Sorry, I can't reproduce the charts but the text conveys the message quite well I think....
July 12, 2003 -- Begger thy neighbor. You remember that I've been talking about the competitive currency devaluations that lie ahead, as every nation seeks to expand its exports? Well, subscribers, it's happening.
The following is from today's Financial Times from the great "Lex Column"
"Is the world heading for a new war of competitive devaluations? Recent comments by policy makers might suggest this. German chancellor Gerhard Schroder sent markets into a spin by issuing a veiled call for a weaker euro. However, Washington appears increasingly willing to tolerate a weaker dollar. The Japanese are determined to fight yen strength and China is stubbornly ignoring pressure to revalue the renminbi. Even the Bank of England seems uneasy. Thursday's cut in British rates was partly a reaction to sterling's recent strength.
"Thus far, this policy jostling appears relatively benign. . . . However, it is impossible for America, Japan and Europe to chase a weaker currency simultaneously. And nobody has a motive to compromise. Until recently, a strong currency was considered a sign of economic virility, because it helped offset inflationary pressures. But with deflation spreading and traditional policy tools losing efficacy, the temptation to avoid painful reform by seeking a weak currency is rising. If the American economy fails to rebound strongly this year -- or Germany weakens further -- the sniping could become nasty."
Yes, dear subscribers, the age of competitive currency devaluations has finally come upon us. Everybody and his brother wants to export, and there's nothing like a weak currency to give your products that "little extra edge." So what do you do to weaken your currency, and it's always weaken your currency against the dollar? Why easy -- you create more of your own currency via your central bank, and with that extra currency you buy dollars. This strengthens the dollar against your own currency, and presto -- your currency is weaker.
Ah, but that old devil China, why won't they let the renminbi float? That renminbi pegged 8.27 to the dollar is killing everybody. Well, you see, China has a problem. It's called unemployment. And they way to decrease unemployment is to put another million Chinese to work. So why in hell would China's leaders want to float the renminbi? The fact is that they wish the renminbi was even lower. China's leaders have enough trouble as is -- and they know that way that they're going to keep their power. It's called employment, more and more employment.
Interestingly, the New York Times on its first page today noted that blacks in the US are losing their jobs at a higher rate than any other group. You see, said the Times, the blacks are heavily employed in manufacturing here in the good ol' USA, and it seems that we're losing our manufacturing base. So it's no surprise that as our manufacturing base moves overseas, those who are employed by our manufacturers are losing their jobs in huge numbers. Oh, I get it.
So let's see -- what's the big picture? The big picture is that today we have the GLOBAL ECONOMY. But the problem is that much of the global economy works for low, low wages, but workers in the US and Europe work for high wages. So guess what -- the jobs are going to China and India and Taiwan and South Korea, and Indonesia. Even poor old Mexico is losing jobs because its wages are "too high."
With all this cheap output, and with everybody getting on the production wagon -- well, there's just too damn much production. It gets worse -- the US service industry is finding that it can get the work done much cheaper in India and China and Czechoslovakia and Russia, and well, you name the country.
So what happens -- our negative trade balance balloons. It balloons up to half a trillion bucks a year. Bad scene. On top of that, the US federal deficit balloons -- to the tune of half a trillion dollars.
Question -- what's holding the dollar up? Answer -- hope, faith, and a lot of help from foreigners who are buying dollars in the hopes of keeping the dollar stronger while their currencies get weaker.
Question -- How long can this situation go on? Answer -- No one knows, and oops, I just dropped my crystal ball. Faye, help me pick up the pieces.
Now let's turn to something easier -- the stock market. Well, to tell you the truth, the market's not easier, but I like to think it is. It helps me to sleep nights.
I get a lot of literature and questions about cycles. You like cycles? My good friend, Ken Gammage of the famous Richland Report is a cycle expert from way back (the poor guy is also a Charger football fan), and here's Ken's scenario -- which is as good as any, and a lot better than most.
Next week a few days of strength and then a top. Following the top we face a drop to 20-week Hurst Nominal Cycle lows in early August. From the August lows the market rallies weakly into late-August or early-September. From the September peak the market suffers a devastating decline into "5-year cycle lows" in October, followed by a retest of the lows into December. It will be similar, says Ken, to the "ugliness of 1987."
Me, all I know is that stocks are very expensive, and that we're not close to anything resembling a bear market bottom. I did notice that the VIX on Friday dropped to a new lows of 20.72, which shows a remarkable level of complacency. I also am amazed at the willingness of the public to happily hold stocks (maybe mostly through their mutual funds) even when the S&P is selling at over 32 times earnings, and these are questionable earning at that.
I've thought a lot about the public's bullishness, or should we call if faith, or maybe complacency. I think it all has to do with the fact that trillions of dollars of the public's money is now in the hand of money managers, and these guys and gals are dealing with "other people's money." So the public thinks, "I'm not going to worry. My money's in the hands of experts, professionals. And if the experts are wrong, well, what can I do. And what are the alternatives, putting my money in a money-market fund that pays me nothing? Nah, I'll stay with the experts."
