An update on my "bizarro world" post

In my last post on Friday before a weekend of bourbon-filled football-watching escapism, I ranted and raved about what I basically think was a baaaad week-ending rally--that is, a stock rally that masked serious underlying issues (especially with the dollar). A reminder:

Today's rally (and the entire 11% rally from the August lows in the SPX index) has been completely on the back of a rapidly devaluing dollar. In real (dollar-adjusted) terms, the market has barely budged, and by some measures gone down. While the market has rallied 11%, the dollar has lost about 10% against the Euro (nearly 17% since June), as the dollar index has hit an 8-month low, revisiting levels last seen at the height of the financial crisis. Now, the Fed is widely expected to debase the dollar even further. All this, while we accuse China of being a currency manipulator. Hold your laughter.

My bitterness has mellowed a bit (it's a holiday, after all...isn't it?), but if you were looking for a graphical representation of my point, you're in luck, thanks to my friends over at The Daily Reckoning.

Increasingly, investors are coming to prefer the sober, welcoming embrace of physical materials to the unrelenting, drunken currency abuse perpetrated by the world’s central bankers.

In actual fact, there’s not a whole lot that hasn’t been rallying in dollar terms lately…except, of course, the reputation of those responsible for destroying its credibility.

While the dollar index plummeted 12.4% from early June to the end of September – even as headlines persisted about a shaky euro – everything else has benefited.

So no matter what the Fed might be telling you about inflation, the market is telling a different story. Of greatest concern is the CRB commodity index, which has outpaced even equities as the dollar has declined. This index includes all of the basic necessities--from crude oil to corn to wheat to orange juice--meaning that the prices of staple goods are skyrocketing. Anyone whose pay is denominated in dollars has seen their real wealth erode since June, no matter what the stock market may say.

Note also that the current Fed policy (of debasing the dollar) is especially damaging to the poorest of Americans. Not only do they largely not have assets invested in the stock market (meaning that their net worth doesn't benefit when the market rallies on the back of a weak dollar), but they also are less capable of "trading down" in expenses when inflation hits.

While a more affluent person might be able to swap steak for hamburger as cattle prices rise, or organic milk for non-organic milk when dairy prices do the same, the poorest Americans have already traded down. Therefore, any inflation flows directly through to their bottom line--they by definition pay a greater portion of their income for food, while the rich can change the products in their grocery cart and keep their expenses about the same.

Inflation and Fed policy over the last two decades is directly to blame for the ever-widening gap between rich and poor that so many have written about so many times. We'd love to blame the corporations for being evil, and not paying a fair wage, but the reality is that Fed policy is at least as culpable. To borrow a cliche, the barbarians are not only at the gate, they're in your wallet. Literally.

[The Daily Reckoning]