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“It’s a poor sort of memory that only works backwards.”
– The White Queen, “Through the Looking Glass” by Lewis Carroll

The big financial headlines in the news lately tout the Dow Jones Industrial Average hitting all-time record highs and nearing its next round number: 13,000.

It has certainly been a great run over the past few years. But the Dow’s performance is much less impressive when you realize that a big driver of the bull market we’ve experienced in stocks since 2003 has simply been inflation. Now I’m not talking about inflation measured by the CPI or any other government data series. I’m talking about real world inflation caused by dollar devaluation.

As the dollar has lost value over the past few years, real assets have increased their value in dollar terms. It’s that simple. Looking at the Dow in terms of Euros demostrates how much it has actually grown intrinsically:

The Dow has also lost ground to alternative assets that are more directly influenced by dollar devaluation such as oil. Here is the Dow priced in oil:

Looking at the Dow priced in gold tells the same story:

Weakness in the dollar has been responsible for a large part, if not all, of the “growth” in virtually all dollar-priced assets. This illusion of growth is not what I would call healthy as it is not true economic gain. It’s my humble opinon that in this brave new world of fiat currencies, if something is not appreciating against most alternative assets it’s not really appreciating at all.

What troubles me now is that the dollar is beginning to look bullish. It is currently approaching a very important long-term support level:

On a weekly scale it looks ripe for at least a bounce off of support:

This suggests there is a strong possiblity that the inflationary tailwind that has boosted all U.S. assets over the past few years may be coming to an end. Leaving the technicals aside, fundamentally all the problems brewing right now in the world of finance suggest that a deflationary bull market for the dollar could begin at any time. The credit contraction that is currently in its infancy is a testament to this potential. If it spreads, we could witness the mirror image of the collective bull markets of the past few years – stepping through the looking glass, so-to-speak, into a world of bearish synchronicity.

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