Richard Russell has some particularly thought provoking comments. If you’re not a reader of Russell’s Dow Theory Letters I highly recommend it:
Yesterday I ran into an old friend, and we talked for a while about the years gone by and our lives. He asked me one question that had me thinking. He asked, “Richard, you’ve been writing about the markets ever since I’ve known you, didn’t you start around 1960?” “1958,” I corrected him. “Yeah, I started writing in 1958, and I’ve never lost my interest in the markets.”
“What do you like about the business?” my friend quizzed me further.
“Well, what I find fascinating about the business is that it includes absolutely everything. It has to do with what’s really happening, it has to do with trends, it has to do with the real world as we know it, and it has to do with our future. The markets cut through the propaganda, the lies, the hopes and the fears. Basically, when you’re following the markets you’re following man’s most precious possession — his money.
My friend looked puzzled and said, “Interesting — Give me an example of the trends you’re talking about.”
“I thought for a while, and answered, “Look at the rise of China and Asia. And look at the slow, steady demise of the US. That’s a trend that nobody wants to deal with, but the money says it’s happening. The US is fast losing its industrial base to China. Gold, real money, is accumulating in China. In a year or so, China will be the world’s leading manufacturer and buyer of automobiles. China is buying up all the assets on the planet that are available. In my neighborhood, two of the most expensive houses have been bought over the last month by Chinese. I see an increasing number of Chinese walking around La Jolla. It’s a trend that I note, and it’s a rising trend.
Then there’s the fascinating situation in Japan and Russia where their populations are contracting. In Japan the reason is that Japanese women don’t want to get married any more. They think Japanese men make lousy husbands. Japanese men are demanding and macho and hate to do work around the house. Japanese women and young ladies have more fun staying single. And it’s creating a huge problem for Japan.
The whole trend of empowerment for women is changing the world. Women own 40% of the businesses in America. Women make most of the decisions on what cars or which house a family buys. Women globally make $12 trillion in salaries and wages each year. Currently, there are 99 women billionaires in the world. 92% of decisions to take vacations and where are made by women.
Then there’s the huge question of America’s future. Bob Prechter has come out with a fabulous 1000-page volume entitled, “The Mania Chronicles, A Real-Time Account of the Great Financial Bubble, 1995 to 2008.” This is a tremendous profusely-illustrated work, and when you go through it, you realize that there will be huge repercussions. I gather Prechter thinks one repercussion will be a hair-curdling depression. We’ll know about that with the passage of time.
And I wonder, if Bob Prechter is correct, will it be a deflationary depression or an inflationary depression? Either one would be a disaster. Either way, Americans would be wiped out. Americans were wiped out by a deflationary Depression in the 1930s. Germany was wiped out by a hyper-inflationary depression during the early 1920s.
Today the US sits spellbound and confused while the Obama administration (actually the Fed and the Treasury) attempts to halt the bear market and turn it into a bull market. Amid a flood of government propaganda, “less bad” has been given a new meaning, “less bad” is the new “good.” Evidently, investors have believed in the Fed’s efforts to thwart the bear, believed it enough to trigger a powerful bear market rally. Most analysts and economists have belatedly jumped on the band wagon and have belatedly declared that a new bull market has been born.
If they’re right, we’ve been “saved.” If they’re wrong, then we’re pouring trillions in newly-created fiat money down the drain. Personally, I believe the optimists are wrong. But bear market rallies can go a long way. As I’ve said, if the Dow recoups just 50% of its bear market losses, the Dow could rise to the 10,300 area.
So follow the markets, which is really following the money. I know of nothing more fascinating, which is why I’m still at it after all these difficult years.
Time for some long-term perspective. Below you see a chart of the S&P going back to 1949. The long rising trendline was violated in 2002. The S&P then rose to a new high, following which it plunged, breaking below its 2002 low in 2008. At the same time the Dow broke below the halfway or 50% level from 2002 to 2007. That 50% level was 10725. Interestingly, the Dow has never since risen above 10725. My conclusion is that we are experiencing a rally in an ongoing bear market.
From another standpoint, I have never seen a bull market of the size of the 1980 to 2007 affair end without a major bear market to follow. Such bear markets always terminate with great values such as a price/earnings in the 5-6 range and a dividend yield of 5-6%. But as they so often say on Wall Street, “Maybe this time it’s different.
Source: Dow Theory Letters
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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