? I took the bull and the bear out. Now we're waiting for the answer -- it should arrive soon. August 17, 2009 -- Russell prediction. . . "The coming revolution" -- Americans living within their means. .........................................
When the weekend comes around, if there's not too much going on, I have some time to think. My hope is to be able to come up with something that makes sense about the markets and the economy and the nation. Here's what I've come up with --
Back in 1945 I could buy a loaf of bread for a dime. I could take the subway from one end of NYC to the other for a nickel. I could buy a good dinner for a dollar. I could see a double feature (two movies, in case you didn't know) at anywhere from 15 to 65 cents. I could go dancing with my date in a top-grade NY hotel (Pierre, Plaza) for $2.50. I was renting a three-bedroom apartment in an upscale upper East side apartment house for $275 a month.
What has happened since 1945? Prices of everything have gone up. Today, everything is OVERPRICED. I was making $65 a week back in 1945, and I could live comfortably. Today I can't live on 10 times that amount. Today everything is just plain overpriced.
There's an economic "law" called "regression to the mean." Today we're experiencing deflation. Consumer prices have dropped more in the last year than they have in any year during the last 60 years. The price of almost everything is heading down. And if a retail outfit like Abercrombie decides to hold its prices (nothing is discounted or on sale at Abercrombie), customers simply skip the store and shop elsewhere for lower prices.
And I'm wondering whether we're not in the process of seeing prices regress to the mean. What do I mean by the mean? The mean is the center of a series of numbers. For instance, take the series 1, 2, 3, 4, 5, 6, 7, 8, 9, 10. The mean is not the average of those ten numbers. The mean is the middle, in this case 5.5 -- right in the middle of the series.
I don't know where the mean of prices since 1945 is. But that may be where prices are headed. If this is true, we could be heading for the second great depression or at the least a huge change in Americans' standard of living.
Ben Bernanke is probably aware of this, and he has bet his reputation on defeating deflation. And the question I ask is -- how far will the"gang of two," the Fed and the Treasury (Bernanke and Geithner) go, in their battle to halt deflation and their quest to bring back asset inflation?
Many years ago, in the 1960s, I used to correspond with the great Hamilton Bolton, one of the founders of the Bank Credit Analyst. In those days Hamilton warned that it was taking an increasing amount of debt to produce a dollar of Gross Domestic Product in the US. As I remember, back in those days it was taking $3 of debt to produce $1 of GDP.
My old friend, Ian McAvity, has continued Ham's study (Ian McAvity's Deliberations out of Toronto). In his latest report Ian writes, "Over the 4 years to September '07 when the meltdown began, nominal US GDP rose $2.86 trillion (25.8%). Total credit Market Debt increased by $14.85 trillion (44%) over those 16 quarters, this translated to $5.21 of new debt per every $1 of GDP. In the two years to September '08, it rose to $6.49 of new debt to $1 in GDP. Ballooning Federal debt to recapitalize banks isn't going to translate into resurgent growth in consumer spending. Off the mat, probably yes, but recovery is likely a long way off."
So today it takes $6.49 of debt to produce $1 of GDP. But with consumers strapped for cash and loaded with debt, I expect consumers to continue cutting back on their buying for many months ahead and maybe for years ahead. For this reason, I expect the debt-to-GDP to surge to new highs.
Americans are not stupid. They know that the current massive debt building must end up with tougher times. And they are cutting back as they prepare to face hard times. As it was in my boyhood, debt is becoming a dirty word.
And I keep asking, how far will Bernanke, Obama and Congress go in their quest to halt deflation? Is there some point at which no amount of credit creation, no amount of injecting money into the system, will cause consumers to spend? If the money is there and available, will they come? I think we're about to find out.
And I wonder whether we've arrived at the point where regression to the mean takes over. If so, that would fit in with the thesis that we are simply experiencing an upward correction in an ongoing primary bear market.
