DOLLAR UP, GOLD DOWN BUT WHY?

TV pundits continue to say that the dollar is up because oil is down while others say that oil is down because the dollar is up. Each of these statements are like saying that I walked to the store and my right foot got there at about the same time as my left foot, the two go together. The correct question where is the body going next. If the body turns around and comes home from the store, both the right foot and the left foot will follow.

The reality is that we only recently turned the body and took a few steps toward the store. Both our right foot and left foot are helping us get there but we have a long way to go.


We may zig-zag along the way but the dollar is so low that US assets are very cheap, which means that foreign investors must buy dollars in order to buy cheap US assets. Oil is so high that finding lower cost substitutes is easy. We have historically used lots of oil because it is a cheap and clean source of energy. When the price jumps so high, other sources become viable until more oil is found. Projects started 3 to 6 years ago are being completed. The Saudis spent about 9 billion dollars over the last 5 years developing one field. At peak production, next year, it will produce 1.2 million barrels per day. This oil will cost the Saudis less than $30 per barrel to produce. It is obvious why they are expanding production at older fields and working on yet another new field.

The Chinese Take a Turn

Over the past 20 years, China has accumulated trillions of US dollar reserves while by encouraging the people of China to work hard and save. In recent months, there has been an attitude change. Why save so much? According to the Carpe Diem web site, the Chinese have started to enjoy the fruits of their labor. Their spending has been helping US exports to soar. It is time to invest in the USA. The dollar is going up because trillions of dollars are starting to demand US goods. Kudlow is right about "King Dollar" being the key to the bull market. My disagreement with him in recent weeks has been his insistence that US officials should attempt to talk up the dollar or intervene in the free markets to turn the dollar. These interventions only add volatility (risk) to the markets. I say let these markets settle themselves. The invisible hand of Adam Smith is many times more efficient than government bureaucrats.

The last big run in the dollar, from 1995 to 2000, saw a heck of a run in the stock market. Of course! The two usually go for walks together.