Quote:
Originally Posted by Neal Stevens
Say what??  I didn't understand any of that.... |
Sorry for not being clear enough. I'll provide my opinion in case you are interested, but it is kind of verbose, because I'm going to start with the basics. I'm sure you're familiar with them but others might not be.
The Dow has jumped almost 2000 points in just a couple months, with multiple false-starts and reversals, indicating heavy trading activity and investment. Normally, that is a good thing. Well, heavy trading activity isn't always such a good thing because it indicates market instability but it cannot be denied that investors are buying into the market, for some reason.
The worrisome thing is that the GDP has continued to contract, even exceeding forecasted contraction, and unemployment has risen. Normally, you would think that investors would shy away from the market in such circumstances, and most are. Historically, that is what they do.
Also, the exchange rate of the U.S. dollar has continued to decline more rapidly than many other currencies.
So why would investors be buying? And why is the trading so erratic?
Quite simply, many of the major investors can see what's coming and are trying to make hay while the sun shines.
Here's how it works. The value of the U.S. dollar is based upon the strength of the GDP, more or less. Each dollar is basically worth its' proportionate value in terms of quantity of dollars to Gross Domestic Product, sort of. GDP isn't the best measure because of how it is calculated, some economists prefer to use Purchasing Power Parity, which is calculated differently but means the same thing as GDP/dollars. Neither is perfect, but both are relatively good approximations.
Anyways, that's a function of supply and demand. If production of dollars outpaces economic value, they become worth less, and vice-versa. Inflation and deflation, in short.
The other major factor is the ratio of U.S. money supply/economy to foreign money supply/economy, or more precisely, the rate at which these values change relative to each other. If I gave you one dollar for 100 yen, and the next day one dollar was worth only 50 yen, I would have made a wise trade, because I got twice as much yen for my money, and each yen is also more valuable now.
Currency traders, and other investors, take all this into account. After all, it does one no good to make $100 from a $50 investment in the stock market if the dollars you spent to make the investment are only worth a quarter next week. You'd have more dollars, but you'd have less money, or purchasing parity.
Right now, the USD is weakening because the GDP (upon which its' value is based) is getting smaller, whereas the number of dollars is still increasing. Dollars are becoming worth less, and there is no real prospect for recovery in the immediate future. That weakness is exacerbated by the fact that other nations and their investors know that, and so place less value on dollars.
Wise (read professional, mostly) investors, are placed in a quandry by this situation. The U.S. dollar is in a bad way right now because the gap between money supply and GDP is widening. The Dems have spiced up the situation by throwing another trillion dollars into the mix, some printed, some borrowed. Both contribute to inflation of the currency. Even worse, they are expanding the size of the government by a third (future borrowing printing to finance that), and their economic recovery measures are so worthless that they no longer even fall under the principle of Keynesian economics, which also sucks.
These investors are just waiting to see which economy and currency experience a resurgence first. Until then, they are just treading water by investing in anything that looks like it might become more valuable in the short term, in order to accumulate soon-to-be-less-valuable dollars, which they can then dump on people who think the U.S. economy will recover because Barack has a fireside chat or something, the profits from which they will use to buy into the economy they see as having the most potential for resurgence.
I used the term "fool's rally" in my last post. That is what I am talking about here. Dedicated investors base their investments upon macroeconomic trends, but they occasionally buy heavily to increase the price of a stock and encourage further purchase of the same, driving the price up. Then they sell it before people realize that there is no market for that company's products/services and it posts a quarterly loss.
Investors are also pulling out of low-risk, low-yield investments because they do not expect the yield form those investments to appreciate faster than inflation depreciates their money. They are refocusing that capital into high-risk ventures while they can, in hopes of making a net gain in the fashion described above.
Does that make more sense?