The Problem Is Debt Not Economic Growth

The rising stock market and U.S. dollar will be interpreted by some as an indication that the economy is improving. The reality is that stocks, commodity, and precious metals markets, and 'economy', all priced in US dollars, are surging due to massive stimulus and liquidity injections (trillions) over the past two years.

There's an old saying that the Fed can affect nominal but not real prices. The endless sea of rising markets is little more than a manifestation of this truism. The Fed cannot affect “real” or stable currency price trends. For example, the stock market rallied from 2003 to 2007 after the huge foreign liquidity injections in 2002 and 2003. The rise in stock prices, driven by devaluation, was also accompanied by a surge in gold. Gold adjusted or “real” stock prices peaked in 2005. This was well ahead of the US dollar highs recorded in 2007. Massive liquidity injections, much larger than 2003, has created yet another powerful US dollar (nominal) rally in 2009. While the headlines concentrate on surging stocks prices, they ignore the fact that the “real” price advance, similar to 2003-2007, remains weak. When TIME within the cycle is right, the stock market in stable currency terms will peak well in advance of the USD high. See charts below.

U.S. Large Cap Total Return Index (LCSTRI); S&P 500 Total Return Index


U.S. Large Cap Total Return Index (LCSTRI); S&P 500 Total Return Index to Gold Ratio


U.S. Large Cap Total Return Index (LCSTRI); S&P 500 Total Return Index to Gold Ratio Zoomed:


The oscillating periods of strength and weakness in the US dollar Index since 2008 is also being interpreted as an indication that the economy is improving. Brief periods of strength, however, do not necessarily signal an attraction of capital due to improving economic prospects in the US. Currencies can also appreciate as a result of economic stress induced by excessive debt. One must look no father than the unexpected rise in Japanese Yen despite an ever-increasing economic implosion since 2007. Inflows into the Yen with terminate when capital is no longer willing to return home to save a sinking ship swamped by excessive debt.

Japanese Yen ETF (FXY):


The US, unfortunately, is not far behind Japan. The endless - "the economy is improving" rhetoric provides only misdirection from the real problem – DEBT. History tells us that the reason for all the stimulus and liquidity injections, similar to what’s occurring in Japan, is not related to sub-par growth rates but rather the excessive debt burdens. Headlines also forget to mention that little has been done alleviate the excessive burden since its extreme high in 2009. As long as the malinvestments of the previous expansion are not liquidated, the solution will be more currency devaluation through global stimulus and liquidity injections. This is why gold continues to appreciate in all global currencies. The debt problem is global.

Total Credit Market Debt As A% GDP