Today’s all-time intraday high on the S&P 500 reminded me of a correlation I had looked at in the past.
I re-charted it just now and frankly, the implications are fairly profound.
1. Note that for most of the chart as the value of the U.S. Dollar Index drops, the market goes up.
– What that means is this. The stock market prices went up, but the value of our currency dropped. So even if you were making money your gains would be
more or less mitigated if not negated by the drop in buying power of the Dollar.
2. Note the vertical line I drew. It points to a month where the correlation broke, and both started to rise at the same time.
– What happened in November 2008? The Fed’s first QE program began. So, as they unwind more and more, something is going to have to give. Maybe
a rate hike reduction. Maybe the dollar crashes as three of the main asset classes (equities, treasuries, precious metals) all melt-up at the same time into
one last grand parade before a devastating crash. Or perhaps they introduce more Quantitative Easing.
Note: I”m not saying this is going to happen anytime soon. Rather, I’m advocating one of my primary investing principles: ALWAYS HEDGE.