Zeev's Turnips Patch-No Politics (ZEEV)

[carl_p_r2]

To me it seems unlikely that we can continue on the current path with rising gold prices and rising stock prices for much longer. The logic for a rising stock market is that the economy is doing well, and that it can absorb the monetary stimulus of the Fed and respond with sustainable growth. The logic for a rising gold market is that the economy is not doing well, and that it will ultimately not be able to absorb the monetary stimulus without responding with renewed inflation. One or the other of these would have to be false.

If you look at the current account issues, the bull market is saying that these don't matter, that the USD will not collapse, and that foreign investment (i.e. the capital surplus) will continue because of a strong and growing US economy. Gold is saying that the current account deficit can not continue, and that the USD will eventually have to fall in value to correct the balance of trade. There is clear consensus from all sides that if the balance of trade were corrected quickly, it would plunge the US into a deep recession, and that the world would follow. Thus, a rising stock market clearly discounts that alternative.

Thus, I conclude that ultimately one of these two rallies will fail.

Carl