Market inter-dependence

By Didier PH Martin

At the beginning of the 90s, John J. Murphy published a book titled "Intermarket Technical Analysis". The main thesis defended in this book is that markets are inter-dependent. Mainly that the currency market has some impact on the commodities market which in turn has some impact on the bond market, this latter having some impact on the stock market. The author take as a case study the 1987 market crash and demonstrate the market dependencies that led to this event.

The recent events may confirm the author's hypothesis.

Last fall, Bernanke made an eloquant speech about a new revolutionary technology that may be used to resolve the deflation manace: the printing press. Following the Chicago school of thoughts, by increasing the monetary mass through a reduced interest rate, this would result with an increase of the demand counter-balancing the effects of the deflation. However, by increasing the monetary mass the feds also reduced the value of the dollard. When something becomes too abondant, it becomes cheaper. This is what is happening with the dollard.

Several factors are behind the US dollard devaluation:

• The fact that the dollard demand is not caused by good exportation but more by investment from foreigners. Recent scandals and the stock market bulle burst is not something that will increase any confidence in the strength of the US economy.
• The fact that more dollards are in circulation with the corollary of reducing its value.
• Incertainties about the future.
• New economies providing better return on investment.

Since the dollard was up to recently the main currency at the basis of international trades, its devaluation leads to an increase of the value of gold. Gold is not the only commodity that may see its price increased in the near future but since it will become more expensive to import good from other countries, other commodities will see their price to follow the price of gold. And if commodities are more expensive, companies see their earning to be reduced by increased expenses. And poor earning leads to a weak valuation for public companies. Weak valuation to low stock prices.

In other words, Murphy may be right this time.