The silent engine

Fresh all time highs for the S&P500. In April, it was down 7.1% for the year. Now we’re up 11% YTD. 44% on a rolling 2 year period, as you can see in the lower chart below. The companies in the index are presenting one of the strongest earnings growth periods of modern history. At the same time, and in the same period, gold measured in US dollars has almost doubled. Or if we flip the reasoning, the dollar’s purchasing power, in gold terms, has almost halved. Is that one of the silent engines of this market? We know from cases like Venezuela or Argentina, and I’m conscious the comparison is a stretch, that when currencies lose their meaning (when the fiat word no longer applies), the stock markets tend to go up to keep up with debasement, as it is one of the few ways to maintain your purchasing power. One could argue the U.S. situation is different, as it is the largest economy in the world and the dollar is the global reserve’s currency, but at the same time, debt is growing very fast ($39.2Tn currently) and the deficit is growing rapidly as well. Debasement is one phenomenon that we can almost only declare with hindsight, even though clear signs are being presented to us. What’s holding the fort together is the bond market. Yields are trading below 5% in a controlled manner, and that’s the key. What happens to inflation, and the Fed’s response to it, will define what’s next for the dollar and the stock market.

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