Supply and Demand Is The Solution
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The U.S. Dollar Index is trading sharply higher this morning gaining 0.68 cents to $81.00. On November 4th, 2010 the U.S. Dollar Index was trading as low as $75.63. At the same time the S&P 500 Index was making new highs for the year around the 1227.00 level. However, once the European Union began to signal new debt worries the U.S. Dollar Index has surged higher and the major market indexes around the world have sold off. Is a stronger U.S. Dollar index good for the world or bad for the world?
When the U.S. Dollar Index declines or trades lower the global markets seem to inflate and trade higher. Most commodities from copper(NYSE:JJC) to cotton(NYSE:BAL) soar higher when the U.S. Dollar Index declines. Oil and most other energy products also increase in price when the U.S. Dollar Index declines and higher oil actually makes most manufactured goods more expensive. It is important to note that oil is used in the making of rubber, plastic, paint, and almost everything that is made for commercial and industrial use. Therefore, while a weak U.S. Dollar Index will help inflate asset prices it is a direct tax on the U.S. consumer.
What are the positives of a stronger U.S. Dollar Index? The stronger U.S. Dollar Index will simply make for cheaper prices in all commodities, and give the U.S. consumer stronger buying power. As we all know by now the U.S. consumer loves to spend money. Please note that U.S. consumer spending accounts for roughly 70.0 percent of the gross domestic product in the United States. If the U.S. consumer could buy more goods at lower prices why would that be a bad thing for the U.S. economy? If Americans can find goods to be fairly valued they would certainly consume a lot more. For example, if the housing market in the United States declined enough most people with money would certainly begin to buy up the excess supply. As it is right now there seems to be very little interest in the buying of homes in the United States. Supply is out pacing the demand by a huge margin. This weak demand comes despite the lowest mortgage interest rates in modern history.
The answer to solving this problem is to let supply and demand work as it was designed. If the system cannot function correctly the inevitable will just be prolonged. If the stock market and housing market is ever going to operate on the laws of supply and demand it will need to stop being propped up by the central banks around the world. Once supply and demand dictates what trades higher and lower the world will be fine once again.
Nicholas Santiago
Chief Market Strategist