Optical Illusion / Optical Truth
May 4, 2016·0 comments·adaptive investing
Asset prices across oil, emerging markets, and manufacturing are moving in near-perfect synchronization with the US dollar. Yet the data showing why they move this way (supply disruptions, growth forecasts, production schedules) remains invisible. Something has fundamentally changed in how markets price risk.
• The dominant narrative attributes oil price declines to OPEC supply wars and fracking competition. But when you plot the data, the dollar's movement explains 96% of oil price movement while real-world supply factors disappear from view.
• Emerging market growth is treated as a function of local fundamentals and regional risk. In practice, a negative 89% correlation with the dollar suggests Emerging Markets are now a pure monetary policy derivative with no independent economic content.
• US manufacturing health, measured by purchasing managers' surveys of real factory conditions, tracks the dollar at a negative 92% correlation. The gap between what's supposedly happening in the real economy and what the data actually shows has become striking.
• This alignment isn't coincidental. Seven years of central bank messaging has trained investors to interpret every market move as a reflection of policy intent, creating a self-reinforcing behavioral loop where monetary policy becomes the only variable that matters.
• If this pattern holds, what happens when central banks can no longer maintain monetary divergence? The entire pricing structure rests on one assumption about policy direction, leaving little room for economic reality to reassert itself.
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