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Oh it's still, all about the dollar

|Includes: AUY, GDX, Newmont Mining Corporation (Holding Company) (NEM), NTR

Today the DXY (U.S. Dollar index) gapped above its daily 200 moving average only to pull back shortly after the open. When the dollar pulls back commodities and inflationary stocks are free to run higher, and usually do. Today we are seeing many of the gold mining stocks trading higher such as Newmont Mining Corp (NYS: NEM), Yamana Gold Inc (NYSE: AUY), and the Market Vectors Gold Miners ETF (NYSE: GDX). Agriculture stocks such as Potash (NYSE:POT), and Monsanto (NYSE: MON) which are inflationary plays have also traded higher on the back of the intra-day dollar pullback.

Since 2001 the U.S. Dollar has been declining. In 2002 the DXY (U.S. Dollar index) was trading around 120.00. In March 2008, it traded at a low of 70.70. Since the 2000 stock market top many are calling the stock market the lost decade as the Dow Jones Industrial Average is below its 2000 level. Remember in the 1990's the dollar was the world’s strongest currency. In September 1992 the DXY traded at a low of 78.19. This was also the low for the dollar as the stock market was near the end of a recession and a new administration was taking over. As the dollar strengthened in the 1990's so did the stock market. Now the stock market only rallies when the dollar declines. This is how important the weak U.S. Dollar has become over the last decade for stocks.

There can only be one reason for this reversal of fortune in the dollar as it has fallen from grace, and it is simply, DEFLATION. The Federal Reserve Bank and the U.S. Treasury are fighting deflation. The way they are trying to fight deflation is by simply inflating the economy back to health. The high prices of gold are telling us this.

Gold is at all time highs while the Dow Jones Industrial Average is below its 2000 stock market high. The cost of most goods and services are cheaper than ever. Take a computer for example; ten years ago a computer would cost over $1000.00, today a much better computer costs less than $500 bucks. Airlines are another industry group facing the deflationary headwinds. Plane tickets are sometimes cheaper than a Greyhound bus ticket. The airlines simply do not have any pricing power. On the flip side of this coin are the high energy, commodity, food and agriculture prices. The necessities are expensive. It is starting to seem a lot like Japan in the United States now. Please recognize, Japan has been fighting deflation since 1989 with little or no success.

The Japanese Nikkei index topped out at 40,000 and has been trading around 10,000 currently. This could be what is in store for the Dow Jones Industrial Average for the next ten years as well. I'm not convinced that the solution to this problem is to inflate your way back to health; if that can even be accomplished with huge unemployment, and a massive housing crisis.

Capitalism can be cruel sometimes for many. When you live by the sword you must die by the sword. However, it does work when it is left alone to do its job. The secret to capitalism is failure. Yes, companies must be allowed to fail. If they are not allowed to fail then we will have to deal with the repercussions. Unfortunately, this will mean many years of choppy markets, lacking real movement which may even go lower before things get better.

Nicholas Santiago,
Chief Market Strategist