Flasback 2007 - Dollar, Gold and Equities inter market analysis
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Flasback 2007 - [ dollar gold and equities inter market analysis]
We maybe at a point where the US or Developed markets and EM or Developing
markets diverge from each other strongly for a while. If not on an absolute
basis then on a relative basis. And here is why. A falling dollar is not always
good for the US/DM combine as the rising dollar meant rising flows to the US
and falling Euro Yen etc was a stimulus to the other economies. Now when the
dollar falls however it means stability for the EM/ASia/DevM combine as their
debts are no more at currency risk and many are commodity producers and will do
well when commodity prices are r, ising.
-Here is a combined chart of 2007-2008 that ads historical perspective. When
the US topped in Oct 2007, the high from where the Great Financial crisis
followed. Did all world market top there and then. No they did not. The only
reason I can think of is that the dollar as shown on this chart was falling
till April and stayed down there till June before turning up long term. That
period therefore saw India still heading higher till Jan 2008, and Commodity
producers like Brazil Russia or Canada continue to all time highs into May 2008
[thanks to rising Oil among others]. Gold prices too rose for most of this
period. The point of this chart is to show you that markets can diverge if the
reasons arise.
So put that into the current scenario where most commodities are rallying.
Another dip in the dollar should convince most that the trend for the dollar
has also changed. Then the falling dollar would push up EM/Asia/DevM
currencies. But at the same time also continue to push up commodity prices. But
it may not be good for the US. Am not sure whether it will be pure
hyperinflation or a touch of stagflation at that point. But what it would
result is in the divergence in the performance of these markets with the Non
Developed market space outperforming, the exact opposite of what we say in
2014-2015. This could continue to the point where interest rates rise far
enough to hurt everyone. And if they remain behind the curve then well, it will
be a historic divergence between these asset classes.
The arrows on the Dow [DJIA] chart show where
other markets made their tops in the months that followed.