And what are the experts doing? Why, they're buying the Russell 2000 kind of stocks, and they're buying the beaten-down tech stocks. So what if these stocks don't pay dividends? Dividends are for wimps and losers. Real men want growth. "Hey, it's a new world out there, and we're into it."
For the year, so far, the poor old Dow is up only 9.33%. The S&P is up 13.45%, and the Nasdaq is up 29.83%. The Russell 200 is up a juicy 23.67%.
The Confidence Index rose from the previous week's 85.1 to last week's 85.6.
The S&P at the end of last weeks was selling at 32.93 times earning while offering a dividend yield of 1.67%.
The S&P Industrial Average was selling at 41.83 times earnings with a dividend yield of 1.46%. How 'bout those values?
The true (common stocks only) advance-decline ratio was as follows -- July 7 4.67; July 8 4.82; July 9 4.92; July 10 4.43; July 11 4.73.
And that's the world as Richard Russell sees it.
I want to thank all my noble subscribers who wrote to tell us that they no longer need the paper editions of Dow Theory -- they're getting the Letter of the net. This is a huge help to us, and again I ask -- if you can live without the paper edition of Dow Theory Letters, please send us an e-mail and let us know. Send an e-mail to [email protected]. Many thanks. Richard
This is quite an e-mail below. Do I have smart subscribers or what! -- Russell
Hi,
Just read John Mauldin’s letter on the Fed and Poker, and a light went on in my head.
The P&F chart below is fascinating. The S&P shows a quintuple top. Chart counts shows break up will have a destination target of 1100. Break down will have a destination target of around 875. Inflation vs Deflation.
Bank Credit Analyst (with whom I happen to agree) calls for a break “up”. Their own momentum oscillators are clearly pointing up. This would be consistent with my “Indian Summer” Scenario.
Here are some interesting Questions:
Is the Bond Market just a scared rabbit in the headlights or does it actually believe no inflation? Does the Bond Market “appear” complacent because it’s being manipulated? (Huge dollars or huge bluff required) M-3 has ballooned by $100bn in the past 3 weeks (huge dollars provided). Has the money been used to buy back US bonds from Japanese sellers?
I think that “Silver” may be the catalyst. If it breaks up through US$5/oz, this is likely to be followed/accompanied by an S&P break-up, then $CRB and, finally, gold.
Implication is that US Dollar “might” come under pressure again, but chart below shows no sign yet, and downside target count of 100 - following the breakdown from 112 has been met.
There is an open question regarding bond yields. Market forces will need to be gargantuan to buck any “natural” trends. So what’s natural?
Here’s a wild thought: If Inflation breaks out inside the US, then US$ denominated assets should rise. Euro Dollars and Petro Dollars will become worth less relative to hard assets. Could it be that we are headed for inflation in the dollar value of hard assets?
Under the above circum stances, yields would rise. Now here is a VERY interesting chart
And here’s where John’s idea of poker playing comes in. If the breakdown below 47 (4.7%) was CONTRIVED (ie a false breakdown caused by a Fed induced bluff) then we could very well see yields shooting UP, and the P&F destination count is 5.8%.
Rising yields could put UPWARD pressure on the dollar, but chart counts have been reached – implying that the US Dollar could move sideways from here – stabilising at around 90 – which is EXACTLY where it started out between 1989 and 1997! (See chart below)
Thank you John Mauldin! The picture in my head is now crystal clear:
Indian Summer on the equity markets and economy – accompanied by hard asset price inflation – followed by unravelling after the Presidential Elections. The NEXT time we hit recession, the Fed will have nowhere to turn because the problem is not “Money Supply” it is “Market Saturation”. The rat will be cornered.
Cheers
................................................................................................................................... Dear Mr. Russell,
I'm a very much a small-timer, unable to participate in any economies of scale in my investments. I've got about 26% of my investments in gold shares and mutual funds, and nothing in the metal as such. My problem is that I live in Moscow in an apartment. Both taking possession of and securing physical gold would be very risky for me.
Hence, I was anticipating the new gold ETF. Previously, I had been tempted by the Canadian one, CEF, but was put off by the inclusion of silver. Now, however, it seems that CEF is getting closer to book value, probably because the NYSE one is about to be released, and silver is signalling the beginning of a bull market.
Wouldn't CEF right now be a good bet?
Naturally, I do not expect a personal answer. If this topic is sufficiently, my answer will appear on the website.
That website is my keen daily pleasure. I regret holidays because there is no Russell to read on them. Don't change a thing that you are doing.
Sincerely,
William W.
Russell -- Yeah, I think the new ETFs on gold will be a good deal, and I believe they will be popular.
