The United States is home to the largest and most liquid investment markets in the world. There's hardly a market one can think of that is not exchange listed. This has made the United States the primary destination for excess global capital placement wherever it has gone towards the relative safety of government bonds or been more aggressively allocated towards stocks, ETF's or even the futures markets. The final destination of the intangible funds is less important than the singular character that all these investments have in common. They're nominated in US Dollars and the Dollar's value may be more meaningful than the underlying asset class.
Investment securities are not protected from the vagaries of their underlying treaties. Therefore, globally allocated investments owned in US Dollars can lose money in a flat market if the Dollar declines. The Dollar peaked in early July and has since fallen by more than 6%. Therefore, if your US equity portfolio has not earned more than 6% since July, you've actually lost money. The Governmental shut down has accelerated the recent slide and pushed the Dollar to a new 30 day low for the second time this week. This is only the second time since May of 2011 that we've made multiple 30-day lows in the same trading week.
Perhaps more troubling to global investors than the currency-based loss is the fact that the traditional safe haven investments, even in Dollar terms, have not behaved as expected. The primary relationship between the Dollar and the US equity markets since the financial implication of 2008 has been negative. This has been embodied by Dollar rallies on stock market declines. Very simply, foreign capital gets converted to US Dollars and placed to work through buying declines in the stock market. Conversely, when foreign investors take profits in a rising stock market and convert back to their base currency, the Dollar falls.
We also see this relationship play out in the gold market. Economists on TV tell us to buy gold as a defense against a declining US Dollar. Sensationalists point to the overwhelming debt being created by our country and tell us to buy gold because our country is on the verge of implosion and our currency will become worthless. Speaking of correlations, it's amazing how many of the people say this is the ones selling gold investments. Astute investors would notice that the correlation between these two markets has been trending since since early June. This means they're moving in the same direction more frequently rather than opposite each other as expected.
Foreign purchases of US goods have always been Dollar depended. Every nation and agricultural enterprise within every nation is forced to tie their commodity purchases accordingly. Therefore, it becomes especially disturbing when a weaker dollar fails to attract foreign purchases of global staples. Beginning in August of 2012 we started to see the commodity markets decouple from the US Dollar. Wheat was the first market to be sated. Corn followed suit in October of 2012 and hogs joined the new normal last November. This means that even base foreign needs have been filled. Therefore, they are more likely to trade in the same direction as the Dollar going forward rather than the typical negative correlation that we've seen from bargain hunters looking for inflation in the commodity markets.
The International Monetary Fund (IMF) stated that world Consumer Price Index (CPI) came at 3.2% year over year for August. This is down from 4.9% a little over a year ago and ties in rather neatly with gold's last run at $ 1,800 per ounce early last October. The US employment rate is generally believed to be artificially low in the as reported number of 7.3% and Gross Domestic Product (GDP) here in the US came in at a very tame 2.5%. These statistics, combined with a low global industrial capacity usage number suggest that inflation is nowhere near. Furthermore, the Federal Reserve Board's recent decision not to implement a tapering of the $ 85 billion per month in economic stimulus reinforces the notion that their primary concern is deflation, rather than inflation.
Many economists believe that we may be near a tipping point in the bull run that has followed the economic meltdown of 2008. The obvious concern now lies in the protection of the wealth that's been garnered during the recent run. Clearly, the ownership of alternative investments is not going to play out the way the pundits have claimed. Therefore, investment vehicles that will profit from a decline in both asset value and currency depreciation should be seriously considered. These include inverse ETF's as well as the future markets, which will allow the seamless implementation of short trades including treaties. Equity futures spreads selling small caps like the Russell 2000 and buying big caps like the S & P500 are also a good idea when expecting volatile, downbound markets. Remember that cash is only king as long as the King's throne is not sinking.
Source by Andy Waldock