Primary movements tend to run to conclusion, no matter what. They may be manipulated for a month or so, but not for long. If the bear market is still in force, then when the current upward correction becomes exhausted, the stock market will turn down again with increased force. At that time Bernanke and Geithner will face their baptism of fire. Trillions of dollars will have been wasted in a loosing battle to turn the tide.
Last night, amid amazing publicity from critics, the third season of Mad Men began. Mad Men, according to MatthewWeiner, it's creator, is about people's reaction to CHANGE.
I believe we are now in a period of historic change. I've lived through four periods of great change. (1) The Great Depression. (2) World War II. (3) 1959 and the beginning of the "hippie" generation of the 1960s. (4) Today, and the beginning of the great decline in the American standard of living.
Russell Comment -- Yes, this is an historic time of change. Debt is piling ever-higher, deflation and world over-production are driving prices down, and many people fear that the "American way of life" is being lost.
Lost? How can it possibly be lost? Here are some figures from Barron's.
$180.7 billion -- Federal deficit for July. $1.27 trillion -- Total deficit so far in 2009, a record. $332.2 billion -- Government spending in July, a record for any month in US history. $151 .5 billion -- US government receipts for the month of July. 5.6% -- decline in monthly receipts from a month ago.
How did it happen? Fiat money, Fed-created inflation, and spending beyond our means (yes, the government can spend far beyond its means too). All this has put us in a precarious position. Can more (enormous) spending get us out of this mess? Ah, that's the question that is currently putting the best minds in the nation at odds. ................................................................
Question -- Russell, you said that the Fed could continue to inflate until the bond market said it had to "stop." Well, the Treasury market is still holding up.
Answer -- Yes, and the Fed is buying Treasuries. In effect, the Fed is holding up the Treasury market.
TODAY'S MARKET ACTION:
My PTI was down 6 to 5937. The moving average at 5904, so my PTI is bullish by 33. The Dow was down 186.06 to 9135.34.
Transports were down 129.90 to 3576.02.
Utilities were down 5.58 to 367.49.
Sept. crude was down 0.76 to 66.75.
Total Volume on the NYSE and associated exchanges was 5.73 bn.
There were 336 advances and 2728 declines on the NYSE.
There were 22 new highs and 7 new lows.
S&P was down 24.36 to 979.73.
NASDAQ was down 54.68 to 1930.84.
My Big Money Breadth Index down 10 at 685.
Dollar Index was up 0.40 to 79.41. Euro was down 0.91 to 140.79. Yen was up 0.46 to 105.89. Currency prices as of 1 PM Pacific Time.
December gold was down 12.90 to 935.80. September silver was down 0.747 to 13.97.
GDX was down 1.91 to 37.30.
HUI was down 18.76 to 338.70.
Bonds: Yield on the 10 year T-note was 3.491. Yield on the long T-bond was 4.348%. Yield of the 91 day T-bill was 0.17%.
My Most Active Stocks Index was down 13 to 142.
CRB Commodity Index was down 3.99 to 253.33.
The VIX was up 3.62 to 27.89.
Late Notes -- From "out of the blue" the stock market turned down. Is this bear market rally topping out? That's the trillion-dollar question. It will take a week or two more to find out. In the meantime, the bull proof will be whether BOTH Averages can rise to new highs above last Friday's peaks. The highs for the rally were recorded last Thursday at 9398.19 for Industrials and 3774.12 for the Transports. (When quoting numbers for the Averages, I am always talking about the closings).
It's important to note that unlike recent sell-offs, today's early decline did not recover much by the close. This time eager buyers didn't "buy the dip." That's an important change in the character of the market. Today, ominously, the Averages closed near their lows.
My PTI was down 6 to 5937. MA was 5904, so my PTI is still bullish by a shrinking 33 points. Today may have been a 90% down-day. Down volume was a huge 94% of up + down volume. There were 336 advances on the NYSE vs. 2728 declines. The decline was very broad -- of the 25 most active stocks on the NYSE, only 2 were higher -- C and PFE!
The Dow closed down 2.00% and the Transports closed down a huge 3.51%. Extreme caution is warranted
