The Dow is set to make another run at 10,000.

– S&P @ 1100

– Nasdaq @ 2200 …

Stocks are trying to break into new bullish territory, fueled by a ‘cheaper dollar’ and slosh- over from the dollar carry trade.

Nymex crude oil futures are trading a bit over $80 a barrel,

Brent crude futures @ $78.

Talk is about the ‘cratering dollar’. Cratering against what? Certainly not against crude oil. So far, the race in price from $70 to $80 a barrel has caused sell offs in stocks and supported the dollar against other currencies. The crude- to- dollar relationship – dollars priced in oil – does not allow for the further devaluation of the dollar.

Dollar strength is made manifest in the stock markets. This is the action of the markets themselves, not a machination of OPEC or central banks/governments. The stock market/ oil market arbs have taken over from the toothless and decrepit ‘bond market vigilanties’.

Pay attention to the action in stock markets against oil prices. If $80 oil holds, the result will be a sell- off in stocks. The downdraft in stocks thence demands a reduction in the oil price. This has recently taken place over the past few weeks. It is also a mirror of what happened last summer, at lower stock and oil price levels.

Oil may never reach the +$100 a barrel that so many have glibly predicted. The S&P may never reach 1200.

Stocks represent an interface between the oil- consuming physical economy and credit- inflating finance economy. When a primary input in the physical economy becomes blatantly too expensive, support declines for the finance- driven securities/asset prices.

The physical economy cannot rationalize high(er) securities prices against very high input costs. This is the long- term effect of peak oil, something that took place ten years ago in money terms.

The peak of cheap oil took place in 1998. Cheap oil is needed by the physical economy; this economy is built around consuming/wasting cheap oil. Expensive oil is good for oil traders and oil producers, only.

An outcome of the process taking place right now can only be increasing awareness of the dollar as a hard currency. Instead of being backed by gold, it is de- facto backed by oil. As a hard currency, the dollar is almost impossible to short against unbacked fiat currencies or other evanescent speculations, particularly in a near- zero interest rate environment.

One reason oil producing countries are trying to diversify away from the dollar is not its weakness but its new relative strength. Oil producers have to understand that dollars may become scarce with oil prices declining as a result. This would be a consequence of declining demand, not pleasant for the producers.

The stock/oil paradigm is turning Ben Bernanke’s inflation strategy inside out. A hard dollar has severe implications worldwide: the dollar short- carry trade which has ‘stimulated’ the past few month’s world- wide economic rebound is in jeopardy. The oil market is telling the other markets the dollar is worth more than the Federal Reserve and Wall Street suggest. People will ignore the markets for awhile as ‘noise’ but as the correlation between stocks and oil prices becomes more obvious, it will get traders attention.

When speculators come to the same conclusion I have here, the dollar shorts will start to unwind their positions and the dollar carry trade will come to an end. Since almost all speculators are on the ‘dollar short’ side of the trade, the first to close their positions will pocket a nice profit.

The rest will be guillotined. There will be a massive dollar short squeeze. There simply aren’t enough cash dollars in circulation to support the scaffolding of dollar speculation built on top of the small money base.

I believe the next deleveraging leg is beginning right now. $80 oil is the new $147.

We simply as a people are that much poorer.