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Excerpts from last nights Dow Theory Letter. Β If you don’t read Russell or subscribe to his letter I highly recommend it. Β 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 —

R man.

  1. ejack

    As you mentioned yesterday, China is inevitably linked to the US due to it’s huge investment in treasuries. At some point, won’t China get so worried that its investments are threatened by a devaluing dollar, that it may jump the gun and start liquidating their treasuries? Won’t this make it harder for Bernanke to inflate our way out of this debt situation?

  2. Cullen Roche

    China has already expressed concerns. They’re trying to diversify out of dollars, but the U.S. is such an enormous part of their export driven economy that they can’t control the flow of dollars into China.

    I imagine over the year that China will continue to diversify out of dollars, but for now we kind of have them by the short and curlies…..

  3. vfsv

    I notice he ended with “from the recovering – R man.”
    —Has Russell been ill?

  4. haljett

    I wonder too, if the price of gold hasn’t been kept down because hedge fund managers found it necessary to sell some of their gold in order to pay back all those cashing out of their funds. Something I’ve been thinking about lately anyway.China of course continues to have a psychological affect upon the market too, I think. Building up their reserves through their mines and now looking to buy gold from the IMF. That is holding the price fairly steady I think. You know they are banking on a dollar failing at this point. And I don’t know if that’s because they want it to fail, though I used to be sure they didn’t, or because they just know it’s inevitable with all the money we are printing out of thin air.Looking at ExactPrice right now I see gold managed to get up to $929 this morning. Fact that it remains at these levels tells me that a fair number of people are hedging some of their bets there.

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