Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

[Jim Nickerson]

Re: Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

As I've mentioned before, no one here (I'd hope) expects long-term deflation -- I think when people mention deflation, they are thinking of a repeat of the 2008 break. Having watched both Fed, ECB, Japanese and Chinese blatant bank manipulations, I think the proper answers are:

Are the circumstances for a deflationary episode in place? IMO, yes.
Will TPTB ever allow such an event to occur? No. Any such risk will be immediately met with money-printing both blatant (TARP II, more European bailouts) and subtle (US swap lines). These maneuvers were not in place for the 2008 break; they are now.
Might such an episode cause stock market dislocations? Yes. We've seen them recently. If you are looking at stocks though, IMO this is not the site for it. iTulip is stock-adverse (for general indexes they are right, for specific sectors and stocks, IMO wrong, but hey, that's why I belong to multiple sites)

And here's a good question for EJ. PMs have been a good purchase yes -- especially if you bought with iTulip in 2001. Would you buy them now?

(edit add)
One more thought -- with popular opinion turning against deficits and out-of-control spending, how might this affect things?

Did you just ask on a new thread whether buying TBT (long interest rates on TYX) should be a no-brainer? People who see things as "no-brainers" are not infrequently just that, I.e. they have no brains. Here you think something is consistent with deflation, but there you were going long TYX interest rates. Seems to me a bit of thinking two opposites things at one time with both correct.

Whether anyone actually is correct in the deflation/inflation argument, one should avail oneself of both sides of the arguments. Most people espousing an opinion on one or the other do so with little to no mention of a time frame. You might read David ROsenberg's on-going comments on the deflationary case, which he thinks is the predominant situation currently and for the the first half of this decade.

[Milton Kuo]

Re: Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

And here's a good question for EJ. PMs have been a good purchase yes -- especially if you bought with iTulip in 2001. Would you buy them now?

Eric's recent article, Before the FIRE Gold Update: Is $1,237 the new $720?, answers the question pretty clearly, I think:

We, however, have maintained our 2001 forecast that gold prices are likely to peak in this geopolitical structural Great Shift in the range of $2500 to $5000.

So iTulip's forecast is for gold to ultimately double or quadruple from the current price of approximately $1,200. Yeah, I think that's a recommendation to buy (up to the iTulip-recommended 30% of one's portfolio.)

[DRumsfeld2000]

Re: Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

Just for clarification, RR has mentioned on a number of occassions his belief that the market is sometimes manipulated. He thinks that this usually happens at the end of the trading day and that the markets will eventually overcome this manipulation. It makes investing difficult and does not help shorting.

[EJ]

Re: Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

As I've mentioned before, no one here (I'd hope) expects long-term deflation

I cannot assume that because the general meaning of the term is not a correction in prices but a process that lowers asset, commodity, and wage prices for an extended period as in the 1930s resulting from the inability of monetary authorities to compensate for a collapse in the private credit markets and bank lending.

-- I think when people mention deflation, they are thinking of a repeat of the 2008 break. Having watched both Fed, ECB, Japanese and Chinese blatant bank manipulations, I think the proper answers are:

Today most of, but not all of the investing world now understands the process that we described to readers 10 years ago as a cycle of asset price inflation, crash, and asset price deflation in the FIRE Economy that briefly spills over into the Productive Economy through employment and demand, pushing down commodity prices, and that monetary and fiscal philosophy is geared toward not allowing the process to become self-reinforcing. In the old days a year ago I was endlessly arguing with commentators such as Steve Keen who were certain that runaway deflation was in train in 2008. If you go back and read those articles from that time, he and others are convinced that the Fed cannot stop the process. Today the lesson remains largely unlearned, or at least mis-learned.

Are the circumstances for a deflationary episode in place? IMO, yes.

No, not as in 2008. That's what 90% of the investment world thinks. That was a one time event. You cannot crash the private credit markets and fill in with government borrowing twice. A completely different process will occur in the next crisis, which will be a crisis of public over-indebtedness not private over-indebtedness.

Will TPTB ever allow such an event to occur? No. Any such risk will be immediately met with money-printing both blatant (TARP II, more European bailouts) and subtle (US swap lines). These maneuvers were not in place for the 2008 break; they are now.

Yes, that's what we told everyone since 2006 and now that it's happened, most believe it. Unfortunately, it's not going to happen again, at least not the same way as in 2008. The first year of a debt deflation bear market are all alike, thus our forecast in Dec. 2007. After that, they are all different.

