June 9, 2004
Today's site may be one of the most important that I write this year. Please read it carefully.
Here Are the Hopes -- The UN says OK to the US's sovereignty plan for Iraq. The "hope" -- the administration hopes that the US can get the hell out of Iraq by election time -- and hopefully before.
Greenspan babbles that he's ready to hike interest rates at a faster than expected rate if inflation flares up. As usual, Greenspan talks the talk -- but he "hopes" he doesn't have to walk the walk, which would mean doing any rapid boosting of interest rates. In fact, Greenspan hopes that he won't have to boost rates at all (however, the market's forcing his hand).
Nevertheless, the market isn't listening to Greenie. It's upping short rates on its own, as shown in this chart of the 91-day T-bill. Ah well, markets will be markets, and they go where they want -- without the permission of the Fed or anyone else.
At this point, I view the world economy as an inflated balloon that is slowly losing air. This is dangerously deflationary. Every central bank in the world is fighting the deflationary forces. They're fighting deflation through the wholesale production of paper money.
The Question is -- can corporations and individuals work off their debt, can they get their "balance sheets" in order while the world economies are still is good shape -- or is the air going to "whoosh" out of the global balloon too fast for the central banks to control -- and is the world going to sink into recession?
This is the question which the stock market is now struggling with. The widely-followed S&P recovered exactly 50 percent of its bear market losses, and now the S&P is perched literally "on the edge." Can the S&P move up above the 50% level -- or is this "it," is this the best that the S&P can do? If so, after an extended period of wiggling and waffling (which has been the case so far in 2004) is the S&P and the rest of the market going to head down again?
Probably everything I write for the rest of this year will, one way or another, deal with this question. Are the forces of world deflation going to win out? Or can the central banks keep the balloon inflated -- or at least deflating slowly?
OK --I'm going to give it to you straight in big black letters -- and I doubt that you're going to read this anywhere else.
The global situation is very deflationary. There's too much debt -- and too much global production at viciously competitive prices.
Any time the Fed eases up on its inflationary operations, deflation begins to take over. We can see it most clearly in the action of gold. The fact is that the Fed is actually not inflating enough -- and that's exactly what the action of gold is telling us.
Next, why the strength in the dollar, when everyone is saying that the dollar should be heading down (including, I might add, Warren Buffett)?
I've said this before, and I'll repeat it -- the HUGE debt position in all areas in the US economy amounts to a "synthetic" short position against the dollar. The dollar's strength is telling us that. Contrary to what everybody seems to believe, there is not enough liquidity in the system. Any time the Fed eases up on the money supply or any time the Fed does not create enough liquidity, the dollar surges (as it's doing today) and gold drops.
Greenspan has a huge problem -- the price of goods is rising (price inflation) and Greenspan is being pressured to raise rates. But the larger global background is deflationary, and I have to believe that Greenspan's knows it.
What's Greenspan to do? He'll talk about the Fed raising rates in to the hopes that talk will forestall inflation, but he'll ACT as if the real problem is potential deflation, and he'll be very reluctant to actually raise rates.
So the great irony which nobody understands -- THE FED IS NOT INFLATING ENOUGH. GOLD IS TELLING US THAT! EVEN COMMODITIES INCLUDING COPPER ARE TELLING US THAT!
CONCLUSION -- What can I say that I haven't already said? I don't like the economic picture, I don't like the deflationary implications of today's' market action, I don't like the fact that all of America is positioned for inflation, and again I repeat that I didn't like today's market action.
Your biggest position should be in US dollars now, with gold basically owned for insurance purposes. In the end, if we do get "out-of-control" deflation the very validity of the dollar and all paper money may come into question, at which point gold would be the only place to be.
But right now, judging (my judgment, of course) the main place to be is in US dollars. If we get deflation, rates will ultimately go down and T-bonds will be the place to be, but the timing of that kind of action is very difficult -- particularly since the "carry trade" is just beginning to unwind. Everybody was doing it big time -- but now with long rates rising the carry trade is starting to produce losses. (The carry trade = borrowing short at low rates and putting the borrowed money into higher yielding securities).
Safety first at this time means US dollars.
So much for Wednesday -
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsf
June 9, 2004
The inimitable and venerable Mr. Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron's during the late-'50s through the '90s. Through Barron's and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-'66 bull market. And almost to the day he called the bottom of the great 1972-'74 bear market, and the beginning of the great bull market which started in December 1974.
http://www.gold-eagle.com/gold_digest_04/russell060904.html