The good news: The US market indices continue their upward trend last week as the Dow Jones industrial average broke above the 11,000 mark for the first time in over five months. The bad news: this latest market uptrend appears not to be driven by good economic news but rather by an emerging "carry trade" driven by the easy money policies of the US and a number of other countries around the world, including Japan.

The carry trade game here is simply to borrow money from the Federal Reserve or Bank of Japan via low interest rates and invest in the stock market. In this carry trade, the dollar falls and the US markets go up but the net effect in real, dollar adjusted terms is negligible.

From this perspective, any price appreciation in the stock market is merely offsetting negative currency effects. This is hardly a bullish scenario. That's why while this may be a good market for short-term traders, it is a dangerous one for longer-term investors tempted to move cash off the sidelines.

What bugs me about all this is a Wall Street "patriotism" that equates the debasement of the currency and easy money with something it must be good for the country because it's good for the markets. What a crock.

All of this will continue until countries around the world confront China on its mercantilist and protectionist trade policies. China's grossly undervalued and manipulated currency alone is driving the monetary policy not just of the United States but also most of the countries in Asia. A weak Chinese yuan forces Japan, South Korea, Taiwan, and all of China's major competitors in Asia to try to drive their currencies down. Meanwhile, the commodity countries like Brazil and Australia are going bonkers because their currencies are bearing the lion's share of the burden of China's beggar thy neighbor currency regime through currency appreciations of their own – and result in export difficulties.

What I find really irritating as well is the rush of American journalists – Exhibit A is Fareed Zakaria's mindless apology for China in this week's Time magazine – to support Chinese mercantilism and protectionism. It's not even blind ideology on Zakaria’s part. It's just plain arrogance and stupidity. If you get on enough TV shows and get asked your opinion enough, you start to believe you actually know something. My guess, however, is that when the light weight Zakaria is on any TV set, they have to nail his shoes to the floor so he won't float away.

Anyway, that's my rant for the week and I'm sticking to it. The sober analysis is that this is an upward trending market with a wall of worry that is primarily macro-based. Climb it with caution.

Stocks that I am holding: SNTA, DEPO,DUSA,LPTN,NRGX,QTWW,SVMI,SNT,SBOTF,CYB,TBT,MITI,
GME(SHORT),DTV,VVUS,HOV,TEVA,SOMX,MDVN

Updates: I cashed out the rest of my Chelsea – will reload if it dips below $5. I took a small loss in YRCW, which did a reverse stock split and wiped out all the fun speculation on a penny stock. I will add to TBT every time it drops a buck.

As a final note, there are often typos in this newsletter and the culprit has to do with the fact that much of it is dictated using Dragon Naturally Speaking. The accuracy rate is quite high, but some silly things do slip through. So if you see something that doesn't look quite right, trust the syntax and make your own internal correction.

Navarro on TheStreet.com

Click here to review my videos on TheStreet.com.
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Professor Navarro’s articles have appeared in a wide range of publications, from Business Week, the Los Angeles Times, New York Times and Wall Street Journal to the Harvard Business Review, the MIT Sloan Management Review, and the Journal of Business. His free weekly newsletter is published at www.PeterNavarro.com.

© 2010 Copyright Peter Navarro - All Rights Reserved
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