Might such an episode cause stock market dislocations? Yes. We've seen them recently. If you are looking at stocks though, IMO this is not the site for it. iTulip is stock-adverse (for general indexes they are right, for specific sectors and stocks, IMO wrong, but hey, that's why I belong to multiple sites)

But the process now is fundamentally different as are the antecedents. That was then; this is now.

And here's a good question for EJ. PMs have been a good purchase yes -- especially if you bought with iTulip in 2001. Would you buy them now?

I consider the absence of gold from one's portfolio as reckless, so yes I'd buy some today if I didn't own any.

As for stock indexes performing poorly versus individual stocks, that's certainly true. As you say, that's not what we do here, although we may create a portion of the site where stock selection information can be shared among members. Our role is to remind readers, who are subject to the continuous onslaught of misinformation about gold and stocks, that the messages they hear repeated in articles in the popular business press about gold such as this one are quite simply factually incorrect.

The first time we posted these charts in How to make $301% in six years with low volatility in January 2008, we were up 301%. Now, 417%.

Since 2005, gold has outperformed stocks every single year


Since 1998, the S&P has gained 13% while gold has gained 417%

(edit add)
One more thought -- with popular opinion turning against deficits and out-of-control spending, how might this affect things?

That is discussed in an article we're working on for Monday. It is going as expected. Recall this chart that we posted first in 2007?

The three charts within this on chart show the relationship between post-bubble reflation policy, GDP, and stock prices. The message is that once a credit bubble has collapsed, the performance of the markets depends as much as ever on the market’s perception of the performance of the economy, but the performance of the economy and, more importantly, market perception of future performance of the economy, depends on government policy and the impact of politics on policy. Note for example the impact of Hashimoto fiscal reforms in 1995 on GDP in 1997 and 1998.

History repeats. First there is the bubble, then the crash, then the reflation, then the political backlash, so far all according to the process that we put forward to readers three years ago. The problem from an investing standpoint is that after the first year of a debt deflation, monetary and fiscal policy become politicized. If you think back four years ago, when I first proposed the idea that the Fed was going to buy all of those asset-backed securities, an assertion roundly jeered by nearly everyone I debated at the time, 99% of the American public didn't know what the terms "monetary policy" and "fiscal policy" meant. The crisis got their attention. Now we have "as if" populist policy making informing the political backlash. The fiscal reformers are acting "as if" the U.S. is not in a condition of over-indebtedness. Going cold turkey on budget cuts and raising interest rates to incent saving is a great idea if the debt were not there, but it is, so we have to deal with it. Certainly the markets have to be worried that "as if" monetary and fiscal policy may prevail for political reasons as it did in Japan in 1995, and that may indeed be one of the factors shaking up the markets, besides the euro debt crisis.

[jpatter666]

Re: Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

Did you just ask on a new thread whether buying TBT (long interest rates on TYX) should be a no-brainer? People who see things as "no-brainers" are not infrequently just that, I.e. they have no brains. Here you think something is consistent with deflation, but there you were going long TYX interest rates. Seems to me a bit of thinking two opposites things at one time with both correct.

Whether anyone actually is correct in the deflation/inflation argument, one should avail oneself of both sides of the arguments. Most people espousing an opinion on one or the other do so with little to no mention of a time frame. You might read David ROsenberg's on-going comments on the deflationary case, which he thinks is the predominant situation currently and for the the first half of this decade.

I do subscribe to Rosenberg's newsletter. And Mish. And iTulip. Fleckenstein. ChrisMartenson. And more.

[jk]

Re: Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

History repeats. First there is the bubble, then the crash, then the reflation, then the political backlash, so far all according to the process that we put forward to readers three years ago.

i still like ka-poom theory. we are now in the "deflation scare" stage, even for many who frequent these boards. there will be a political reflationary response. we cannot follow japan's course over the longer term, however, because contrary to japan's condition [as ej points out] we are massively in debt. the next major crisis [as opposed to this minor one] will be what fleck calls "the funding crisis," again as ej points out above.

