Why were they. Because as must surely be well known by now, they were based on money flow, arising from a debt structure.
That debt structure were mortgaged houses, but vast numbers of them, in the great American republic, that vastness which has inspired many and has produced such wealth. That is the money flow Euro latched onto to value it. It is the source of the rise from 2001 onwards. It is that resurrection which is the present dislocation of stocks and $ and the sync of stocks and Euro.
How is it being resurrected ? Well, keep interest rates artificially low for an undefined long time and what happens - mortgages. And some data indicates this is happening. The risk of the housing bubble was taken into advanced products structured by financial engineers. This risk now is being taken into the greenback, and this risk is a valuation weighing heavily on $.
A good sense of $ value is given by USD/JPY. Both are safe haven currencies, though JPY is more purely one and both have low interest rates. Look where it is on 1 month, that breakout at 95 long forgotten. On the 1 week it has relatively wandered far from the 55 period moving average and it is feeling its pull. That MA works like a relatively precise distortion in space time, on 1 min or 1 week.
But one can measure the strength of a trend by the extent to which that pull can be counteracted. In terms of valuations we are back in 95/96. If you want to look at the long term power of a valuation spike, look at the probe in 4/95.
That is both pulling it down now and providing support. Note the three tests of that support level, a counteracting force. But what is that support level, exactly, it is the first surge up from the spike down, the surge which made this a reversal, then.
That strength in $ in the late 90s was about the weakness of Japan, yes, but it was as well about the huge surge in equities. Can one say that a long term weakness of US equities (stripping away inflated asset values) is the reason for the move back down to this level...
Let's look at the tech boom, was that bogus or not. Yes, there were so many asset inflations, but it was within companies it was contained, the bubble collapse produced a downturn, not a crisis. But the use of the housing market as an asset *creator* produced a crisis of epic proportions. This should be warning enough not to do the same thing again. The tech surge was about a future belief in money flow, but money flow from companies, from revenue. And you know what, it wasn't so far wrong.
The companies chosen may have been off, but look at the enormous revenue being produced by Internet tech companies now. They are the salvation of this recession, and the economic strength of the US. So the market made an accurate prediction, but as always with this kind of data the level of detail was what caused problems, i.e. which companies to pick.
What I am saying is, this was a real example of the markets ability to value, and it accompanied a rise in dollar, as it should. A true rise if stocks should produce a true rise in dollar. If Obama does what he says he will (which is what he has been doing), then dollar should rise, along with interest rates ending the conduit. But relying on a resurrection of a mortgage bubble will lead only one place.
© 2010 Guy Barry - All Rights Reserved.
