Due to the ramp up at the end of yesterday with the approaching signing of the latest stimulus bill, it appears there’s going to be a rally.

UDN/PSQ would be nice hedge against each other.

Most mathematical models are geared around the bell curve (thank you Herr Gauss) and the assumption is that all 99% of all data will fit within three standard deviations of the mean (average).

The 3 Day Moving Average on the SPY in 2008 on both the loss as well as the bounce was in excess of 4 standard deviations (4 Sigma) of the mean.

Then go back and look at the swings in valuation on the DOW in the first two quarters of 1929.

Then I would suggest looking at Rogoff’s paper and doing some work with a copy of Excel and the Standard Deviation function on those stats and try looking at what the ranges would be at about 4 Sigma.

I think this country’s policies are becoming increasingly destructive towards business and capital. Rather than cleaning our economic house, we’re merely shuffling things around and pursing much more of the same policies that brought us to this disaster.

Love the “American Peso” comment! I’m kicking myself for not going long USD merely as a hedge to the long gold and short Treasury positions I’d adopted last month. Hindsight is always 20-20…think I may lay off the short USD stance for a bit and wait until mid-year to load up again.

Since Jan 14, 09 – the USD has gained about 3% (tracked via UUP).

Since Jan 2, 09 – it’s up about 5%.

Oh, there is a negative correlation between the DOW and the UUP at about -0.86 strength.

Not surprisingly, therefore – look at January’s numbers on DOW/S&P.

Ken Rogoff has a working draft dated Dec 19, 2008 where he presents some fun facts about The Aftermath of Financial Crises:

1. Average length == 6 years
2. Average drop in housing value == 35.5%
3. Unemployment increases on average for 4.8 years
4. Average increase in unemployment is 7%
5. Average real GDP drop timeframe average == 1.9 years
6. Average real GDP drop == 9.3%
7. Cumulative increase in public debt during banking crisis == 186.3%

There are two alternatives: catastrophic divestiture caused by some sort of credit rating shock, or gradual adoption of other currencies to substitute USD holdings. As a speculator, the first will make the most profit, but as a citizen I truly hope for the latter outcome.

Although not likely, we can hope public policy changes sufficiently to bring America back into a globally competitive position.

Look, the USD has already crashed. Check the history from 2003 to August 2008.

There is a correlation between the USD and the DOW. When one goes up the other goes down. It’s one of the basic pillars of the US market and here’s the deal. Last week the UUP (US Dollar bullish ETF) just crossed the 50DMA.

It bounced off the 200 DMA in December and has rebounded hard up the line.

It will continue doing so until the vast majority of the USD holders outside of the US are able to divest themselves of the currency and THEN you and short the USD.

It’s a toss up at this point what will be the reserve currency of the twenty first century: either the Euro or the Yen.

Not the US Dollar.

I wrote about this more in detail here for anyone with an open mind to the actual numeracy behind the market and not blind political analysis posing as market savvy.