Hurculean Effort and the Dollar

The Dow and the S&P 500 failed ultimately in their Herculean effort to come back today. The NASDAQ succeeded. When I woke up this morning Dow futures were down close to 100 points. In true market fashion (after all right now it is the hip thing to do isn't) the markets for the most part shrugged off everything I highlighted this morning and more. Financials got clobbered again, surprise surprise. For some reason I had one of the best days I have had in months powered surprisingly by my longs. Funny how those things work.

Everyone is acting like this weak dollar is great for the the American economy. It is to a certain extent and it if it would have happened several years ago the impact we would feel would be alot less but a plunging currency and a rising stock market does not mean all is well if you look with a longer time horizon. In 1921 the German mark was plunging and the German stock market surging. The WSJ on September 9th 1921 said

Early in July paper marks began to show such a tendency toward depreciation that the investing classes in Germany took alarm and there was a mad rush to invest their paper in industrial and other securities before currency dropped further.

Of course the party did not last long. Germany along with Russia, Poland, Austria and Hungry where no longer on the gold standard and pursuing inflationary policies to try and stimulate a struggling economy compared to France and England which had about 25% deflation and the U.S. which saw 11% drop in prices. Eventually this monetary policy caught up with them which led to an almost complete loss of capital in these markets and an almost non existent economy.

Of course the U.S. is nowhere near a post WWI Germany but my point is though a weak dollar can have some short term benefits it is no where near a good long term policy. A plunging currency means there is something wrong in that country as viewed by the rest of world. Time will tell how much unwinding needs to occur and the ramifications for American dominance both economically and militarily.