Excerpts from last nights Dow Theory Letter. If you don’t read Russell or subscribe to his letter I highly recommend it. He has seen more cycles than just about anyone on the planet and his advice is priceless:
Now, I believe, we are in a primary bear market that will ultimately “clean house.” It will deleverage business, consumers, traders, nations and every other area that has been leveraged. The process will be extremely painful, as all bear markets are, and in the end it will bring stocks, assets, real estate, back to around the basic values that existed prior and just after WW II.
For a long time I have stated that anyone under the age of 75 has never seen “hard times.” I believe hard times lie ahead — they are already here for many people in the US and around the world. I’ve said that a house is a good buy when you can buy it, rent it out, and pay for all your expenses and still come up with a profit. I’ve said that stocks are a “bargain buy” when you can buy blue chips at 6 or 8 times earning and when dividends on the Dow or the S&P bring you a 5-6% return.
If this is true, this bear market has a long way to go. But what I did not envision is our government running deficits in the trillions of dollars. Running these fantastic and outlandish deficits in the trillions of dollars means that the US will have to sell an incredible amount of bonds to our creditors. Or we will have to inflate, create the money out of thin air. Many years ago I wrote that the fate of the US will be expressed in three words — INFLATE OR DIE. We are there now. Printing trillions of Federal Reserve Notes must end in inflation.
Ben Bernanke views deflation as “dying.” He has decided that we must “inflate or die.” Bernanke has decided that the method of fighting deflation is to smother it with money. Create enough money and deflation will be overwhelmed. But if you do that, what will happen to your currency?
If I produce 100 million toy bears, what will happen to the price of toy bears? The price will collapse, and at some point nobody will want a toy bear. They’ll hate the very look of a toy bear. They’ll buy toy hyenas or toy Bratz dolls instead.
And that’s where we are now. I see the future (and the markets) as rocky, volatile, unstable and full of cross-currents — plus unintended consequences.
Now I hear talk of devaluing the dollar. If we do that, the dollar will buy more while debt remains the same. Devaluing makes debt easier to handle. The US devalued the dollar against gold in 1933 when it raised the price of an ounce of gold from $20 to $35.
But how do you devalue today? There is no standard (like gold) any longer. You’d have to devalue the dollar against every major currency — against the pound, against the euro, against the yuan, against the yen. You can’t devalue the dollar against gold, because gold is no longer recognized as the ultimate standard of currencies.
Yet as the dollar declines against other major currencies, the price of gold will rise. The reason gold has not hit new highs against the dollar is because the dollar has been fairly strong against other major currencies and gold is priced in dollars.
Severe damage was done to the bear market rally today. At the close the Dow was 290 points below its May 8 peak. Worse, the Transports are down 352 points below their respective May 8 peak. Unless both Averages turn around and advance to new highs (and I emphasize both averages) I think this rally is over.
Note that the Transports would have to rally 352 points to better their May 8 peak of 3351.17. I don’t have a crystal ball, but I don’t think they can do it. If they can’t, the market will either sink into a trading range or test the March 9 lows. On top of everything else, today appears to have been a panic 90% down day. Holders of DIAs should be out at tomorrow’s opening.
That’s it, from the recovering —
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.