Going cold turkey on budget cuts and raising interest rates to incent saving is a great idea if the debt were not there, but it is, so we have to deal with it. Certainly the markets have to be worried that "as if" monetary and fiscal policy may prevail for political reasons as it did in Japan in 1995, and that may indeed be one of the factors shaking up the markets, besides the euro debt crisis.

so the markets are afraid that fiscal restraint might actually prevail. i suppose that is somewhat possible in europe, but the ecb has taken it's first bite of forbidden fruit by continuing to accept greek debt. and it's very hard to believe that the u.s. will enact restraint fiscally if indeed the economy turns down again. and we all know the fed will do whatever it can legally, and illegally, to prevent gd2.

i bought some more oil this week. i'm probably too early.

[EJ]

Re: Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

Did you just ask on a new thread whether buying TBT (long interest rates on TYX) should be a no-brainer? People who see things as "no-brainers" are not infrequently just that, I.e. they have no brains. Here you think something is consistent with deflation, but there you were going long TYX interest rates. Seems to me a bit of thinking two opposites things at one time with both correct.

Whether anyone actually is correct in the deflation/inflation argument, one should avail oneself of both sides of the arguments. Most people espousing an opinion on one or the other do so with little to no mention of a time frame. You might read David ROsenberg's on-going comments on the deflationary case, which he thinks is the predominant situation currently and for the the first half of this decade.

Good discussion, but please keep it respectful of your fellow members.

We operate on the idea that if we understand the underlying market and political processes that are driving the economy and markets then we have a shot at forecasting. We do not see inflation or deflation as eventualities but as symptoms of an ever-changing set of asset market and political processes. The bubble process is predictable. That is why we were able to accurately forecast markets as first the technology stock bubble and then the housing bubble went through definable stages. Now the world is different. Politically-oriented reflation policy after a bubble collapses is not predictable.

No one expects runaway deflation anymore. That theory is bankrupt. Our theory has been that after the crash and reflation that the economy drifts in and out of periods of inflation and deflation as fiscal spending ebbs and flows, much as in Japan since the mid 1990s, but not for as long because we are foreign credit constrained.

Here's a chart from early 2008 that we used in an article to dispel the idea that Japan experienced a prolonged period of deflation.

Japan "accomplished" this--if that is the word--by financing its public borrowing with export earnings. The U.S. would like to do this but as a net debtor will run out of credit long before 15 years pass. We will experience some form of credit and currency crisis, then face the "austerity" music, which will send us into the same spiral it always sends over-indebted nations:

1) Rising threat of insolvency leads to sovereign debt crisis
2) Spending cuts intended to reduce debt issuance slows the economy
3) Demand declines
4) Output declines
5) Tax revenues decline
6) Credit-worthiness declines
Go to step 1.

I believe the fundamental flaw in the inflation/deflation debate is the misguided effort to arrive at a final outcome. Trying to nail down a final outcome of over-indebtedness is futile. There is no final outcome. There is only perpetual change and adjustment.

I encourage readers to think in terms of markets and the economy as processes not events and put your energy into understanding processes of change. That's what we do here and it's the reason we have been successful to date.

[jk]

Re: Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

Japan "accomplished" this--if that is the word--by financing its public borrowing with export earnings. The U.S. would like to do this but as a net debtor will run out of credit long before 15 years pass. We will experience some form of credit and currency crisis, then face the "austerity" music, which will send us into the same spiral it always sends over-indebted nations:

1) Rising threat of insolvency leads to sovereign debt crisis
2) Spending cuts intended to reduce debt issuance slows the economy
3) Demand declines
4) Output declines
5) Tax revenues decline
6) Credit-worthiness declines
Go to step 1.

I believe the fundamental flaw in the inflation/deflation debate is the misguided effort to arrive at a final outcome. Trying to nail down a final outcome of over-indebtedness is futile. There is no final outcome. There is only perpetual change and adjustment.

I encourage readers to think in terms of markets and the economy as processes not events and put your energy into understanding processes of change. That's what we do here and it's the reason we have been successful to date.

what this "same spiral" doesn't address is the case wherein the currency in question is the global reserve currency.

we see what's happening with some tremors in the euro, a global reserve wannabe. now imagine the panic when it's the dollar under attack.

[we_are_toast]

Re: Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

there will be a political reflationary response.

Here's where I have the big problem, the politics. In 2008, we had Bear Stearns, Lehmans, AIG, Fannie, Freddie, Merill ... all either collapsed or collapsing, and you had the Treasury Sec. saying the worlds economy would come to an end if we didn't pass TARP I NOW! It was a heck of a fight and it barely passed! The stimulus barely passed and cost one Senator his job.

