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Monday Market Mania – Fukushima and Dollar Still Melting Down

|Includes: TBT, TLT, The United States Oil ETF, LP (USO), UUP
 

How do you kill the Dollar?

That’s the question that was on everyone’s mind last week (and you can review our Billions of Dollars of profitable trade ideas in the Weekly Wrap-Up, many of which will be useful again this week if we keep falling!) as the smallest indication of Dollar strength caused a Global equity meltdown.  As Stock World Weeklyhas been pointing out all year and as evidenced by this 2-year chart of the Dow relative to UUP (Dollar index), essentially our entire 40% rally since last summer was at least augmented by QE2′s 20% weakening of Dollar buying power.  

If we give the market the benefit of the doubt and say there should be a 1:1 relationship between the Dollar losing buying power and the price of equities (which are priced in Dollars) rising, then we could assume that 20% of the rise in the market was "natural" while the other 20% was inflated due to the weak Dollar.  BUT – you have to take into account the double boost that is given to commodity companies who get paid more for what they sell so that’s tremendous over- PRICING of the energy, mining and agricultural sectors.  Our exporters also greatly benefited from the strong Dollar and that benefit will reverse itself should the Dollar reassert it’s strength.  

Obviously, no one is ready for this.  The weak Dollar was pretty much the only reason we had the pretense of a global recovery.  It made is look like there was a demand for commodities (there was not), it made it look like there was a demand for American goods (there was not) and it made it look like we were paying our debts, which we were – but with discounted Dollars that were being created by the Federal reserve at a rate of over $50Bn per month.  

In fact, the Fed has expanded their balance sheet (ie. printed money) by $2Tn since October of 2008.  As you can see from the chart on the left (from the Cleveland Fed), there have been huge increases this year in "Long-Term Security Purchase" (T-Bills) as QE2′s primary purpose was to keep our lending rate artificially low by faking a demand for the $140Bn a month of debt paper that is being issued by Treasury.

This chart just covers the first four months of the year and you can see…
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