What’s Up With The Markets?

Since early this month, stock prices have pulled back.  Commodities, including gold, have followed suit.  Some in the media have chalked this up to a renewed weakening of the economy, along with other fundamentals.  That’s incorrect.

If it were truly economic fundamentals that were weighing on stocks, that wouldn’t explain the coordinated action in gold prices.  Stocks and gold have been practically joined at the hip.  When a broad range of disparate assets seems to all behave similarly, you have to look for the common element.  Otherwise you’re left with theories of spooky metaphysical conspiracy between assets or artificial complex rationalizations.  The common element?  The pricing unit … in this case the US dollar.

Digging for answers in the latest employment reports or coronavirus statistics would be a waste of time.  What’s really happening is simple.  Inflation – the rapid dollar depreciation we saw earlier this year – has gone on hiatus.  (FDI 2020 0919)  While the Fed stands ready to deploy a firehose of liquidity (read: freshly created dollars) aimed at the financial system, the nozzle is clogged. Earlier this year Congress had little trouble coming to an agreement to spray trillions of Fed-created dollars into the system.  But now with looming elections, partisan gamesmanship has gummed up the works.  

We’re not merely Monday morning quarterbacking here.  This is a testable hypothesis.  If it is correct (and it is!), the dollar will resume its downward trajectory once there is any clear sign of progress in breaking this logjam.  Proof will come in the form of a broad rally in stock and commodity prices.  Absence of such progress means that the deflationary undertow of debt left over from prior “stimulus” has the upper hand and prices will remain weak.  (Do Low Interest Rates Cause Inflation?)  But make no mistake … it has little to do with genuine fundamentals … no more than the post-crash rally in stock and commodity prices – infamously disconnected from real economy – was proof of economic recovery.  

3 thoughts on “What’s Up With The Markets?

  1. cb says:

    If it were truly economic fundamentals, the market would never have been where it was. It has been FED action, and anticipated FED action by market participants, along with government policies that encourage a steady stream of money flowing into the markets.

  2. cb says:

    so, I think you are saying that ” Inflation – the rapid dollar depreciation we saw earlier this year – has gone on hiatus” ,,,,,,,,,,,,,,,,,,,,,,,,,

    because the other Inflation, the expansion of the amount of dollars in the system due to the printing and digitizing of those lying, thieving sad-sacks at the FED, has gone on hiatus.

    in this case due to the stall of that almost as equally sorry group known as the Congress.

    Fear Not! The FED will print again, and your hypothesis will be proven correct ,,,,, again!

    1. Bill Terrell says:

      Zooming out to the big picture, we have one set of securities called dollars and another set called stocks. We refer to the ratio of the value of the second set to the first the “price” of the second – even though it is equally dependent on both. If value of the second set just stays the same while the value of the first set falls, the “price” of the second is said to rise.

      Because our terminology emphasizes the second, people tend to confuse a decrease in the first with an increase in the second. This leads them to imagine the decrease in the first somehow reflects a genuine improvement in the fundamentals underlying the second. Hence the myth that printing money somehow improves economic fundamentals is hard to shake.

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