Friday was stunning. After a shock unemployment reading of 10.2%, the market surged. And then, after a weekend of stewing things over, markets rocketed higher again today, and are now comfortably sitting at the highs of the year.
So why the powerful rally despite the so-so fundamentals? Maybe because rising unemployment guarantees a continuation of sub-0% interest rates.
Think about it. In recent months, stocks have maintained a tight 1-to-1 inverse correlation with the dollar. As the dollar declines, stocks go up. Anyway, it’s now safe to assume continued dollar debasement, and thus a continued rally.
Granted, there are sceptics. The recent pause in stocks brought out, once again, the likes of Roubini, Prechter, and Faber warning of a shock dollar rally, potentially clubbing stocks dead. But so far, it’s not happening, and Bernanke will be in no mood to tighten anytime soon.
Here’s Jan Hatzius (via PragCap) arguing that the Fed won’t raise rates even in 2010.