Bill,

I love your blog; it's really one of the best out there. With all due respect, however, you are getting two things majorly (a word?) wrong: (1) you are looking at above-expectation PPI and CPI numbers as dollar-bearish; and (2) you are arguing that a strong dollar will help US equities and real estate.

Re: point (1), insofar as headline inflation numbers affect cross exchange rates, they only do so based on expected FUTURE inflation vs. interest rates. In other words, if you believe that interest rates effect crois exchange rates, a currency strengthens vs. other currencies if domestic REAL interest rates are higher than foreign real interest rates. Real interest rates equal nominal interest rates minus EXPECTED inflation -- not past inflation.

When you consider the fact that above-expectation CPI and PPI increase expected Fed tightening, without increasing expected inflation as much, then you can see why the USD is strengthening. Conversely, recall when the Fed was cutting rates from '01 to '03 and past inflation numbers were coming in way low...but the USD weakened because it expected future inflation to be higher than nominal interest rates.

The other reasons for a weakening dollar could also be due to the fact that other economies are weakening at a quicker pace the US' is (like Germany, for instance).

And perhaps the most imnportant reason is one you allude to -- the bearish sentiment and bets laid against the dollar are overwhelmingly one-sided. You can bring up all the fundamentally bearish things about the dollar you want, but almost everyone knows this and bet accordingly. The job of the capital markets is to punish one-side bets -- to puich the most people in the harshest manner possible. Looking at the net spec long position in gold (very high relative to the past) will also tell you how much specs have jumped onot the anti-dollar bandwagon.

Re point number (2), that an appreciating dollar is good for US equities, real estate, banks, etc. I couldn't disagree more. First, if you examine the rally of the last 2-2.5 years, precisely the opposite is true -- all of the these things have done well while the dolar has tanked. More importantly, a strengthening dollar is screaming one thing to me above all other things: TIGHTER MONEY, i.e., liquidity is drying up.

Over the last 25 years, if you compare the dollar to US equities, you'd see that the dollar rallied from 80-85, but that US equities only started going somewhere in late '82. The dollar tanked from '85-'87, but the market rallied...until the crash (which I'll get to below). The dollar went nowhere from '87 to '95, but still underperformed equities. The dollar rallied hard from 95-2000, and equities did too...I'll grant you that. But even as the dollar rallied on a trade-weighted basis from 2000 to ealy 2002, the markets tanked. Then the dolar tanked in '02 as equities tanked, I'll grant you that.

I think the thing to notice is that if there is a PANIC out of the dollar, then there is the associated panic out of equities, but short of a panic, I don't think there's been as tight a relationship between the dollar and equities, real estate, etc. as you say.

But I will go one step further and say that because I bvelieve that this whole 2-2.5 year rally has been a rally of other things against the dollar, I believe a strong dollar will reverse this trade and other things -- except for maybe US treasuries -- will trade off because of a strong dollar.

And I believe a strong dollar is in the cards for the intermediate term. Long term, it'll go much lower, but that's going to have to wait awhile.

Bill,

I suspect the WMT-TGT divergence all comes down to the customer base. Target's base is more upscale, although there is certainly a wide overlap. If you look at the other deep discount retailers, like the dollar stores, there is a world of hurt.

Regards,
Josh Silverman