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Currency Stocks


Whenever you talk about stock prices you are inherently talking about a level of currency.

I made a statement the other day saying one could view the world's recent stock market rallies not as if stock prices were rising, but instead as a fall in currencies. Because I view what central banks are doing as particularly insidious (as opposed to what the Fed has been doing for years only because the degree of it has accelerated and that other central banks have now jumped into it just as egregiously), I want to make sure that I fully explain that statement.

Whenever you talk about stock prices you are inherently talking about a level of currency. Let's take an example. An American company ticker symbol BS is trading at $100. A U.S. investor can call his broker and buy one share for $100. An investor in Japan with the yen trading at 100 (100 yen equals one dollar) can call his broker and buy that same share for 10,000 (100 yen x $100) yen.

Now let's say the yen rises against the dollar to 90 (it now takes only 90 yen to buy $1). The Japanese investor who likes IBM stock can now buy that same share for only 9,000 yen. He thinks this is a bargain so he instructs his broker to buy more IBM until it gets back to the old price. The stock is bought until it reaches the Japanese customer's limit of 10,000 yen. Back in the U.S. the stock is bid up until it reaches $111.11 ($100/.9) and then stops. The U.S. investor who owns the stock at $100 "feels" 11% wealthier. He decides because he is wealthier that he can afford to borrow a little from his credit card and buy his wife that new mink coat.

To our Japanese investor, however, IBM is still trading at the same price as before. It is trading at $111.11, but still only 10,000 yen (90 yen x $111.11). He "feels" no wealthier than he did before.

I debunked in a diagram recently the notion of the U.S. borrowing Asian savings and showed it for what it really was: a printing process. For every dollar the U.S. prints, the Japanese/Chinese sterilize that dollar by printing one of their own pieces of currency. The Japanese and European stock markets have been rallying more than the U.S. market recently because their currencies have been falling more rapidly than ours.

Falling more rapidly than what you say? Falling more rapidly than gold (when you compare currencies to gold central bankers cringe and scream foul). All currencies have been falling against gold because all central banks are printing currencies, just some more rapidly at differing times than others. In fact it seems that each central bank is "taking turns" in a coordinated way printing currency.

But all currencies are thus falling against gold. In fact, if you priced all these rallies in gold instead of currency you would find that there haven't been any rallies at all (or not much).

No real wealth has been created in terms of gold.

And this is what printing more currency does. It makes nominal prices go up, but it does not produce new wealth. That is only done through increased production.

We can price all sorts of things this way. GDP for example is "very strong" according to CNBC and other market pundits. But it is only strong in terms of dollars. It is not in terms of gold.

In other words, currencies all around the world are falling, giving the impression that wealth is being created. But alas, it is not. We all just have more currency.

What is the harm in this? An increase in the money supply is introduced into the real economy only through new debt. Thus we see huge budget deficits and huge consumer debt all around the world. Thus we see huge external imbalances between producing countries and consuming ones.

This will only stop either when bond holders realize (or acknowledge) that they are being paid back in currency worth less and less and thus demand higher interest rates (U.S. short term rates are going up for this reason) or else the huge money supply being created is interrupted from getting into the real economy either because banks begin to balk at lending more into ever falling credit quality (in 1980 3% of the corporate bond market was junk; today it is 67%) or debtors themselves reduce their demand for debt because they cannot service it. This is the tug between hyper-inflation, inflation, stagflation, and deflation that we see.

This is a long and insidious process first started by the Federal Reserve, in earnest after 1987. The process has become egregious and coordinated in the last few years.

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