A Look At The Dollar, The S&P And Bonds Since The Start Of This Economic Crisis

(Dollar chart is inverted to show direct correlation with the S&P and bond market.)

1) We remarked that the Federal Reserve could print a fair amount of money and not worry about inflation when this crisis started. And that the Fed should set short term interest rates at zero the moment this crisis started. Both positions would have been considered ludicrous at the time. Absolutely no one was taking any type of position that the Federal Reserve either should or could print money. Monetizing the debt is still a position that brings out the hecklers who have a limited or ideological understanding of money. I still support this position. A position based on merit not ideology. None of that merit includes bailing out the criminals on Wall Street which seems to be a Bernanke and Obama favored pastime. Instead it is a position which should be used to assist society in dealing with this crisis constructively.

2) Throughout December of 2008 and early into 2009 we wrote numerous times that the seeds of a rally were building but that a tradeable bottom was not in. That the rally was building but needed time to germinate.

3) We highlighted part of quantitative easing was really an attempt to drive money out of safe havens and into risk. Indeed that is exactly what happened. Unfortunately, it did not work as Bernanke expected because none of that risk was economic risk. It was simply more fraudulent financial speculation.

4) When Citigroup dropped below $1, we wrote that we were no longer bearish on banking stocks. That exogenous factors would determine the fate of banks. This after being incredibly bearish on banks before and during the financial collapse. Banks soon roared higher.

5) We wrote that the Transports were likely headed down to 2200 before any possible bounce. And that is exactly where they landed before rallying 90%.

6) President Obama made a public pronouncement that now was probably a good time to buy stocks. The President has shown through various commentary since that he actually knows very little about economics or how to effectively deal with this crisis. But we can be completely assured Wall Street and the President knew privately what the Fed was about to announce publicly - it was about to start monetizing debt. That very act gave Wall Street cover to front run credit and the effects of monetizing - a nearly certain guarantee of a falling dollar. The dirty little secret as we have always said is that Wall Street's brilliance is tied to one dynamic - insider information about what the Federal Reserve is going to do with monetary policy. And, we can be assured they knew exactly what was going to happen before it was announced to the public. Just as the President did. That is what started this rally in financial assets.

7) The Federal Reserve publicly announces it is going to start monetizing debt. ie, Printing limited sums of money.

8) We wrote that the market had most certainly made a low for the year and the S&P could rise to 1100. At the time, that was a generally unfathomable perspetive. Yet, we are here today. The S&P is now at about 1120.

9) Bob Pisani, CNBC reporter and generally very uninformed about how the economy or financial markets work, gives an on-air tutorial to the general public about how to employ the carry trade. ie, Shorting the dollar and buying stocks. Within weeks the dollar was rallying rather substantially. Contrarily, we have been writing for years that Wall Street has been speculating against the U.S. dollar. As the stock market hit new highs before the collapse, we wrote that the only financial assets we liked were U.S. dollars and Japanese Yen. A position which is still valid. Wall Street continues to speculate aggressively against the dollar. Goldman Sachs recently issued remarks that they believed the dollar would continue to decline because of the current account deficit. A rearview mirror position which has absolutely no merit in any type of analysis and again shows how little Goldman Sachs actually understands about the world around them.

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I am completely amazed that there is literally no one stating that the dollar could be or is likely putting in a long term low. There is a near unanimity that the dollar's rally is a short term movement based on an overcrowded trade. That the dollar will start its descent again in the not too distant future. Once again, this perspective is a Wall Street perspective. One of a trader. We wrote a few years ago that it mattered not what traders attempted to do with the dollar. That fundamentals would crush forex traders were they attempting to short the dollar. And in fact that is exactly what happened to Wall Street as the dollar rammed higher when global financial assets collapsed.

Fundamentals, not traders, drive markets. A strong qualitative and quantitative understanding of fundamentals has allowed us to call more macro outcomes to this cycle than any other source I am aware of. Fundamentals allow or disallow traders to take certain positions until fundamentals change and force traders to change or to lose their money without mercy. At some point fundamentals will crush traders again. I am still of the perspective that the dollar is putting in a long term bottom driven by fundamentals. A very, very lonely position. But a position based on qualitative and quantitative analysis of data. Not of opinion.

One can argue all day long whether the Federal Reserve is a valid institution but given the dynamics of what was unfolding, Ben Bernanke literally did save the world as we know it. At least temporarily. If he hadn't, we'd all be living in caves right now foraging for grubs. The failure of politicians to take this opportunity to fix what ails the global economy will ultimately mean a substantial amount of the global population will very likely be foraging for grubs in the not too distant future.

What's next for the stock market? Frankly, I don't like this rally because I know it isn't driven by fundamentals. Powerful fundamentals that I respect all too well to play with. That said, this rally was indeed real. We'll take a stab at guesstimating where markets will head some time in January but let's end 2009 with a point to ponder - the very reason this rally was so powerful is because the underlying economy is so broken. We'll discuss the fundamentals behind this statement in detail next year.