As everyone’s been observing, the dollar and the stock market have moved in perfect, inverse lockstep. One goes up and the other goes down the exact same amount. David P. Goldman offers some historical perspective for why we shold be nervous about what will come at the other end of this rally.
We have only had one period in which the dollar and the stock market were so correlated, and that is in 1983-1984, the beginning of the great Reagan stock market rally. The world bought the dollar and sold the US economy, before the Mundell twist (tight money and lower marginal tax rates) kicked in and the Reagan recovery began. Now we have the opposite: The dollar is selling off in tight correlation with rising stock prices, again with rising stock prices.
Think of Obama as the un-Reagan: rather than a monetary squeeze hurting stocks, monetary easy is helping stocks, as the world goes to the great American fire sale assets. We’ve had an un-rally, and now it’s going undone. Analysis (specifically Granger causality) says that the dollar index leads stock prices, in case anyone cares. Some writers have noted a relationship between monetary expansion and stock prices. The transmission mechanism, I think, goes though the currency. That is what the statistical evidence suggests.
This is a unique situation: never before has the US stock market traded as if it were a banana-republic equity market reprices to the dollar.
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