Excellent analysis by Jesse covering a number of items, including Robert Prechter’s successes and failures, the contraction in credit, gold, the Federal Reserve, the financial elite, and the sad truth that America’s dominant industry is financial fraud. - Ilene
First, Richard Russell does not ‘slam’ Prechter because he is a gentleman and doesn’t really ‘slam’ anyone. Fights between pundits can be fun in a voyeuristic way, but they are largely unproductive and generally used as a means of gaining attention, and providing distraction from what really matters, in the manner of panem et circenses. And sometimes people use provocative headlines to garner interest as well, in the manner of the New York Post and Daily News.
What Russell is saying is that Prechter is wrong in his interpretation of how deflation will play out, and what the endgame will look like. And he is saying almost the same thing that others, including Eric Janszen and myself, have been saying for quite some time, but in a slightly different ways.
Second, what Bob Prechter does not realize is that a contraction in credit does not imply a one for one decrease in ‘money’ just as an increase in credit these days does not result in a one for one increase in money. That is because credit is not money, it is the potential for money. Why more people don’t get that is beyond me. They trumpet the diminishing returns of money production for each marginal dollar of credit, but they don’t admit that this credit is vaporous, and as it dissipates it does not reduce money supply one for one either.
Third, and probably most importantly of all, even as the credit contracts, and the money supply contracts at some lesser rate as show in the money supply figures, the ‘basis of value’ of the money is also contracting. Since the US dollar is not based on gold, we have to look at what is providing the basis of its value. And what are those things, and what is happening to THEIR value.
And finally, there is a huge overhang of eurodollars out there, that are largely parked in Treasuries mostly of a moderate duration of three to ten years. By buying the Three and Ten year notes the Fed is ‘monetizing them’ and taking…
Could the world economy be headed for a depression in 2011?
As inconceivable as that may seem to a lot of people, the truth is that top economists and governmental authorities all over the globe say that the economic warning signs are there and that we need to start paying attention to them. The two primary ingredients for a depression are debt and fear, and the reality is that we have both of them in abundance in the financial world today.
In response to the global financial meltdown of 2007 and 2008, governments around the world spent unprecedented amounts of money and got into a ton of debt. All of that spending did help bail out the global banking system, but now that an increasing number of governments around the world are in need of bailouts themselves, what is going to happen? We have already seen the fear that is generated when one small little nation like Greece even hints at defaulting. When it becomes apparent that quite a few governments around the globe cannot handle their debt burdens, what kind of shockwave is that going to send through financial markets?
The truth is that we are facing the greatest sovereign debt crisis in modern history. There is no way out of this financial mess that does not include a significant amount of economic pain.
When you add mountains of debt to paralyzing fear to strict austerity measures, what do you get?
The end of Keynesianism? Yes, I think we’re seeing it now. Fed Chief Bernanke in his writing blamed the Great Depression on the Fed for shrinking the money supply. In fact, Bernanke even apologized on the part of the Fed for “causing the Great Depression.” Bernanke, wrote a famous piece explaining to “us know-nothings” that the Fed has a magic instrument, it was the ability to print money, and, if necessary, to drop this Fed-created money to the American people from helicopters. With his magic power, concluded Ben, there was no way the US could slide into another Great Depression.
It was great and comforting concept, but it didn’t work. After leaving rates at zero, printing over two trillion “dollars” and backing billions of dollars in stimulus plans, unemployment remains high, housing stays in the dumps and the national debt has sky-rocketed beyond all reckoning.
The spending plans of the Obama administration and the expansion of money by the Fed has left the US in worse shape than ever. Unemployment is still high, and the US has taken its place along with Greece and Portugal as another “half-broke banana republic.”
How did this horror story befall the once “greatest nation on earth” and the one-time “Arsenal of Democracy?” If a house is built on sandstone and with rotten timber it’s not a question of whether that house will fall apart — it’s a question of WHEN. Ever since the end of World War II, Americans have been enjoying the greatest standard of living the world has ever seen. How did we do it? Was it hard work, sweat, original thinking, risk-taking or pure luck? Hardly any of those, it was through borrowing and creating a gigantic house-of-cards. The cards were the newly-created bits of paper that we call dollars (actually, they are Federal Reserve notes backed by nothing).
Without its abilities to create fiat money, the US could never have built its “house-of-cards economy.” Without the insidious Fed, the US would never have had the ability to create trillions of unbacked Fed notes.
