trade coincided with the decline, thus ending an era. Not to be denied, foreigners tapped into the easy money game during the longstanding era. Wall Street, London, and several European finance centers exploited the opportunity also. When the US$ exchange rate topped in year 2001, and when the US stock market topped in year 2007, the exits became crowded with Japanese and Westerners alike, as they dismantled their leveraged machinery designed to capture the easiest money in modern history. If these firms entered the mortgage bond torture chambers, they had to contend with floors that vanished, as well as swinging axes. Survival is a grand challenge when removing leveraged machinery.
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