What’s wrong with the stock market? Insufficient funds!

The U.S. dollar has risen 20 percent on a trade-weighted basis in the past year. This de facto tightening of monetary policy has eroded the competitiveness of U.S. exports, eaten into economic growth and diminished company profits repatriated from overseas. (from Yahoo Finance, China’s devaluation)

In other words, the collective governments of the world are not printing enough money to pay for all the excess oil and factory produced goods that 21st century technology has figured out how to produce … at existing prices … so prices in U.S. dollars have come down by 20%.  That’s de-flation, and usually not a good thing.  De-flation of stocks will follow.

The root problem is that after the financial crisis, the U.S. Fed, anxious to show it had things under control, considered only the U.S. economy when it terminated its quantitative easing program and announced it would begin to raise interest rates.  But the U.S. is a substantial portion of the world economy, which has not recovered.  Various wars, particularly in Ukraine, but also in the Middle East, are a direct consequence of the financial crisis.  It looks like the Fed will raise interest rates only one time, just to show that it can, and then quit.  At least, that is the talk going around.  At the end of the year, after the September rate increase, there will be a Fed statement that further interest rate increases are not foreseen at this time, and then hopefully an election year recovery can begin.  But the downside has not been very steep except in certain sectors (like energy), which might draw out the debacle … and debacle I consider it to be.  QE3 was ended much too quickly.  I wrote two books to try and persuade the Fed not to be so hasty, but the copies I sent them were returned with a note saying they could not accept “gifts.”  Gift, heck, it was urgent advice.  :D))

In this respect, it is insufficient money supply to cover remarkably cost effective production that has caused the decline in oil.  There is always a level of “cause” deeper than you think.  The actions of OPEC have not fixed the problem, they admit.  The oil crash will not end because a few shale producers are run out of business.  It will end when U.S. layoffs by major U.S. producers cause enough pain for the Fed that it changes from its tightening stance.

On a side note, the expected triple bottom in MORL was *not* confirmed.  There is a triple bottom, but the 3rd bottom was not higher than the 2nd, so it simply means “unknown.”  The strong move up today was a good sign, though.


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