If anything, the politics has shifted much farther against the government interfering, and the public believes TARP I was simply a give away to the banks. If Tim Geithner came to the leaders of congress today and said we need TARP II NOW! They wouldn't just laugh at him, they would toss him out on his butt.

The prevention of a "disinflation" episode as severe as the 2008 episode seems very dependent on the political will for fiscal stimulus. So far there doesn't appear to be any more stomach for stimulus in Europe or the U.S. It sure seems like conditions will need to get much worse than 2008 before the public and politicians will accept government intervention.

The big mystery will be the FED. Bernanki was very imaginative in 2008 and his bag of tricks is probably much larger than my imagination.

i bought some more oil this week. i'm probably too early.

Same here.

In the time it took me to write this I see 2 new postings.

This seems very reasonable to me;

1) Rising threat of insolvency leads to sovereign debt crisis
2) Spending cuts intended to reduce debt issuance slows the economy
3) Demand declines
4) Output declines
5) Tax revenues decline
6) Credit-worthiness declines
Go to step 1.

EJ, If your postings today are teasers for Monday's report, I'll be very anxious to read it.

[EJ]

Re: Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

what this "same spiral" doesn't address is the case wherein the currency in question is the global reserve currency.

we see what's happening with some tremors in the euro, a global reserve wannabe. now imagine the panic when it's the dollar under attack.

The point isn't repeated here but Ka-Poom Theory from 1999 is a theory that if the United States enters into the process outlined above that at some point a panic out of dollars occurs, with gold the primary recipient of dollar denominate flght capital. That is why we own gold. Judging by the preformance of gold since then we are not alone in feeling a need to hedge that risk. The continuous annual rise in gold prices since 2001 we believe reflects a continuous increase in dollar debt default and inflation risk that Ka-Poom Theory lays out. There are few alternative explanations that make sense.

[jk]

Re: Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

i think this is apropos- an analysis based on a theory of "generational" succession:

Fiscal Impasse in the Fourth Turning

Posted by Neil Howe


I was invited to go to this Peterson event in downtown DC, but was sick and so I missed it. Not, I must confess, that I was eager to listen to twenty-five mostly- Silent (born 1925-1942) high muckety-mucks all the say the same thing… at great length and at great detail… about the deficit. Believe me when I say: I have heard it all before. WP columnist David Broker, an honest good-government type (and also a Silent), gives a pretty good account here of what actually transpired. And a pretty good assessment of this commission’s poor odds of success. Alan Simpson put it right in his usual humorous style: “a suicide mission.”

I’m inclined to think that this vast fiscal impasse will become a very important component—if not, when the bubble bursts, the actual crux—of the emerging Fourth Turning (Crisis).

As an issue, it has all the prerequisites. It is something everyone has long known was coming, but also something that everyone just preferred not to think about. It is something which, if left unsolved, will surely result in disaster. Yet it is also something which, in order to solve, requires huge changes in habits and behaviors, and in long-term winners and losers, throughout America. And this is the key point: One could, in theory, imagine solutions that would involve completely different winners and losers, and realize completely different visions of America’s future, that is, in terms of its political economy. At one extreme, for example, you solve it all by just cutting taxes—a lot. Or at the other, by just cutting benefits—a lot. And you have a polarized Prophets [baby boom] archetype running the country that has divided itself (I’m speaking now of its most engaged and passionate leaders) into two largely irreconcilable camps. Each camp has its own vision. And each camp already believes that its own corner solution is inadequate: In other words, many in the GOP want a balanced budget with *less* government spending than now; and many Democrats want a balanced budget with *more* government spending than now.

Even aside from the psychology of the Prophet, it’s perfectly understandable why one side or the other will never feel that the moment is quite right to settle on a long-term solution. Each side wants to go to work when it’s on top. The GOP feel, reasonably, that hey why not wait for a couple of years until we get a new commission in which *we* outnumber *them.* Similarly, not many leading Democrats were eager to join a commission set up by George W. Bush.

The bickering and gaming continue as the new recession has hugely speeded up the disaster deadline—like turning on all the boilers in the Titanic’s engine room while the iceberg looms. We’re in real trouble.

Let me further add that it’s not just happening to us, but to every other major economy in the developing world. Just look at the per-GDP public debt in Japan, or the headlines about Greece (are Spain and Italy and the rest of the “Club Med” next?) The trigger to the chain reaction is unlikely to start with us. But, once the chain reaction starts, we may be a big part it.

