Friday, October 2, 2009

Greenback & Co

And it goes running all through the night
Until it ends there is no end
--Cyndi Lauper

In his posts today, Fleck dismissed the 'proposed' inverse relationship between the dollar and stocks as 'silly.'

The data suggest otherwise.

Comparing the SPX to the USD over the past 3 yrs reveals a pretty strong relationship. When the dollar goes down, stocks go up and vice versa.

While this relationship may not hold for all of history, it 'works' right now because of the leverage in the system. Many folks have borrowed lots of US dollars while owning risk assets like stocks at the same time. Stated another way, people sell dollars (USD price goes down) in order to buy stocks (SPX goes up).

When they want to shed risk, people sell stock and then buy dollars to pay back their loans.

As long as there's lots of dollar denominated debt out there, this relationship promises to hold to a signficant degree.

positions in SPX, USD

1 comment:

OSR said...

The relationship between the yen and the SP500 is well known. Since the yen is typically the inverse of the doallar, I'm not sure why this is silly.