russell at his most bearish
RUSSELL ON GREENSPAN
June 9, 2004 -- Today's site may be one of the most important that I write this year. Please read it carefully.
Here Are the Hopes -- The UN says OK to the US's sovereignty plan for Iraq. The "hope" -- the administration hopes that the US can get the hell out of Iraq by election time -- and hopefully before.
Greenspan babbles that he's ready to hike interest rates at a faster than expected rate if inflation flares up. As usual, Greenspan talks the talk -- but he "hopes" he doesn't have to walk the walk, which would mean doing any rapid boosting of interest rates. In fact, Greenspan hopes that he won't have to boost rates at all (however, the market's forcing his hand).
Nevertheless, the market isn't listening to Greenie. It's upping short rates on its own, as shown in this chart of the 91-day T-bill. Ah well, markets will be markets, and they go where they want -- without the permission of the Fed or anyone else.
At this point, I view the world economy as an inflated balloon that is slowly losing air. This is dangerously deflationary. Every central bank in the world is fighting the deflationary forces. They're fighting deflation through the wholesale production of paper money.
The Question is -- can corporations and individuals work off their debt, can they get their "balance sheets" in order while the world economies are still is good shape -- or is the air going to "whoosh" out of the global balloon too fast for the central banks to control -- and is the world going to sink into recession?
Personally, I think we are a few to several years away from deflation. It will come only after hyper-inflation. The last thing any politician wants is another Great Depression and will fight it tooth and nail.
This is the question which the stock market is now struggling with. The widely-followed S&P recovered exactly 50 percent of its bear market losses, and now the S&P is perched literally "on the edge." Can the S&P move up above the 50% level -- or is this "it," is this the best that the S&P can do? If so, after an extended period of wiggling and waffling (which has been the case so far in 2004) is the S&P and the rest of the market going to head down again?
No doubt about, everything about this market says crash but it hasn't happened. I look for a big correction, next year.
Probably everything I write for the rest of this year will, one way or another, deal with this question. Are the forces of world deflation going to win out? Or can the central banks keep the balloon inflated -- or at least deflating slowly?
The economies of India and China, and even Japan is growing and should continue to grow. Add the money oil countries are making and I'd say the majority of the world is doing pretty well. The U.S. has the biggest problem now and it should continue being problematic.
OK --I'm going to give it to you straight in big black letters -- and I doubt that you're going to read this anywhere else.
The global situation is very deflationary. There's too much debt -- and too much global production at viciously competitive prices.
The Kondratief Winter will come soon and create the deflation/depression but only after the fed continues to desperately prevent it by creating as much "money" as possible.
Any time the Fed eases up on its inflationary operations, deflation begins to take over. We can see it most clearly in the action of gold. The fact is that the Fed is actually not inflating enough -- and that's exactly what the action of gold is telling us.
Next, why the strength in the dollar, when everyone is saying that the dollar should be heading down (including, I might add, Warren Buffett)?
I just checked a three year chart of the yen, euro, and bp and they are clearly in an uptrend with the usd in a downtrend. A rally in the usd is good to prevent it from collapsing.
I've said this before, and I'll repeat it -- the HUGE debt position in all areas in the US economy amounts to a "synthetic" short position against the dollar. The dollar's strength is telling us that. Contrary to what everybody seems to believe, there is not enough liquidity in the system. Any time the Fed eases up on the money supply or any time the Fed does not create enough liquidity, the dollar surges (as it's doing today) and gold drops.
Sounds like the fed needs to continue providing even greater liquidity, they should be able to do that. I understand the purpose of the K-Winter is to purge debt, consumers and corporations can work off debt, or file bankruptcy. But what does the government do about it's enormous and growing debt? Think Baby-Boomers starting in 2008, how can the guv work of this debt "safely"?
Greenspan has a huge problem -- the price of goods is rising (price inflation) and Greenspan is being pressured to raise rates. But the larger global background is deflationary, and I have to believe that Greenspan's knows it.
For Asia, the problem is inflation, not deflation I believe. That's a lot of people.
What's Greenspan to do? He'll talk about the Fed raising rates in to the hopes that talk will forestall inflation, but he'll ACT as if the real problem is potential deflation, and he'll be very reluctant to actually raise rates.
So the great irony which nobody understands -- THE FED IS NOT INFLATING ENOUGH. GOLD IS TELLING US THAT! EVEN COMMODITIES INCLUDING COPPER ARE TELLING US THAT!
CONCLUSION -- What can I say that I haven't already said? I don't like the economic picture, I don't like the deflationary implications of today's' market action, I don't like the fact that all of America is positioned for inflation, and again I repeat that I didn't like today's market action.
Your biggest position should be in US dollars now, with gold basically owned for insurance purposes. In the end, if we do get "out-of-control" deflation the very validity of the dollar and all paper money may come into question, at which point gold would be the only place to be.
I'd say the exit of paper currencies will come after hyper-inflation.
But right now, judging (my judgment, of course) the main place to be is in US dollars. If we get deflation, rates will ultimately go down and T-bonds will be the place to be, but the timing of that kind of action is very difficult -- particularly since the "carry trade" is just beginning to unwind. Everybody was doing it big time -- but now with long rates rising the carry trade is starting to produce losses. (The carry trade = borrowing short at low rates and putting the borrowed money into higher yielding securities).
Safety first at this time means US dollars.
So much for Wednesday -
