- The attached chart shows the change in the S&P 500 Financial Sub-Index (i.e., S5FINL Index on Bloomberg) that accompanied various changes in the DXY dollar index (using year-over-year changes for both).
- As can be seen, U.S. financial stocks tend to have the best performance when the dollar strengthens. The magnitude and direction of the change in the USD corresponds with the magnitude and direction of the change in Financials.
- During the time period that the chart covers (1990-2008), Financials have generally performed well, which is why most of the bars are in positive territory. But the important point is that Financials had their best performance when the dollar was the strongest and the worst performance when the dollar was weakest.
- A long-held premise stated in the Lowdown
has been that rebuilding of the US financial system would require a strong dollar in order to attract the necessary capital from overseas. We are now at that point in the cycle when everything is coming together: 1) Previous changes in the US yield curve suggest that the worst of the business cycle downturn is over; 2) Emergence from recession in the US while the rest of the world slows down supports the dollar; 3) A huge amount of bad debt has already been written off while the upward-sloping curve is allowing many financial institutions to improve operating income. - The macro environment is improving for both the USD and financials. The two go hand-in-hand.
Now, lacking a bit in inspiration today, I decided to see how that conclusion might fit with Asian banks, just for a broad feel for what is going on. Looks at first glance, Asian Financial Crisis recovery period aside, that Asia's banks benefit more than those of the US from a firming USD.
Could we actually see a secular upswing in our banks, if the USD really does continue its upswing?!
Tried to do it on Bloomberg, but too hard! Data from Bloomberg, but my Excel manipulation.OR maybe a strong USD can just lead to a strong NASDAQ or... just Asia ex-Japan in general?! (Or just all equities???)
Strong USD is certainly not my null hypothesis for the longer term, but could well continue for another few months as Europe and Japan show even worse growth characteristics than the US.
And THAT could carry my now-famous "leggy markets" further than even I was expecting.
*** late addition: see here for correct chart!!
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3 comments:
Right now I see a flight to quality (kinda a joke) as credit deteriorate in Europe. It is gonna be ugly we actually see countries dump their dollars (e.g. there is the amount of currency float that is realistically representative of how the printing pressing have been run.)
When things don't add up there is usually a reason why - and we just don't have the information.
My hunch is it is a currency intervention and they will pull out all the stops at least until the election - after which the hangover might intensify the housing flue.
See 8/10 and 8/12 at http://blog.nowandfutures.com/index.html
I don't think the FEDs have to tell us what they are up to.
The other point is what is real inflation right now? If inflation is 12% and the market is doing 2% - we are only losing 10%. I do believe the gov is in the business of lies (see the primers at http://www.shadowstats.com/section/primers
Yup - a flight to quality, but ub a knee jerk reaction sort of way... though the traditional fear bolt hole of gold seems not to have been working, until the last few days. The other one, the Swiss Franc, dropped like a rock against the "safe haven" USD as well, and has only now started to stabilize.
What do you think - wishful thinking from the USD playahs, just covering their shorts and spinning a tale about relative growth? Or Twin Deficit talk will cut in and smack the USD? Remember, trade balances were flattered by the weak USD, so...
I wrote recently of my thoughts on the housing market, so I think we're on the same page in terms of worse to come in the housing market.
I am less of a believer in a conspiracy theory about the Fed and the USD... and the BS about the "strong Dollar Policy" - though I might be inclined to believe there was more to it than what we see if the (post-Volcker) Fed was marginally more competent.
But you're right about the inflation rate... sure, the US probably still OK at CPI=5.6% but PPI=9.8%!!! Does nobody else SEE these numbers?!?!?! OK, P(Oil) down will help, but there'll be an ongoing feed through.
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