In times of stress you can’t rely on normal conditions to hold. In fact, reactions to stress can be quite the opposite … completely unpredictable.
It’s no different in financial markets.
During normal conditions, you have a good grasp on expectations of how markets relate to each other and how one market might respond to certain conditions relative to another. With this information you can build a diverse portfolio that gives you a level of protection against vulnerabilities in individual markets or securities.
But in times of crisis, these historical relationships can go awry. And the current crisis has exposed the “shock” risk of this diversification philosophy. No region, nor market, was spared.
The U.S. stock market has become a proxy for recovery. And right now, all eyes are on stocks.
Now new “post-shock” relationships have developed in the currency markets, where foreign currencies are trading in a tight relationship with the U.S. stock market. When stocks are moving lower, the dollar is moving higher. And when stocks are moving higher, nearly all currencies (except the dollar) are following.
The gist is, the U.S. stock market has become a proxy for recovery. And in a global economy dependent upon a U.S. recovery, all eyes are on stocks.
The Canadian Dollar is a
Perfect Example …
Canada has had a recent pick up in manufacturing and housing activity. And the Canadian banking system is known to be in superior condition to that of the U.S. banks. That might appear to be the reason the Canadian dollar (CAD) has had a nice climb and is breaking out against the dollar.
Yet its rise is not fundamentally driven …
The Canadian economy is contracting at a steeper, annualized rate than the U.S. Consequently, the Bank of Canada has been aggressively lowering interest rates following the policy decisions made in the U.S., the UK and Japan. To add to the Canadian dollar’s woes is the fact that Canada is highly dependent upon trade with the United States, which has softened from a weak U.S. consumer.
Despite all the problems, the CAD is still strengthening, because it has everything to do with this stock market proxy of economic recovery in the U.S.
As you can see in the chart below, when the S&P 500 Index topped in November 2007, the Canadian dollar began mirroring the index and the relationship became even tighter as the crisis intensified toward the end of last year. And now that stocks are in rally mode — so is the Canadian dollar, in lock-step.
So if currencies are trading off of U.S. stocks, and U.S. stocks are signaling a perception of recovery, then it’s a good idea to know what the real prospects are for recovery.
…to read the reasons why and look at another interesting chart go HERE and scroll down to:
What Does Recovery Look Like for the Worst
Economy Since the Great Depression?
According to the IMF, Fed Chairman Bernanke’s projection of a recovery toward the end of the year is taking the absolute best case scenario.
Posted May 8th:
If you’ve beenreading my stuff for the past few years, then you’ve been ahead of the real estate pack every step of the way.
I warned you well in advance that the housing market would implode … that the mortgage industry would collapse … and that virtually any stock exposed to building, construction, banking, or finance would suffer immense collateral damage.
More than three years ago, in fact, I published a special report called the “Great Real Estate Bust of 2006-2008”. It explained what the bust would look like, and named specific stocks that were toast — including, but not limited to, Beazer Homes (BZH), Countrywide Financial (CFC), New Century Financial (NEW), PMI Group (PMI), Bear Stearns (BSC), Lehman Brothers (LEH), and Washington Mutual (WM).
When housing demand dried up, some high-flying stocks bit the dust.
Today, you can’t even call up quotes on five of those companies because they’ve gone bust or been acquired in shotgun marriages. Other stocks named in that report … as well as in multiple columns in Safe Money Report and Money and Markets … are trading for mere pennies, nickels, and dimes.
Why do I bring this up? Because I think it shows I have some credibility when it comes to real estate — and because it’s time to signal another important shift in my thoughts on the housing market. Namely, that the nexus of the real estate downturn is shifting and that the residential market is poised to stabilize in the coming quarters.
To read Mike Larson’s Forecast For the Next 12-to-18 Months go HERE
Mike Larson auther of An Important Housing Market Update joined the company in 2001, and has more than 10 years of experience researching and writing about personal finance, investing, and the housing and mortgage industry. In 2003, Mr. Larson was named associate editor of the company’s monthly Safe Money Report. In this role, he is responsible for writing and editing as well as analyzing trading opportunities for clients. Mr. Larson is also a regular contributor to the company’s daily e-letter, Money and Markets and editor of three of its premium trading services.
Before joining Weiss Research, Mr. Larson was a personal finance reporter for Bankrate.com, where he wrote extensively on mortgage lending, banking, residential real estate, and Federal Reserve Board policy. His responsibilities included analyzing economic data and interest rate trends for a weekly column and developing rate forecasts for a regular index feature. Previously, Mr. Larson held positions at Bloomberg News and the Boston Herald.
Recognized as an interest rate and mortgage market expert, Mr. Larson’s views have been quoted in numerous publications nationwide, including the Washington Post, Chicago Tribune, Dow Jones Newswires, Associated Press, Reuters, CNNMoney.com, Sun-Sentinel, Tampa Tribune and the Palm Beach Post. His in-depth analysis of the housing and mortgage market and accurate forecast of the subprime crisis has lead to frequent appearances on CNBC, CNN, Fox Business News, and Bloomberg Television, as well as many nationally syndicated radio shows. Mr. Larson’s understanding of the U.S. real estate market has also been recognized overseas, having recently been featured in a documentary on the subject produced by a Barcelona-based television station. In addition, his writing has been acknowledged by both the National Association of Real Estate Editors and the Massachusetts Press Association.
Among the first analysts to call the housing slide, Mr. Larson’s policy paper, “How Federal Regulators, Lenders and Wall Street Created America’s Housing Crisis: Nine Proposals for a Long-Term Recovery,” received broad media coverage following its July 2007 submission to the Federal Reserve and FDIC. In the paper, Mr. Larson accurately predicted the long-term impact of the deepening subprime mortgage crisis on the broader economy that the nation faces today.
Mr. Larson holds B.A. and B.S. degrees from Boston University.
Bryan Rich – author of US Stocks & Dollar, CDN Dollar is an accomplished currency specialist with more than 12-years of experience in trading, research, and consulting in the global foreign exchange markets. He is President of Logic Fund Management, a currency management and consulting firm.
Bryan began his career as a trader for a $600 million family office hedge fund in London. The macro-oriented fund managed assets for a prominent European family, and was one of the largest players in global currency markets in the 1990s. Later, he was a senior trader for a $750 million leading global macro hedge fund located in South Florida. There, he helped manage and trade a multi-billion dollar foreign exchange options portfolio.
His consulting resume includes work for a boutique currency fund in New York, where he developed trading models and strategy for the core investment program of the company. He later joined the company as a partner, based in their Wall Street office.
Bryan has also served for several years in a management and consulting role for the Weiss Group, performing in a variety of analytical areas across its economic research, money management, ratings, and institutional research divisions.
He has a BA from the University of North Florida and an MBA from Rollins College.