What lies ahead for equities, real estate and gold?
*Dow Theory Letters, Richard Russell, February 13, 2006:
Question -- How might gold act in a bear market?
Answer -- Do you note how erratic gold is acting now? Surging
volatility -- down 20 dollars, up 14 dollars, down 14 dollars. . . This
is indecision, confusion, clashing opinions. One scenario -- the
economy starts to tank in a bear market, gold first gets hit. The
Bernanke Fed freaks out in the face of potential deflation as home
prices sink. The Fed drops short rates a full point and opens the money
spigots wide. The dollar plunges, and gold then starts to climb.
I've written repeatedly about the Fed's fear of even a hint of
deflation. The Greenspan Fed made a long and exhaustive study of the
long Japanese deflation and bear market. Moreover, Fed chairman
Bernanke is an expert on the Great Depression and the Fed's mistake in
allowing and even abetting deflation. Take my word for it, the Bernanke
fed will use any means at their disposal to fight a recession and
deflation. I have no doubt that the Fed would institute and accept
hyper-inflation rather than deal with deflation.
Question -- Russell, are you saying that the Bernanke Fed would create
hyper-inflation if a deflationary recession set in?
Answer -- That's exactly what I'm saying. In fact, I believe the Fed
would institute a number of "unconventional" techniques if they had to
-- in an effort to turn any hints of deflation around.
Question -- If the Fed opened the flood gates and drove interest rates
down again, wouldn't this impact on the dollar?
Answer -- Absolutely.
Question -- With it all, I hear that Bernanke wants to prove that he
can be tough on inflation, and that he will raise rates another quarter
at the end of March.
Answer -- Yes, that is definitely the talk. In fact, the money market
has already factored in another rate boost. But many analysts don't
believe Bernanke will take a chance or raising Fed Funds to 4.75%. The
next Fed meeting at the end of the March will be fascinating.
Question -- Russell, what other comments do you want to make regarding
the picture ahead? A lot may depend on what happens to real estate over
the next six weeks.
Answer -- One thing that bothers me and it's something that I haven't
talked about is this -- the great bull market that began in 1980 topped
out in January 2000. Following the top-out, we experienced the initial
bear leg which took the Dow down to a low in October 2002. But at that
low stocks never declined to "great value" levels; in fact they never
even got close. At the October 2002 lows, the yield on the S&P was
a minuscule 1.79%. No bear market in history ever ended with the
S&P yielding 2% or less. The 1.79% yield of the S&P was more
characteristic of a top rather than a bottom!
Following the 2002 low, we had the recovery which was inspired by Fed
Funds as low as one percent and a huge infusion of liquidity. But now
six years have gone by, a mountain of debt as been built up in the US
economy, and yet the Dow has never been able to reach its 2000 bull
market high of 11722.98. To my mind, that's ominous.
Then more recently we've seen the Transportation Average rise to new
record highs unconfirmed by the Dow. That's a Dow Theory warning
phenomenon that nobody has paid attention to. I may be the only living
person who still follows the tenets of the Dow Theory, but I maintain
that the recent non-confirmation by the Dow was a classic warning that
"something is seriously wrong."
As I interpret it, the primary bear market has been "held back" for six
years due to manipulation by the Fed. When the primary trend is
artificially held back, the bottled-up bearish forces become like a
compressed spring. Ultimately the bear force will express themselves.
They will be released with great force. This concept bothers me, it
bothers me a lot. And I am fearful regarding how it will impact on the
economy.
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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