Why This Equity Rally Is About To End Badly

The deafening cacophony on Wall Street for the past six years has been since interest rates are at zero percent that there is no place else to put your money except stocks. For most, it just doesn’t matter that the ratio of Total Market Cap to GDP is 125 percent, which is 15 percent points higher than in 2007 and the highest at any time outside of the tech bubble at the turn of the century. Sovereign bond yields are at record lows across the globe and the strategy for most investors is to ignore anemic economic growth rates and just continue to plow more money into the market simply because, “there’s no place else to put your money.”

But the epicenter for this market’s upcoming earthquake will be in the FX market. The US dollar has soared since May due to the overwhelming consensus that while the Fed will be out of the QE business in October and raising rates in 2015, Japan and the Eurozone are headed in the exact opposite direction. The BOJ is already going full throttle with QE and the ECB announced last week that its own asset back security purchase program would begin in October. The Greenback is already up over 5 percent on the DXY in the past four months and a continued increase in the dollar’s values will start to significantly impair the reported earnings on US based multinational corporations. This deflationary force is one reason why stock prices could correct very soon.

But what is even more likely to occur is a sharp and massive reversal of the dollar’s fortunes. As stated before, nearly everyone on Wall Street is convinced the Fed will be hiking rates next year. And now that the BOJ and ECB have committed to go all-in on QE, how much more can they really do to cause their currencies to depreciate further? With the Ten-year notes in Germany and Japan yielding just .93 and .50 percent respectively, can these central banks really make the case that borrowing costs are still too high to support GDP growth?