Asset Prices And The Dollar

Just a follow up to a previous post on interest rates and the stock market.

I encountered David Chapman’s article on Oil recently. He makes a case for Oil not being in a bubble and that the idea that speculators are driving the commodity prices as too overrated.

What I found interesting however, were Chapman’s charts on the patterns of previous rises in asset classes and the movement of the US Dollar. I borrow these charts and post them here for illustration.

Consider the previous dot-com boom and bust, and the NASDAQ Index:

Compare this with the recent trends in Oil alongside the US Dollar:

Can you spot the difference? The stock market boom in 2000 was accompanied by an appreciation in US dollars. Contrast this with the commodity boom now which is accompanied by a depreciation in the dollar.

The original rise in Oil in the classic inflationary period of the 70s and 80s is even more succinct:

The spike in Oil was accompanied by a declining dollar, just as the subsequent crash was accompanied by an appreciating dollar.

Two simple insights from the above:

• Stock Markets are positively correlated with the Dollar
• Commodities are a hedge against inflation, which is essentially a falling dollar

Corrollary to the above:

• The dollar falls during inflationary threats, fueling a boom in commodities, and a slump in the stock market.

My previous post wondered at the positive correlation of US interest rates to the stock market, and the reason could be that rising US rates, make the US dollar more attractive, which could fuel movement of capital from hedging in commodities and back into Dollar-denominated assets like (corporate) stocks and bonds.

The historical performance of commodities have always been rapid spurts and rises, while that of stocks have been a gradual uptrend over a longer period. I take this to suggest that commodities are always the temporary safe-haven for speculative capital during times when the stock markets are in distress. Once crises abate, speculative capital quickly leaves the havens and resumes their former trend (although the swings get wilder and wilder, relative to the previous crises).