October 14, 2003

Separation Anxiety

Seeing this chart reminded me of two movie scenes. The first, from Aliens. After Ripley torches all the eggs of the mother alien in her lair, and then turns tail and leaves, the big momma decides to chase her. But in order to chase Ripley, the alien has to rip its body in half, separating its main torso from the hideous egg-laying portion of her anatomy. Second, in the last Terminator movie. After the Governator crashes a helicopter on his modern terminator nemesis...the machine rips itself in half from the waist down to free itself from being pinned. It then crawls after its prey. (I won't give the rest away if you plan on seeing it.) So what does the dollar index decoupling from stocks mean? One word, hyphenated: asset-inflation. Sooner or later, a weaker dollar will lead to dis-investment in dollar denominated assets. But between now and sooner, all that generous liquidity Mr. Greenspan, the tax cuts, and mortgage refinancing have made available is going straight into stocks. Only increasing rates of liquidity will keep prices going up. And where will the new money come from? From rising incomes? Negative. From more tax cuts? Negative. From economic growth and earnings (making stocks more affordable?) Negative. Any positives out there? Only one that I can think of...the mother of all put buying opportunities. The Stock Market as Icarus


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