With the Dow down 700-odd points, at around 9620, and the S&P 500 off 70 points, at 1020, the big question has gotten bigger: where is the bottom in this bear market?
As usual, we may be looking in all the wrong areas.
The answer may not lie with how far down the equity market goes, but rather with how high the greenback and the price of gold can reach, compared with how low oil can fall. In an increasingly globalized financial market, using these three asset classes as a basis for buying into this market may be more sensible than judging how cheap stocks look. This is because of the implications of the movements of all those asset classes.
Perhaps one of the most destabilizing aspects to the global economy has been the myth of "decoupling": specifically, the process of separation in performance between emerging markets and the U.S. market. The decoupling theory, popular in 2007, assumed that whatever happened in the U.S. market no longer really affected markets such as China and India. It's what has contributed to a huge bearish speculation in the dollar, which ultimately led to credit drying up in a now little-talked about unofficial credit market called the "yen carry trade". As the dollar rises, so credit frees up naturally in the Far East, as Japan's hyper-low interest rate lending facilities (comparative with other emerging markets) become a more opportune facility with which to borrow money. That's because the value of the yen relative to dollar-led currencies the world over doesn't wipe out any of the advantageous borrowing margin you get on a carry trade.
Secondly, gold is the ultimate harbinger of "cash ready to move". It's common to think of gold as a bearish commodity, but in reality, this couldn't be further from the truth. Gold is where funds store money when they require some sort of capital growth (while assuming speculative risk), and at the same time want to move it quickly between asset classes in the event of a buying opportunity (in say, equities). It's worth remembering that as cash and equity reserves grew in the last five years, the gold price soared (part of this is due to mark-to-mark accounting, a little-known concept).
Finally, a falling oil price implies that earnings begin to look promising again, and hence companies look comparatively cheaper over the longer term.
Think of it like a traffic light: the red light is the dollar -- once that strengthens, the yellow (get your car in gear) light goes off. That's gold. Once oil prices go into a death spiral, that's the green light -- but only if it's the only light on. Otherwise, like recently, you get a pile-up at the intersection.
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