Dollar Breakout Looming….with further discussion…and more
We continue to watch the dollar / gold relationship for signs of dollar strength and the coming decline in gold. Probably the easiest way to do that is to watch the ratio between the gold ETF GLD, and the dollar ETF UUP. At yesterdays close the ratio was GLD 6.96 times UUP. A drop in the ratio below 6.70 will start to trigger a move to a stronger dollar.
Further Discussion at 9:10 AM CDT
The US deficit issue is the underlying factor in a stronger dollar. Obama has an opportunity here to show hardball leadership and if successful, would provide a huge stimulus for the dollar. Some important points that should be reviewed first are:
1) The US tax system of relatively low tax rates on the top end since 1980 has shown an ability to increase growth at the price of increased deficits. Trickle down increases government debts.
2) The real problem is that the middle class has been continually squeezed financially, and in an economy where the middle class is responsible for 70 percent of consumption and we have an economy that is based on consumer consumption, something has to give.
3) From this equation the current Obama goal of 4 Trillion dollar in deficit reduction over the next 10 years with reduced expenditures planned at a rate of 3 to 1 against reduction of tax breaks makes a lot of sense.
And more at 9:35 AM CDT
I’m watching stocks and commodities rally. What is feeding this frenzy of what I view as a major longterm trap? Some possibilities: 1) the market believes that what Bernanke says is true, that the soft patch is temporary and we will return to more normal growth in the second half; or 2) the market believes that some workable plan will come out of Washington on deficit reduction and a bull market will germinate.
The important question it seems to me, is US Debt Reduction bullish for the stock market and the economy? In my opinion the answer, in the Long Term, yes. In the short term, ie the next five to six years as this secular cycle comes to an end, no.
With a stock market move since 1980 that is highly correlated to government debt increases, it is obvious what will happen as we start reducing debt. The economy is a little different story, unless slow growth and stability is what you are seeking. I’m fine with slow growth and stability.