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Prieur Perspective: Breaking the Back of the Greenback?


Bad news for the dollar is good news for gold.

Stock markets kicked off the last week on a high note, but then the US parted ways with other markets as the remaining 4 days went downhill for American stocks. In contrast, global markets in general had only one down day on Thursday.

In addition to non-US equities, risky assets such as commodities, oil, gold, silver and platinum, and high-yielding currencies performed strongly amid fresh signs of "less bad" economic and financial conditions. However, safe-haven trades such as the US dollar and government bonds got whacked - especially following Standard & Poor's decision on Thursday to mark down its medium-term outlook for the UK's AAA credit rating from "stable" to "negative." This raised concerns that the US may face a similar fate.

As the implications of surging government debt levels move to center stage, the US Debt Clock makes for sobering reading. Click here for the live version.

David Rosenberg, Merrill Lynch's former chief North American economist, who has just commenced duty with buy-side firm Gluskin Sheff & Associates, commented as follows:

"While the UK government debt-to-GDP ratio is around 40%, the rating agencies are looking at 100% in coming years. The US government debt/GDP ratio right now is near 65%, but clearly heading higher. It seems as though 100%-plus is the trigger point for downgrades ...

"So the view out there that the US is about to receive a credit downgrade despite the dramatic expansion of the government balance sheet is a little premature. For now, it makes for nice cocktail conversation but as super-sized as the deficit is (13% of GDP), there is enough room in the debt ratio that the US would likely have to run three more years of this sort of fiscal policy to be seen as a candidate for a downgrade."

The performance of the major asset classes is summarized by the chart below.

Following the previous week's bruising, the MSCI World Index last week gained 2.2% (YTD +2.3%) and the MSCI Emerging Markets Index 5.4% (YTD +31.6%).

Similarly, the major US indices reversed course, but in a much more subdued fashion, as seen from the fairly flat movements of the major indices: S&P 500 Index (+0.5%, YTD -1.8%), Dow Jones Industrial Index (+0.1%, YTD -5.7%), NASDAQ Composite Index (+0.7%, YTD +7.3%) and Russell 2000 Index (+0.4%, YTD -4.4%).

The NASDAQ remains the only major US index still in the black for the year to date, finding itself in the company of the majority of emerging and mature markets.

India's BSE 30 Sensex Index (+14.1%) was the strongest market for the week, having rallied by 17.3% on Monday on unexpected election results. This was the biggest one-day gain in the 30-year history of the Index.
No positions in stocks mentioned.
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