08/28/08 04:05AM EDT

The Democrat attack dogs at the DNC were barking, and the US Stock Market bears were running. Yesterday was as good a day for the bulls as a low volume trading day in August gets – all they had to do was sit on the beach and watch everyone run from their own shadows.

If you’re doing all of the macro work right now, you have to be scratching your head here. I am. Here are the two big questions that I can’t shake: 1. Could an Obama Presidency be an ultra bullish American catalyst? And 2. Do markets away from the US need a bear market in the US Dollar in order to recover?

In some respects, asking myself these questions is counterintuitive – but usually that’s the only way to find an objective answer. Since the most relevant macro correlation I can find is the S&P 500 to the US Dollar, it’s un-objective to dismiss the 2nd, and 3rd derivative effects of the directional moves implied therein. The reference date to be focused on was July 14th, when both the US$ and the US stock market hit their respective year to date lows. As the US$ recovered, so did the market. It’s fairly easy to argue that the 2nd derivative effect of a strengthening domestic currency inspired deflation in commodities.

The problem of course, is that in every big macro “Trade” there is a winner and a loser. Since July 14th, America has been winning, and the rest of the world losing. This is a much different dynamic than what the “it’s global this time” crowd has become accustomed to. Since it’s a basket index, the US$ strengthening has equated to Asian and European currencies weakening. As those currencies weaken, they import the same kind of inflation that the US did when the US Dollar was in the thralls of a bear market.

Let’s look at short term trading in Indian stocks to amplify this divergence. The US market was +0.8% yesterday, and India’s Sensex closed down another -2% overnight. Since August 11th, the Indian stock market is down another -9.7%, and the US only down -1.8%. But hold on a second, India isn’t levered to commodities like say Russia is? However, India’s economy is levered to the political intensities associated with a world class bureaucracy; particularly as economic growth slows and currency driven inflation accelerates! Russia on the other hand has lost -20% of its value since August 1st, while the US market is +1% over the same duration. Russia started a war; China held the Olympics; but they, Brazil, and India (remember, the “BRICs”) have gone straight down since nominal commodity inflation began to deflate.

This is as confusing as it is to write – but these are the facts. And despite the structural issues currently associated with the US Financial System, in the end, America may very well be the safer place to invest in a global economy that is stagflating. Asian central bankers are being forced to support their currencies right now – both the Philippines and Thailand raised interest rates in the last 48 hours, the Koreans had to intervene and support the won, as did the Chinese. The Chinese Yuan is having its best up day in a month this morning as a result of government posturing. As Asians support their currency however, this virtuous circle of interconnected markets plays negative to both the US Dollar and her stock market. If the US$ deflates, imported commodity inflation re-flates... and Obama’s populist call to arms gets louder, alongside his chances of winning.

Now that I am right royally confused, I’ll submit a solution to stop gap this protracted global de-leveraging bleed – bring Obama into office, and have him behave like an economic Republican. The run-up in cheap money driven global economic prosperity is ending. Ask the folks in Pakistan, who had to plug in trading curbs again last night, after a 6 day -18% market decline. Or ask the Japanese management team at Toyota, who is guiding down their global auto sales numbers for 2009 to 2%, down from the long standing high single digits they ran when everything globally was growing.

The re-organization of global economic superpowers is in motion, and socialist countries with Keynesian monetary policies are going to finish last. Best of luck putting this all together, if you can! For now, patience and cash are kings.

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