If any of you are interested in the global fiscal situation, here is a just-released report ( http://www.bis.org/publ/work300.pdf?noframes=1) by the Bank for International Settlements (“The future of public debt: prospects and implications”). These are bankers giving advice to other bankers. Their language is typically very dry and cautious. But they use words like “daunting” and “frightening” in this report.


http://blog.lifecourse.com/2010/05/f...m_campaign=rss

[Basil]

Re: Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

Just for clarification, RR has mentioned on a number of occassions his belief that the market is sometimes manipulated. He thinks that this usually happens at the end of the trading day and that the markets will eventually overcome this manipulation. It makes investing difficult and does not help shorting.

Yep, up over 100 points in less than 15 minutes on almost no volume at the close on a Friday is manipulation if there was any.

[jpatter666]

Re: Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

Did you just ask on a new thread whether buying TBT (long interest rates on TYX) should be a no-brainer? People who see things as "no-brainers" are not infrequently just that, I.e. they have no brains. Here you think something is consistent with deflation, but there you were going long TYX interest rates. Seems to me a bit of thinking two opposites things at one time with both correct.

And just expand on my earlier response. I don't think you read it right.

I said that while the circumstances for deflation may be aligning, TPTB will NEVER allow it to occur. I expect ka-poom. I expect inflation.

However, if the last few years have taught me anything, it's that TPTB can make the game go way longer than anyone expects. That's why I take nibbles here and there. I also had enough brains, thank you very much, to query whether this nibble was appropriate.

So there.

(edit add)
Oh, and by the way, on the TBT post didn't you read the line after it saying that since it seemed a great deal, I must have obviously missed something? Suspicions aroused -- which is why I posted. Honestly, read the whole thing next time....

[ThePythonicCow]

Re: Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

i think this is apropos- an analysis based on a theory of "generational" succession:

Fiscal Impasse in the Fourth Turning
...
If any of you are interested in the global fiscal situation, here is a just-released report ( http://www.bis.org/publ/work300.pdf?noframes=1) by the Bank for International Settlements...

When I read reports from the BIS or IMF (if I manage to stay awake) then I find their warnings and analysis remarkably balanced and sensible, at least by way of comparison with what comes out of the mouths of my political "representatives" in Washington, DC.

One recent criticism of the European Economic Union is that it is a monetary union lacking political power.

One criticism of the financial reform bill that passed the U.S. Senate last week was that it gave yet more power to the Fed.

The "throw the bums out, a pox on both their houses" political movement seems to be gaining strength in the U.S.

EJ bemoans the shift of the driving force of the driving force in the economy to the political arena. This makes his work of anticipating economic changes harder.

... I am beginning to see a pattern here.

The power of respect is flowing toward some of the bankers, away from politicians and some other bankers.

I expect that most of the politicians but only some of the bankers will be discredited. Power will shift to the remaining bankers. I am long (in thought, not stock) JPMorgan, Rothschild, Rockefeller, IMF and BIS. I expect Goldman Sachs will be sacrificed as the arch-typical evil bankster on the altar of public revenge. I expect many politicians and many local and regional banks to be consumed in the crisis. I expect power to shift toward a stronger world monetary system, which will include bouts of crisis and counter-crisis, in the usual Hegelian dialectic. I expect a greater separation of political and monetary regimes. My hero Ron Paul will fail to "audit the Fed" in any meaningful fashion. Some more secondary financial crises in larger U.S. states (e.g. California) and secondary nations (e.g. the PIIGS) will continue to pile debt onto the U.S. (Fed, Treasury, GSE's, ...) until a world-wide financial crisis ushers in another Bretton Woods and a new world reserve currency.

This financial crisis will be a major element of our fourth turning crisis (though, unfortunately, probably not the only major crisis before us.)

[chr5648]

Re: Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year

Yep, up over 100 points in less than 15 minutes on almost no volume at the close on a Friday is manipulation if there was any.

I don't find that situation to be extraordinary or something of substance. It happened on a friday near the close. There are less people trading on fridays so the depth in the market is much lower, especially at the end of the day. If you talk to any traders, most will not trade late on friday.

So if there is less depth and less people in the market, a big order to buy some dow or s&p 500 futures options, and stocks will drive that market up big time. On the other hand lets say your trading at the open any day of the week, if you put in that same big order there are more people trading, more stop and limit and limit orders that will give liquidity and price will not move like that.