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Monday, August 31, 2009

The Nikkei (in USD) vs the S&P 500 (not in USD)

There is a chart floating around the blogosphere (Zerohedge, Infectious Greed, Felix Salmon, Henry Blodget, to name a few) from Bloomberg, which shows why the 'S&P 500 May Surge 40% in Duplication of Japan'. Before we dive in, lets first take a look at a chart of the Nikkei since 1984, and the S&P 500 since 1994 (i.e. the 10 years delayed aspect we'll detail later).



Nothing special. No fit, thus no way (yet) to claim the S&P 500 is ready to jump another 40%. So how do we convert this into a chart showing a 40% rally is on the way. Felix Salmon details:

So it seems that the BofA analysts who came up with this chart first converted the Nikkei to dollars, only to then convert the S&P 500, which was in dollars all along, out of dollars. Hm.

If the intention was to strip out the local currency, then why did they convert the Nikkei to dollars, rather than the same basket of currencies they converted the S&P 500 to? Probably because the relationship would have been non-existent. But doing so makes for the chart seen here:



And the details:
The Nikkei doubled between October 1998 and April 2000 in dollar terms, as the chart illustrates. The S&P 500 has risen 34 percent since March when the Dollar Index, a measure of the dollar against currencies in six major U.S. trading partners, is factored in.

A “melt-up” rally in the U.S. may be triggered by central bankers keeping interest rates near record lows, an economic recovery or an undervalued dollar, Bank of America strategists wrote in an Aug. 26 report.
The analysts claim (via Henry Blodget) that:
The consensus is usually wrong and that it is always smart to consider the alternatives. And this is certainly one of them.
Good point. Alternatives should be considered, but those alternatives should be fully understood. But, in analyzing why the relationship between the Nikkei (in USD) following the Asian crisis / during the Internet Bubble TO the S&P 500 (in a broad currency basket) following the subprime / financial / systemic crisis is strong, these same analysts made the following statement:
We do not know precisely why this relationship has worked.
Which is fine if "precisely" didn't mean "at all". But, what hasn't been mentioned regarding the Nikkei within five years (in both USD or Yen) of this supposed 40% rally... new lows.