Dollar Tanks, Stocks Up…Surprise Surprise

Markets once again shot up at the expense of the dollar.

Rampant speculation is abound about a collapse as the administration does nothing about its drop.

These fears I believe are misplaced in the intermediate term. I’m going to go out on a limb here, but perhaps the Fed is actually following good policy given the options. The actual problem is that we are keeping US denominated debt from defaulting within the banks.

The amount of wealth lost in this recession is still far more than the gov’t has printed through their various liquidity programs. We still have a shortage of dollars throughout the world. The problem is that zombie debt is being kept alive and thus making it seem like there are many more dollars than there are actually. If we actually didn’t enforce “too-big-to-fail” mantra, these dollars would vanish as the debt defaults.

Eventually the markets are going to see that despite the massive liquidity that is being released growth will be very hard to come by and the zombie debt will begin to disappear as banks are finally forced to recognize losses. Asset prices will be readjusted in due time as this reality sets in. The bond market has not been fooled since the beginning. Despite higher gold prices and a declining dollar (fueled by speculative investments in the worlds‘ equity markets) bond yields have stayed flat or decreased. The reflation trade is not working for the real economy. Stock markets will continue higher for now as the Fed keeps the spigot open, but at some point, it will have to account for the fundamentals of the economy.

When the markets begin to realize this is anyone’s guess, but absent a miracle from the economy, the rise in the stock markets will not be sustainable. The Fed knows this. The problem is that we are not getting rid of the zombie dollars and the market still thinks that the debt is good.

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