I’ve insisted all along that the US should have allowed the primary bear forces to fully express themselves, as they inevitably will do anyway. But in its arrogance and ignorance, the administration decided that they could halt or sidestep a
Richard Russell has been very vocally bearish of late. He’s not the only notable investor who has turned increasingly bearish in recent months. Currently, Russell believes we are in the “dead zone” – a sort of no man’s land for the market where we could potentially meander for a while, attempt to regain our footing and then get knocked flat on our backs:
“We’re in the area that I call the “dead zone.” I’ve been here before, and it’s not easy to write in the dead zone. The dead zone tends to appear after a period of dramatic and clearly-defined action. After such periods the market will often act like an exhausted prize fighter who has been knocked down to the canvas. He gets to his feet, but he is unsteady on his feet, and he’s playing for time — until his head clears. He’s fending off the other fighter as best he can, and he’s depending on his experience. Will he make it to the end of the round? But what kind of shape is he in for the next round?
To be more specific, the last significant low for the Dow was recorded on June 7 at 9816, Transports 4038. I want to watch these two points for indications of further strength or weakness.
The Lowry’s figures are important at this juncture. Their Selling Pressure Index at 707 is 462 points above their Buying Power Index which stands at 245. Thus Selling Pressure is in the dominant position, which suggests that the market should work sharply lower at the drop of a dime.”
Nothing would derail the Fed’s great reflation/recovery experiment like higher interest rates. Several notable investors including David Einhorn (see Einhorn’s thoughts here) and Julian Robertson (see Robertson’s thoughts here), have expressed their concerns over the potential for higher interest rates. The great Richard Russell of the Dow Theory Letters has long feared a spike in interest rates. In a recent note he explained that the end of quantitative easing has bond investors worried over the future of interest rates. Russell believes higher rates are the next big move in the bond market:
“Older subscribers may remember that I said that the Fed could continue its “quantitative easing” (printing money) until the bond market says it can’t. Below is a daily chart of the 30-year Treasury bond. The bond market doesn’t like what it sees. I view the pattern on this chart as a huge, down-slanting head-and-shoulder top with the bond sitting right on support. The bond appears weak, and if support is violated, interest rates will be heading higher. And that’s the last thing the Fed wants at this time.”
“I know of only one rule that always holds true for the stock market. The market will advance to a state of overvaluation and over-enthusiasm, and this will usually identify a top. The top is followed by a long road to a state of over-pessimism and undervaluation and this will identify a bottom. We call the extended and winding travels between these two — bull and bear markets. Most unusual is the investor who can stay invested for the full length of a bull market or the investor who will remain OUT for the full length of a bear market.
Why so? It’s because of greed that investors won’t stay out of a bear market. And it’s because of fear that an investor won’t stay in during the full length of a bull market. I’ve often likened the stock market to a living animal. It’s an animal that is scheming and fighting to part us from our money. It’s been said that never has anything invented by man been so frustrating to man as the stock market.
The remarkable thing about the stock market is that it contains the sum total of what everybody knows about absolutely everything. It’s been said the “everybody knows more than any one person.” And that’s what I find so fascinating about the stock market. The combined wisdom of hundreds of millions of people are reflected in the action of the stock market every minute and hour of each session.
The trick is to interpret the action of the market and what the action is telling us. I’ve searched for 50 years trying to find that “pot of gold,” and as far as I know, nobody has ever succeeded. It’s the eternal mystery, it’s the everlasting puzzle. The day that some genius fully understands and beats the market, that day the market will cease to exist.
I note that most analysts are now bullish, and that they are recommending stocks for the “continuing advance.” At the same time, most economists are optimistic, arguing that the “longest
Russell continues to believe we are in a secular bear market and currently believes we could be in a topping process preceding a “vicious” downturn:
I haven’t liked the stock market. I can’t tell with any certainty at this time, but this bear market rally could be in the process of topping out. If it is, I think we’re in for a vicious collapse. Remember, rallies in a primary bear market are movements against the main force or tide of the market. In other words, during a rally, the bear forces have been held back. When a bear market rally breaks up, the market tends to make up for lost time. That means the declines tend to be rapid, violent and vicious. As I said, I can’t tell with certainty whether the advance from the March low is breathing its last. But if it is — watch out; it’s not going to be pretty.
Perhaps scariest facet of another potential leg down is the ramifications with regards to government and monetary policy. Russell believes a substantial downturn below the March lows would mean the Fed policy has completely failed:
By the way, IF the advance from the March low is topping out, here are the implications. It would mean that all the Fed’s machinations and efforts to halt the deflation have gone to waste. Furthermore, if the March lows are violated (and nobody believes they will be) we will probably be in the final and most costly and frightening leg of this bear market.
