Dollar Down 3rd Straight Year

This ought to put things in perspective:

dollar cash index vs S&P P/E ratio
Click for full-sized image

It’s really starting to unravel now. This is more than just idle market speculation, this is a real decline in not only the US dollar, but in the market itself. If you don’t know what S&P P/E ratios are, here’s a snip from the Investopedia definition:

In general, a high P/E means high projected earnings in the future. However, the P/E ratio actually doesn’t tell us a whole lot by itself. It’s usually only useful to compare the P/E ratios of companies in the same industry, or to the market in general, or against the company’s own historical P/E.

Essentially, future earnings are forecast to decline. This has everything to do with the value of the dollar and US businesses facing rising costs as goods and services become more expensive. This also effects consumers, as this Financial Times report notes:

Clifford Bennett, chief strategist at FxMax, was even more bearish, seeing a “real risk of a blowout” in the US current account deficit in the first half of 2005 as the falling dollar forces US consumers to spend even more on imports to maintain their standard of living.

We’re at the point now where we’re looking at a very dark cloud on the horizon, and it’s starting to look like the Fed is actually going to try and inflate its debt away (which is pretty much like jumping off a cliff and betting the ground will dodge your fall). This is the same setup that caused rampant speculation in the 1920s and eventually led to a 5-year decline: huge amounts of loaned money pumped into a market that violently reacted when it realized what the hell was going on. The P/E ratios is an indicator that the real value of future earnings is declining, even though the market iself can sustain record stock prices. Eventually the game is up when demand for credit slackens, which it’s starting to show signs of at the seams.

Who knows? The Fed might be able to pull a rabbit out of a hat and deflate the dollar gradually, but I would bet on a large market correction sooner rather than later.

Previous HoT articles on the subject: 1 2 3 4 5 6 7

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