Dollar and Stock Decoupling

There's a major disconnect in the markets: the U.S. dollar is going down while U.S. stocks are going up. Some call it a decoupling; others dichotomy.
You know what? If the dollar was a stock, we'd be talking about a potential bankruptcy! Why is the dollar in the dumps?

The U.S. Fed is afraid to raise rates despite the fact inflation is well above its stated comfort zone; and because the housing market is still choked in the toilet. Meanwhile, both economic growth and inflation is surging overseas. So, foreign central banks are hiking interest rates. As a result, capital is migrating to foreign countries and away from the U.S. dollar.

That's pretty negative! And it begs the question: How can stocks be hitting new highs when the basic unit of trust in the American economy, the dollar, is careening into the gutter?

Well, if history is our guide, this shouldn't be happening! Take a look at the dollar vs. the S&P 500 index, you will see that the dollar and U.S. stocks used to trade in tandem. But no longer after 2003! It's interesting to see such a decoupling, among major asset classes in the same country — both of which are supposed to express some degree of confidence in that said country. For one, this decoupling is telling us relative to the value of the dollar, that stocks have NEVER been more expensive!

That is a pretty bearish view! Personally, I'm more sanguine when it comes to the U.S. because I think the world's largest economy has more resiliency than a lot of people realize. But here's the point: If you're invested solely in U.S. stocks and dollar-denominated investments, this is a crucial juncture, and it's actually not easy to say which direction things will head next. That's why I'm following the natural resources markets. Why?

Even if the U.S. falters, Asia can pick up the economic slack!

This is already happening, my friend. The TREMENDOUS demand we're seeing out of Asia for commodities of all types — energy, precious metals, uranium and more — combined with an ocean of global liquidity, is probably enough to keep commodity prices and commodity stocks humming along no matter what happens in the U.S.

Remember, I mentioned previously that commodity demand from Asia is enormous and growing. China is the world's #1 user of copper, steel and zinc, and she is becoming a bigger and bigger buyer of gold, silver and uranium. India is right up there, too. What's more, mining and materials stocks are in a M&A frenzy. The IMF's World Economic Outlook, which came out in April 2007, said the world economy should grow at a robust 4.9% in both 2007 and 2008. And it indicated that this rate should hold even if oil goes up to $75 per barrel!

One last thing to consider: Natural resources like gold and silver are priced in dollars. So as the dollar goes down, they usually go up! In other words, those with a more global perspective, as well as those who diversify their portfolio into precious metals could not only survive a bear market in the U.S., they could actually thrive!