The markets seemed to like what the Fed had to say yesterday, including the part about definitely, for sure, no kidding around this time raising interest rates in December. Especially elated were currency traders, who bid the US dollar up on the news.

Somewhat less enthusiastic, however, are the corporate executives who have seen their firms’ sales and earnings squeezed by a strong dollar of late. If rising rates make the dollar even stronger — as theory says they should — then presumably that makes corporate earnings even weaker. The media has been wrestling with various aspects of the dollar/corporate earnings/Fed policy connection for a while, and a consensus seems to be forming that there’s a conflict between aims and results in current monetary policy that another couple of months probably won’t resolve:

Let’s assume that the Fed, after all its dithering, feels honor-bound to raise rates even in the face of slowing GDP growth and increasing global tensions. The dollar will almost certainly respond by rising or at least remaining stable at its current high level.

This in turn means that corporations will face continued pressure on sales and profits, and that the earnings recession will continue for at least another year before easy comparisons start making it possible to “grow” again.

What does that mean for the equity markets? Has there ever been an ongoing rise in share prices when corporate earnings were in a multi-year decline? That’s not rhetorical. Market historians, feel free to weigh in here.

By John Rubino

dollarcollapse.com

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