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01/09/10 Bullish Fundamental Arguments for US Stocks.

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  • #16
    Re: 01/09/10 Bullish Fundamental Arguments for US Stocks.

    1/14/2010 Richard Russell's comments on deflation and gold via http://www.investmentpostcards.com/2...m+Cape+Town%29

    Richard Russell (Dow Theory Letters): Pondering a deflation scenario
    “I’ve been pondering over the following strange situation. The Dow is actually lower today than it was ten years ago. What does this really mean? To me, it means that the market over the last ten years has been discounting ‘no growth’ ahead. When you take an unbiased look at the picture, compared with gold almost everything today is cheaper than it was a few years ago. Since gold is the universal immutable standard around which everything else (including the dollar) fluctuates, this means that the price of literally everything has been going DOWN against the standard which is gold.

    “This is deflationary. Of course you can say that a loaf of bread costs more now than it did a year ago, and this is inflationary. True, it’s inflationary in terms of dollars, but the dollar is lower in terms of gold. So in terms of gold, everything is deflating.

    “This deflationary trend is continuing, and what’s more it’s continuing against a veritable ocean of central-bank created currencies. Subscribers know that I believe this bear market will end, as most others have, with stocks selling at extreme great values - dividends high, price/earnings low. And you ask, ‘How can this possibly occur?’

    “This is the question I’ve asked myself. And the answer I come with is that stocks will be hit by brutal world deflation. That’s what the miserable performance of the Dow is telling me. That’s what the poor performance of everything else against gold is telling me. I’m not talking about the performance over recent months, but their performance over the years.

    “Yes, I know that the conventional wisdom is that we’re heading for all-out inflation. This forecast is based on the thesis that the only way to handle America’s deadly multi-trillion debts is to inflate them out of existence. But suppose the Fed is unable to engineer inflation? Look how hard they’ve been trying over the last year to restart inflation. And what’s happened to housing, the chief object of the Fed’s inflation target? Housing prices have gone nowhere, well maybe they’re less weak then they were six months ago. But inflation in home prices? It’s just not happening.

    “And now political pressure is on the Fed to cut back on stimulus, money-creation and at the same time raise interest rates. This, if it happens, will definitely be deflationary, and it will hit housing and the economy.

    “Ever since World War II the Fed has been on the inflation path. Leverage, rising debt, speculation, and higher prices have been the ‘law’ of the land. Now, I believe we have hit the inflection point; we are just entering the huge deflationary spiral that will unwind six decades of leverage and inflation.

    “In the big picture what I see is that China and Asia will become (they already are) phenomenal producers. The developed nations will not be able to compete with them. The result will be a crushing decline in the price of manufactured goods, which, in turn, will impact on all goods including foodstuffs and services and medical services. In a vain effort to compete with China, India and Asia, currencies will be devalued across the board.

    “Currencies will sink in the face of competitive devaluations (think Venezuela), and whatever can go bankrupt will go bankrupt. Debt will become a dirty word again, as it was during the 1930s (if you can’t pay for it with cash, live without it).

    “The one item that will withstand this crushing force of deflation will be gold, whereas most items have been sinking against gold. If the deflation that I foresee arrives, items will be plunging in price against the standard - gold. This will be the great deflation that nobody foresees and nobody understands and nobody has protected themselves against.

    “When you’re willing to agree that gold, not the dollar, is the universal immutable standard, you can see that the forces of deflation are taking over.

    “For the sake of argument, let’s just say that I am correct. Then as the great deflation envelopes the land, all things (merchandise, stocks, currencies) will sink against gold. So gold then becomes the single item that is not declining, because gold is the standard, and the standard can’t go down against the standard. In that case, everyone will opt for the safety of gold. Gold will be seen as the final and ultimate protection against deflation.

    “Question - Russell, let me play the devil’s advocate. Suppose you are dead wrong, and suddenly all the money that the central banks have injected into the system ‘catches on’. Then what?

    “Answer - In that case gold surges higher. It goes higher because the amount of fiat currency being produced is far greater than the available amount of gold. The sheer amount of new currencies overwhelms the relatively fixed amount of gold.

    “Question - Then, Russell, you’re saying that gold is the place to be whether inflation or deflation materializes.

    “Answer - Yes, that’s the way I see it. Gold will be ‘the last man standing’, as it is now in Venezuela and Zimbabwe.”

    Source: Richard Russell, Dow Theory Letters, January 14, 2010.
    Jim 69 y/o

    "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

    Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

    Good judgement comes from experience; experience comes from bad judgement. Unknown.

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    • #17
      Re: 01/09/10 Bullish Fundamental Arguments for US Stocks.

      Another deflation thinker, James Dines via Peter Brimelow 1/18/2010.

      http://www.marketwatch.com/story/din...rns-2010-01-18

      Originally posted by Brimelow
      But it's been bothering me that everyone now expects inflation.

      I don't see how Dines reconciles a belief in deflation with his bullishness on gold, which he expects to rise in price, not just relatively, but absolutely.

      This is about all the explanation Dines, in his characteristically self-dramatizing way, offers:

      "Economists at what I call the WEE (Washington Economic Establishment) are puzzled that interest rates are not being forced up even though America is the world's biggest debtor, since interest rates normally rise to reflect the added risk of excess debt. But this is what a deflation looks like, as even the price of capital drops, and even those who have awakened to that fact in the last year or two do not appear to comprehend that this is going to be "The Coming Mother of All Deflations," many years in the making, and only now baring its fangs. I long warned that, despite the total Mass belief that inflation would continue forever, I instead foresaw a long deflation and would not be stared down. Or even glared at, as I warned America that it was in a slow-motion deflation, even when Fedhead Greenspan was falsely knighted for having conquered inflation in a ceremony as distasteful to me personally as a liver milk shake."

      I don't get Dines' point about a liver milk shake, either. But it certainly sounds revolting.

      Ah well.

      In other news, Dines comments that his favorite gold stocks have risen 90% over the year ("and I predict that they'll double again," he says). He appears to be standing by his long-standing forecast that bullion will eventually reach $3,000-$5,000 an ounce.

      On stocks, he says he's "intending to remain bullish for at least as long as the indicated uptrendlines remain intact."
      But he adds, "We are looking for a Top in 2010. Whether it will wind up being a mere lateral consolidation as a springboard to higher prices, or the beginning of a breakdown, is too soon for us to discern."
      Jim 69 y/o

      "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

      Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

      Good judgement comes from experience; experience comes from bad judgement. Unknown.

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      • #18
        Re: 01/09/10 Bullish Fundamental Arguments for US Stocks.

        Thanks, Jim. I subscribed to Dines for many years, but abandoned him a year or two ago, when I lost confidence that he understood the macro picture. I guess it's too bad I didn't stay with him through 2009 given his "triumphant 133.6% 2009 rebound." Ah well.

        Still, it's good to read what the old codger is thinking these days.
        Most folks are good; a few aren't.

        Comment


        • #19
          Re: 01/09/10 Bullish Fundamental Arguments for US Stocks.

          Originally posted by ThePythonicCow View Post
          Thanks, Jim. I subscribed to Dines for many years, but abandoned him a year or two ago, when I lost confidence that he understood the macro picture. I guess it's too bad I didn't stay with him through 2009 given his "triumphant 133.6% 2009 rebound." Ah well.

          Still, it's good to read what the old codger is thinking these days.
          That 133.6% obviously didn't include the stock recommendation I purchased. Funny how this game works...

          Comment

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