Are stocks and bonds overdone?
*Dow Theory Letters, by Richard Russell, May 21, 2010
‘There’s no point in my going over all the damage — the plunge in the NASDAQ, the crash in the Stoxx Europe 600 Index, the smash in the Morgan Stanley World Index, the gruesome fact that at 1071, the S&P 500 is 24% below its level of ten years ago. The damage in dollar terms is reported to be $5.3 trillion. That sounds to me to be a sh– load of money.
And the tragedy is that our government has spent two trillion dollars in a vain attempt to halt or reverse the primary bear trend of the market.
I said at the beginning, ‘Let the bear complete his corrective function.’ One way or another, it’s going to happen anyway. Better to have taken the pain and losses — than to push the US to the edge of the
cliff. Now with the stock market crashing, the national debt is larger than ever. In fact, it is so large that it can never be paid off, regardless of cut-backs in spending or increases in taxes.
Had Obama or Summers or Bernanke understood this, they never would have bled the nation dry in their vain battle to halt the primary bear trend. As I’ve said all along, the primary trend of the market is more powerful than the Fed, the Treasury, and Congress all taken together. Our know-nothing leaders have boxed the US into a situation that is so difficult that, for the life of me, I don’t see how we’re going to get out of it. Well, there’s always one way — renege on our debt. Can a sovereign nation renege on its debt and in effect, declare bankruptcy? Sad to say, I think we may find out.
One basic force that the world will have to deal with is deflation. This is the monster that Bernanke is so afraid of. To fight inflation is easy — you just raise interest rates and cut back on the money supply. But deflation is a totally different animal. Interest rates are already at zero. The money has been passed out by the trillions of dollars. The stimuli have been issued. What can Bernanke do in the face of deflation? Are the helicopters warming up? S hould the Fed manufacture a few more trillions of junk Fed Notes and spread them around? How do you defeat the world forces of deflation. If everything is sinking in terms of currencies, what’s left? I remember, Picassos, Modiglianis, diamonds, beach property and gold.
In today’s WSJ there’s an article entitled, ‘How Safe Are the Traditional Safe Havens? The euro-zone is driving cash into traditional safe havens — US dollars and Treasuries, German bonds and gold. But many of these assets face the same underlying problems as the security investors are fleeing.’
Russell comment — Yes, everybody is searching for the ultimate safe haven. I pick gold. The ironic problem with gold is that it is quoted every minute against currencies. If you have a safe haven item like a Picasso, do you quote its ‘Possible’ price every hour? No, you relax knowing that it will always represent wealth. The same can be said of a great diamond. But because it is quoted hourly, investors worry about gold. I’ve said, and I’ll repeat it, figure your gold in number of ounces, not dollar value. When the dollar is history, gold will still be here, and it will still be an eternal item representing WEALTH.”
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