Excerpt from Richard Russell's Dow Theory Letter...
<<...July 10, 2002 -- This could be the most important site I've written so far this year. So please read it carefully.
With rates low and staying low, with the stock market low and staying low ( low in price, not in values), the US is looking increasingly like Japan.
The great fear, as far as the Greenspan Fed is concerned, is DE-flation. Once the economy goes on the deflation path, it can get out of control -- meaning getting out of the Fed's control. The Fed is doing its part in fighting deflation. The Fed is fighting US and world deflationary forces with a massive increase in the money supply (and what else is new?).
However, for the real authority on inflation/deflation, I always turn to the bond market. No sector of the economy is more sensitive to the trend of inflation or deflation than bonds.
Today the bellwether 10-year note is yielding 4.73%. At the same time the TIPS, the inflation adjusted 10 year T-note, is yielding 3.11%. The differential has now dropped to 1.62. A few weeks ago it was 1.78. A year ago it was 2.20. Those sophisticated characters who buy and sell bonds are saying that the trend is toward LESS inflation. Some might even be so bold as to state that the trend is deflationary.
I've been stressing the fact that this nation is up to its eyeballs in debt. The government, the states, the counties, the cities are chock full of debt. The corporations are loaded with debt. American consumers are rolling in debt and taking on more debt even as you read this report. Never has any nation in world history taken on this much debt .
It's no secret that inflation is the debtors' best friend. Inflation makes it easier for debtors to service their debt with depreciating dollars.
Conversely, deflation turns debt into the living nightmare. During deflation dollars become scarcer and more valuable. And in the US where debt is king, a trend towards deflation could conceivably set off a debt melt-down.
A debt melt-down would be characterized by mass bankruptcies and a trend on the part of banks to be ultra-conservative. To put it another way -- deflation and a debt melt-down would be an utter disaster.
We've been watching the stock market deflate into its third year.
The stock market doesn't exist in a vacuum. The stock market moves first and the economy follows. One huge danger is that the stock market could be saying "deflation ahead. And the great fear is that what's been happening in the stock market could be happening in the economy -- a month, six months, a year from how.
This has got to be Greenspan's worst nightmare. Here he is, gunning the money supply for all its worth and he can't get the economy on the inflation path again. The culprit -- too damn much debt.
How do you get rid of debt? You pay it off (almost impossible now since it's still rising), you declare bankruptcy -- or you inflate it away.
It's obvious which method the Fed has chosen -- it's the method that we call -- inflation.
A few years ago I gave the problem an easy three word description. I called it --
INFLATE OR DIE.
I'm sorry to have to put it right there for everyone to see, because I'm afraid that some subscriber may send it to Mr Greenspan (and who knows, Greenspan may even read my sites), and if Greenie sees this simple description it's going to scare hell out of him. Not that he doesn't already know it, but to see it in print, why it's enough to cause him to lose what little hair he's got left.
So increasingly, I'm seeing this bear market as the Specter of the Death of Debt.
The bull market was all about growth and optimism and phony earnings and the phony "New Economy" and getting the price of your options up and rising price/earnings ratios.
This bear market will be all about balance sheets and crushing debt and collapsing earnings (but at least honest collapsing earnings) and rising pessimism and declining price/earnings ratios.
I've been drawing subscribers' attentions to the shocking collapse in the utility sector, and I've been puzzling about why the utilities have been caving in. My conclusion now -- the utilities are loaded with debt. Utilities are huge issuers of bonds. I think the reason the utilities are crumbling is that the market is fearful of their balance sheets -- TOO MUCH DEBT.
So here's my advice to subscribers -- get into as liquid position as possible. If you have a lot of debt, try to cut it down, try to get into a no-debt position.
One big problem is going to be housing, where millions of homes are financed by mortgages. And, in case you weren't aware of it, as far as the cold eye of the market is concerned, mortgages are simply a form of DEBT.
This, by the way, is why I'm not happy about REITS, this is the reason why I'm not happy about the way Fannie Mae and Freddie Mac are acting, this is the reason why I take the new low in the Confidence Index as a bearish omen. The Confidence Index is a barometer of credit conditions.
This is what I believe this bear market is all about. It's about the coming melt-down in debt.
And what's the most liquid form of pure intrinsic value? What the ONLY money that isn't somebody else's debt.
The answer again is a four-letter word -- GOLD.
People ask me how gold could possibly rise in a deflation. In a deflation where the viability of anything and everything could be in question -- the desired asset is cash, money. And the only money that is free of debt is GOLD. In a debt-melt down, the dollar price of gold could "go to the moon." Hey, you heard it here first, dear subscribers, you heard it here first...>> |
