All of the financial assets that move the American economy — the dollar, gold, commodities, stocks and bonds — are finally dancing to the same tune, and that's a big positive for the future, according to veteran economist Scott Grannis
Grannis, former chief economist at Western Asset Management, writes on his blog that falling risk aversion mixed with rising confidence and growth is just the tonic investors need.
"There is no sign as yet of any 'irrational exuberance.' Stocks are doing well because earnings are doing very well and investors are gradually regaining their confidence in the future."
Grannis said the dollar is going up because the U.S. economy is expanding more than that of most other developed nations.
"Gold is falling because inflation remains under control, the dollar is strengthening and civilization as we know it remains intact," he said.
Meanwhile, commodities are falling because the dollar is rising, and because commodity prices had risen to the point that they had too much production and supply, according to Grannis.
And, he explained, bond yields are rising because investors are confident enough to move to other assets beyond fixed-income. That scenario tends to produce leftover bond supplies, which lowers their prices while pushing their yields up.
Grannis noted that commodity prices are measurably higher than they were in 2001, while the dollar is still well below its former highs, and he looks for those stronger-dollar, weaker-commodity trends to continue.
He predicted the current financial asset environment means stocks easily have room to go higher from here. "PE [price-earnings] ratios are up from very low levels (a sign of a great lack of confidence in future earnings), but they are only slightly higher than average," he wrote.
Another veteran economic observer, Ed Yardeni
, agrees with the view that the stronger dollar is depressing commodity prices.
Yardeni, president and chief investment strategist at Yardeni Research, warned on his blog, however, that if commodity prices fall too far, it could be a sign of a rapidly weakening global economy.
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