The earnings season is in full swing here in the United States. We have seen some dismal results and we are not even in the thick of things yet. We are finally seeing the underbelly of the insanity called recovery and we can now all see: There is no recovery yet.
The stock markets in the United States have been goosed with loose, funny money that comes from the incessantly active printing presses at the Federal Reserve. The excess liquidity has managed to inflate yet another asset class — stocks. While the stock bubble and subsequent burst are not new to us, this time it took a new form.
The Dow Jones Industrial Average hit a pre-crisis high in the last few weeks. So basically, the DJIA recovered back to the 2007 levels and then some. All of this happened while the economy has been as shaky as it can be with each positive data negated by negative data. Yet the stock markets rose.
The recent shot in the arm came with the Fed announcing the third round of quantitative easing (QE3). This program seems endless into perpetuity. But this time, the stock markets did not rally like crazy. In fact they shrugged off that news and acted on financial fundamentals of companies’ results.
Has the stock market finally come to its senses?
I sincerely doubt that the stock markets will now trade on economic fundamentals. The reality of companies not hitting their top and bottom lines is what is spooking the markets.
If you peel the onion to know the causes, it is the strength of the U.S. dollar against most currencies that has led to the misses on revenue and subsequently net profits. The U.S. dollar has rallied to strength based on the European crisis and the constant fear of sliding back into a recession. Each fear episode has led to the “risk-off” trade, which is selling foreign currencies, buying U.S. dollars and investing them in U.S. Treasurys and bonds.
This has gone on long enough and deep enough that most companies have missed global sales numbers when they report in U.S. dollars.
This has to have gotten the attention of the folks at the Fed, as well as some of the policymakers. Knowing their desire to tinker with free markets, I am now fully expecting some dramatic measures of weakening the U.S. dollar significantly and boosting the sales of U.S. companies.
In today’s unconventional world, some unique and drastic steps could be taken to drop the U.S. dollar value against other currencies. It will be an interesting fall and spring, with the elections thrown in for good measure.
It is time to sell the U.S. dollar now while it is strong and get into beaten-down currencies such as the euro, as well as commodity currencies like Australian dollars, New Zealand dollars, Singapore dollars (while not beaten down, certainly an excellent investment) and Canadian dollars.
These are speculative investments, but I am confident that in the coming deluge of the U.S. dollar decline, we can see handsome gains in our investment portfolios.
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