How to Determine in What to Invest

The answer is: find the main driver in the markets and figure out how to use it. In this case (click on chart to enlarge) the driver of the stock market is pretty obvious: it’s the devaluation of the dollar, as I showed on this blog and later in a study for Asia TImes Online.

Daily data for the stock market vs. the dollar index year-to-date form a nearly straight line (and yes, I ran the Granger Causality test, and it shows information precedence for the dollar index). Monthly flows from overseas into US equities also rise as the dollar falls (click to enlarge):

Dollar hedges (gold, oil, raw materials) have outperformed the broad market, which makes sense, given that the dollar is the overall driver of the market. If there is to be any growth in the world, moreover, it is more likely to come from China than from the US — so the aggressive growth component of a portfolio should be Asia-centered. Otherwise some high quality fixed income is desirable in case of another major downturn in the equity market.

Comments

[a. palmer jr.:]

In deciding in what to invest one must first decide the financials of the company, the overall direction the company is headed in and several other things the stock market guys know better than I. But, anymore ones first thing to consider is whether the company is corrupted by criminals who run it. In my limited stock market investing I've already been burned by a couple of companies that looked on the up and up, had sustainable businesses but were run by crooks that stole money from the company (and me). That kind of record is seldom posted so the investor is left in the dark.

Oct 18 10:04 AM

[Vuke:]

The economic pie today is shrinking and changing form as it shrinks. The North American economy can produce anything it wants, including energy (nuclear, tar sands etc.) so if a mercantile assault by China continues it will be they who ultimately come out the losers.

A cautious portfolio of domestic oils, PM's, agricultural products and sound corporate securities should weather changes well if NA remains the level of stability and business civility it has historically displayed.

We have our share of crooks, to be sure, but they're pansies compared to much of the rest of the world. Here, you can breathe the air, speak your mind and carry on your affairs with little interference. This is our true strength.

So far.

Oct 18 11:24 AM

[admar:]

Unfortunately regardless of how much or how good the quality of the research one does these days it is of little value in this market. I heard a very wise saying many years ago that is very appropriate, especially at this time. It goes like this,"When the big fish are feeding, the little fish need to be under the rocks". With an inattentive and somewhat ignorant IE:(Burnie Madoff) SEC, A biased and too cautious Treasury, the legality of big boys being allowed to see offers and bids ahead of the transparent market, the Fed making secret moves to control the dollar value it is apparent that the market is rigged in favor of the moneyed gentry. In reading about the inherent risks associated with offerings that should be safe haven (GLD & SLV) I have determined that I should be under a rock. Being retired and on a fixed income and fearful of my Govt. (health care overhaul, cap in trade, energy policy, global warming, etc.), and taxes and inflation I am compelled to keep a significant portion of my assets at risk. Rom Emanual is credited with saying it best for me when he is quoted as having said "never let a good catastrophe (or emergency) go to waste". The average person doesn't stand a chance when the door's of the vault have been thrown open to the predators at the gates.

Oct 18 11:26 AM

[T.Stamps:]

VUKE: Very good point and so important. I wonder how long we
will be able to speak our minds. This administration would love
to shut down the few that do speak the truth.

Oct 18 12:34 PM

[Tony Daltorio:]

That is where you wrong - America has changed - the moral, ethical (corporate reports) standards are now far lower in the US than elsewhere in the world.

For instance, the accounting standards set by international accounting boards are far more strict and believeable than the fantasy accounting standards now permitted in the US.


On Oct 18 11:24 AM Vuke wrote:

> The economic pie today is shrinking and changing form as it shrinks.
> The North American economy can produce anything it wants, including
> energy (nuclear, tar sands etc.) so if a mercantile assault by China
> continues it will be they who ultimately come out the losers.
>
> A cautious portfolio of domestic oils, PM's, agricultural products
> and sound corporate securities should weather changes well if NA
> remains the level of stability and business civility it has historically
> displayed.
>
> We have our share of crooks, to be sure, but they're pansies compared
> to much of the rest of the world. Here, you can breathe the air,
> speak your mind and carry on your affairs with little interference.
> This is our true strength.
>
> So far.
>

Oct 18 08:08 PM

[Jake2:]

The final paragraph of the article says it all. I.e., it says nothing. One might as recommend investing in blue sky, or stocks that rise, or bonds that pay dividends. Reader, pass by.

Oct 19 01:57 AM

[Greg K:]

Hey David,
It makes you wonder why Russia and Temaesk are issuing USD bonds (aka liabilities)

Oct 19 06:50 AM

[Ning:]

Hello David,

I like the way you did dollar index and S&P correlation, so i try to do it myself. However, I didn't find any correlation with data back to 1973, the earliest dollar index you can get from St. L-Fed. I bring back the time from 1973, to 80, 90, until 2008, when I can see a negative correlation. While I think the way you did it is original, I can't agree with your conclusion, because you can always find part of the history when S&P and dollar index moves against each other. Lack of long term (negative) correlation has significantly undermine this argument. I suggest you make it clear in your article that you only used recent data for this correlation analysis. Thanks.

best,

Ning

Oct 20 02:38 AM