While I agree with Russell that we are in the middle of a secular de-leveraging bear, I have a more difficult time believing that the market is about to revisit…
There are a number of items favoring higher gold now.
(1) Interest rates are at zero, which means the “opportunity cost” of owning gold now is highly favorable. You sacrifice no yield in owning gold vs. Treasury bills. T-bills pay you nothing, so you might as well have your money in gold.
(2) The Bernanke Fed will evidently stop at nothing in its all-out attempt to “jump start” the wobbly US economy. This means spending and building debt at a never-seen-before rate. This will result in inflation. The Fed can create fiat money — any quantity at will, but it cannot direct where that money will go. So far, the money is not going into the economy, banks remain reluctant to lend and consumers are reluctant to spend. The newly-created money has been going into bank reserves and into the stock market. Stocks have been rising on an ocean of liquidity. The sinking dollar has been a huge help to the big Dow-type stocks which benefit from their ability to export. This is resulting in world-wide central bank inflation as the banks seek to devalue their money in an effort to keep the dollar strong.
(3) The world’s central banks are now seeking to protect themselves from a falling dollar by buying gold. After years of selling gold, ironically, the central banks are now buying gold. In today’s WSJ we see the headline, “Central Banks Join A New Gold Rush.” Russell Comment — This is indeed ironic. In swapping their own paper for gold, many central banks are admitting that gold is superior to the very paper they are creating out of thin air.
(4) Many nations are now seeking to boost the ratio of gold to paper in their reserves. The US has the largest ratio of gold to junk fiat paper, 77.4%. But the US stupidly only places the value of our gold at $42.22 an ounce. If the US marked our gold to market, it would be a tremendous help to our government’s balance sheet. But the US prefers to live in a fantasy world where gold is worth less than $50 an ounce!
Richard Russell is better than fine wine. His thoughts, as always, are excellent. Investors interested in his daily missives would be wise to investigate his website:
There are two ways to view the stock market’s advance from the March lows. One way is to assume that the stock market, despite an awful lot of negative news, is discounting better times ahead. This is the usual way of viewing a steady stock market advance, and it is undoubtedly the way most bulls are thinking.
The other way to view the advance from the March low is that this is the normal and expected recovery following a semi-crash in the stock market. I consider the 2007 to 2009 collapse a semi-crash. The automatic recovery following a crash is the single surest action in the market. Normally following a crash, the market will recoup one-third to two-thirds of the territory lost during the crash. The Dow would have to advance to the 10300 area to recover just half its 2007 to 2009 loses.
Meanwhile, we are facing an extraordinary situation in US finances. Wall Street, or I should say, the Federal Reserve, has bailed out Wall Street banks and entities that were considered “too big to fail.” The actual and potential costs of the financial bailout put US taxpayers on the hook for $17.8 trillion (that’s trillion), which is more than the entire annual gross domestic product of the US.
In 1990 the 20 largest companies in the nation controlled 12% of US financial assets. Today the 20 largest companies control more than 70% of US financial assets. Many of these include corporations that have been deemed “to big to fail.” The Russell comment is “if they’re too big to fail, then they’re too big to exist.” In a true capitalist (not socialist) economy, if you fail you fail and you’re bankrupt. You just haven’t made the “grade.” If any business is so reckless and so ignorant of risk that it goes broke, then damn it — let it go under. And let its CEO and board be accountable. But that’s hardly what’s happening in the US today.
While the run of Americans are struggling with their economic lives, the big bankers are back…
Never a disappointing read – Russell has never lost site of the big picture despite the rapid short-term gyrations in the market. If you’re not a subscriber of the Dow Theory Newsletters I highly recommend it:
Niall Ferguson, MA, D.Phil., is Laurence A. Tisch Professor of History at Harvard University and William Ziegler Professor of Business Administration at Harvard Business School. He is also a Senior Research Fellow at Jesus College, Oxford University, and a Senior Fellow at the Hoover Institution, Stanford University.
I want to include a few paragraphs from a most important article by the brilliant Niall Ferguson, author of “The Ascent of Money, A Financial History of the world.” Ferguson’s article is about the coming “divorce” between the US and China. I believe the future of the world will revolve around the relationship of US and China. The Ferguson article appeared in Newsweek magazine (Aug. 21) and is entitled, “Chimerica Is Headed For Divorce.” And I quote –
“Let’s look at the numbers. China’s holding of US Treasuries rose to $801.5 billion in May, an increase of 5% from the $763.5 billion in April. Call it $40 billion a month. And let’s imagine the Chinese do that every month through this fiscal year. That would be a credit line to the US government of $480 billion. Given that the total US deficit is forecast to be about $2 trillion, that means the Chinese may finance less than a quarter of total Federal-government borrowing — whereas a few years ago they were financing virtually the whole deficit.
