Richard Russell's Dow Theory Letter
February 1, 2011 -- Is the US's financial position hopeless? I've
studied the US finances backwards and forwards, and as I see it the US's
financial position most definitely is hopeless.
The actual posted national debt of the US is $14.1 trillion. However,
the US reports its finances on a cash basis while omitting its unfunded
obligations in such items as Social Security, Medicare and Medicaid and
various other entitlements. If the entitlements are included, the total
national debt including unfunded obligations would be over $100
trillion.
Wait, it gets worse. Entitlements, defense and interest on the national
debt takes up 80% of the entire budget of the US. That leaves just 20%
that can be sliced away if the US wants to actually cut into its
deficits. So what's left to cut? Actually, nothing that's politically
feasible.
To make the picture even more grotesque, the first group of baby boomers
is now reaching the retirement age of 65. As they leave the nation's
work force, the problem of financing Social Security becomes more
difficult if not impossible.
So what in God's name is the answer to all this? How will the US's
finances be handled? There are only two ways that I can come up with.
The first is -- to default, just declare that the nation is dead broke
and it can't meet its obligations. That would be tantamount to admitting
that the US is less than a third-rate power, a dying banana republic.
Unthinkable.
The second way would be to devalue the currency to the point where
obligatory dollar debts would be financed or paid off with dollars equal
to pennies or nickels.
It's now really a question of timing. With the national debt compounding
at rising rates, the problem of financing the debt becomes ever-more
pressing. For this reason, I believe the process of devaluing the dollar
will have to be speeded up.
From the government's standpoint, the deliberate devaluation strategy
must be kept secret from the public. They must not be allowed to know
that the currency they've worked so hard for, that the currency their
savings are in -- is to be crushed into a shadow of its former self.
Ultimately, the awful truth must come out.
At some point the government may be forced to be honest. The phrase will
be three words that I coined many years ago: "Inflate or die." And, the
government's answer will be, "You wouldn't want this nation to die,
would you? We have no choice, but to pay off, or carry, the debts with a
currency that must be devalued down to ten cents on the dollar.
You don't have to be a genius to read the chart below. This is the
Dollar Index going back a few years. First we see the long decline from
July to November. Then a short rally, that was interrupted by a
consolidation. Most recently, the Dollar Index dropped through the
bottom of the consolidation "box." This chart is one day behind. Today
the cash Dollar Index plunged again (OMG) to 76.99!
At this point, the Dollar Index is oversold and probably overdue for
some kind of a rally. Well, maybe.
The Dow is higher again today. But what of stocks in general? I'll
repeat my take on stocks. When you buy GLD you're buying a certificate
that states that you own a certain amount of gold. I call this "paper
gold." When you buy a share of a D-J Industrial stock, you are buying a
certificate that says you are part-owner of GE or Amex. Current buyers
of diamonds (DIA, the Dow) believe they are buying a share of something
tangible, a certificate that says you are part-owner of 30 great
companies. I believe that is the rationale for the Dow climbing wildly
as it is, this despite the fact that the Dow is overbought and
overloved. Buying the DIAs is tantamount to fleeing the fiat dollar.
Buyers of DIAs are saying that DIA or "paper Dow" is comparable to
buying shares of the exchange traded fund, GLD. Which is the real reason
why the Dow has been surging. Investors who are worried about the fading
dollar are buying the Dow (DIA) because they believe they are buying
something that's tangible -- furthermore, they are far more comfortable
owning the Dow than they are owning gold. In other words, when it comes
to a safe haven, investors feel safer with the Dow than they feel with
gold. To the average investors, gold remains a mystery. Furthermore, the
avalanche of negative media articles about gold scare most investors.
Advice -- I hope I've explained why buying the DIAs or the "paper Dow"
is roughly the same as buying GLD or "paper gold." |
