When the U.S. dollar recently stumbled again to a new low against the yen, it scared the dickens out of a lot of the stock market pros. No wonder. If you plot the performance of the dollar and the market over the past five years, you will find a striking correlation between the movement of equity prices and the movement of the greenback. The two seem as close as Edgar Bergen and Charlie McCarthy. Clear evidence of this sensitive relationship can be seen in what happened in Mid-April, when the dollar looked as though it had finally hit bottom after skidding roughly 20 to 30 percent over the past 18 months against major world currencies.
Once it appeared to have stabilized, the market exploded with the Dow Jones industrials shooting up more than 100 points in a matter of a few weeks on tremendous trading volume. No wonder savvy investors keep a watchful eye on the dollar.
So where's the buck headed?
Several currency experts - save for Julian Snyder, a frightening bear - think the dollar, despite its recent weakness and the probability of additional fainting spells, is pretty close to stabilizing.
They suggest the White House should soon get its inflation and energy acts together (although not without some expected hurdles). They argue that the administration seems intent on improving its horrendous trade deficit ($27 billion in 1977), and the Treasury's recent gold sales - in effect, a defense of the dollar - are indicative of this desire. And they point out Federal Reserve chief G. William Miller's recent statement reiterating the U.S.'s "deep commitment" to the dollar.
There's also some thought that the seven-nation July 16-17 economic summit in Bonn - which Jimmy Carter will attend - could produce renewed support of the dollar, given some credible proposals to promote world economic recovery.
The consensus may well be right. But that frightened bear I mentioned, 49-year-old Julian Snyder, the strapping six-foot publisher of International Moneyline, the nation's largest international currency newsletter, lays out a decidedly contrary view. For starters, he thinks the upcoming summit will be a failure. "I look for a lot of optimistic jawboning - talk of a new era of economic cooperation, more jobs, and no protectionism . . . but no sane thinker will buy this rhetorical nonsense." says Snyder, who recently returned from Switzerland where he sought new foreign insights from top moneymen into the likely cost of the dollar.
What deeply concerns him, he tells me, is the likelihood this will be the first economic summit where "money printing" - expansion of credit - will be openly recommended to save the world economy. Snyder says he hears from foreign sources that stimulative action - an average expansion of up to 1.5 percent of the gross national product - will be called for on the part of the participating countries to combat slowing industrial growth outside the United States and the threat of a deepening world recession.
"What we're talking about is more inflation from more dollar creation and a clear danger the world is headed into the inflationary furnace." Snyder says.
Accordingly, Snyder believes a continuing Fed policy of "creating liquidity" (credit) at a furious rate, plus the failure of the summit, will precipitate a new shelling of the dollar. Between July and October, he says, it should drop another 10 to 20 percent in value against the Swiss franc, the deutschemark, and the yen.
But what about Miller's talk of monetary restraint to temper inflation?
"Miller's talking out of both sides of his mouth," Snyder responds. "On one had, he talks restraint, but the Fed, meanwhile, speeds up the printing presses." Snyder points out that in the past 13 weeks, the Fed expanded the money supply (cash, plus demand deposits) at a record 10.1 percent rate. And in one recent four-week period, the money supply streaked ahead at an annual rate of better than 20 percent. "You just can't continue on a credit-creation jag, substituting printing press money for productivity without paying the price," Snyder says.
But considering the length of the current economic expansion - which is now in its fourth year - wouldn't a tight credit policy bring on a recession in short order, I asked Snyder.
"We need the pain, we need a recession . . . to stop runaway inflation," he replied. "Miller's problem is he just won't take the pain."
Since he's conviced the Fed's easy money" policy will continue to ward off a significant business slowdown - despite periods when jawboning and a bit of credit tightening will give just the opposite impression - Snyder sees little liklihood of a recession that many economists are predicting in 1979. Aided by this ready availability of predit, Snyder expects the economy to slosh through 1979 in reasonably good shape, despite a continuing high level of double-digit inflation. In fact, Snyder believes that if the Fed keeps pouring out the liquidity, the economy could shock everybody with an "explosive expansion."
And therein, he explains, lies a heap of trouble for the dollar. A booming economic always produces a flood of exportable currency, leading to further currency depreciation.
What does it all mean for the stock market? Nothing good. says Snyder, who sees short-term interest rates (currently around 7.5 percent for ninety-day commercial paper of corporations) shooting up to 12 to 17 percent by the end of 1979: he also thinks the rate of inflation at that point could approach 15 to 20 percnet. "They may nickname Wall Street Nightmare Alley," says Snyder, who expects a wicked decline in the Dow Jones Industrials, to about the 650 to 700 level before the end of this October.
I couldn't help but be skeptical of such chaotic predictions, and I guess my skepticism showed. Spotting this, Snyder said to me as we parted: "I know you'd rather hear how wonderful things are . . . how our massive deficits will soon disappear, why we'll lick inflation, why interest rates will go down, not up. But that's gobbledygook. If you want that, just go to the White House.