“The trouble is that the Chinese clearly feel they have enough US government bonds. Their great anxiety is that the Obama administration’s very lax fiscal policy, plus the Federal Reserve’s policy of quantitative easing (in laymen’s terms, printing money) are going to cause one of two things to happen: the price of US bonds could fall and/or the purchasing power of the dollar could fall. Either way, the Chinese lose. Their current strategy is to shift their purchases to the short end of the yield curve, buying Treasury bills instead of 10-year bonds. But that doesn’t address the currency risk. In a best-selling book titled Currency Wars, Chinese economist Song
Back in the middle of February - during the height of the financial-market turmoil, the market was pricing in a shockingly policy-error-ish 36.5% chance of a rate cut in 2016. Since then The Fed has done everything it can to try and regain credibility - attempting to be hawkish in the face of dismal data, baffling everone with bullshit, and droning on about data-dependence. Now, thanks to the FOMC Minutes released last week with officials suggesting investors may be underestimating the pace of tightening, the odds of a 2016 rate cut have collapsed to j...
By Jacob Wolinsky. Originally published at ValueWalk.
Donald Trump will be good for economy, bad for Wall Street: David Rosenberg
Published on May 25, 2016
Live from the 2016 Strategic Investment Conference
Get the latest updates live from the sold-out 2016 Strategic Investment Conference with John Mauldin, Richard W. Fisher, David Rosenberg, James Grant, Niall Ferguson, George Friedman, Pippa Malmgren, Charles Gave, Neil Howe, and many more. Click go to following link to visit the conference’s live blog:
Hello, everyone who has joined us on the second day of SIC 2016. It’s going to be a long and exciting day. Today, we’ll hear speeches from George Friedman, Lacy Hunt, David Rosenberg, and other well-known financial and political experts. We’ll also do video interviews with each speaker, and all of th...
The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through March.
"Travel on all roads and streets changed by 5.0% (13.0 billion vehicle miles) for March 2016 as compared with March 2015." The less volatile 12-month moving average was up 0.41% month-over-month and 3.2% year-over-year. If we factor in population growth, the 12-month MA of the civilian population-adjusted data (age 16-and-over) is up 0.33% month-over-month and up 2.1% year-over-year.
Here is a chart that illustrates this data series from its inception in 1971. It illustrates the "...
Hillary Clinton created “security risks” by using a personal email account and private email server when she was secretary of state, according to a sharply critical report by the state department that could haunt her in the tightening presidential election campaign.
The department’s inspector general, an internal watchdog, said Mrs Clinton had not sought legal approval to conduct official business on the server she installed in...
Central banks likened to pornographers. Greece, believe or not, is still getting bailed out, and China is apparently next. US corporate share buybacks are starting to peter out. Japan lobbies for bigger deficits around the wold. Sprott’s Rick Rule how and why the gold bull market is for real, while precious metals continue correcting. Look for next week’s COT report to be a lot more positive. Pensions are back in the news, and the numbers are as usual very bad. Doug Noland on why the Fed probably can’t raise rates in June — or ever.
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Do you remember when you were growing up and all your friends were allowed Atari game consoles but you weren’t?
Well, I do and the things seemed as foreign to me as Venus. Mostly because the little time I managed to spend on the gaming consoles when my friends weren’t hogging them I found it all a bit silly. I never “got” computer games, and to this day still have poor comprehension of things like Angry Birds.
I suspect that many people around the world view Bitcoin in the same way as I view Angry Birds: with mild amusement and a general lack of understanding as to what the hell all the fuss is about.
I was thinking of this since a buddy of mine recently started ...
After a three-year bull run that more than quadrupled its value by its peak last July, IBD’s Medical-Biomed/Biotech Industry Group plunged 50% by early February, hurt by backlashes against high drug prices and mergers that seek to lower corporate taxes.
Although we try to stay focused on finding and managing promising trade ideas, the comments in the comment section sometimes take a political turn (for access, try PSW — click here!). So today, Jean Luc writes,
The GOP debate last night was just unreal – are these people running to be president of the US or to lead a college fraternity! Comparing tool size? The only guy that looks semi-sane is Kasich. The other guys are just like 3 jackals right now.
And something else – if Trump is the candidate, that little Romney speech yesterday is probably already being made into a commercial. And all these little snippets from the debate will also make some nice ads! If you are a conservative, you have to be scared now.
Phil writes back,
I was expecting them to start throwing poop at each other &n...
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Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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