Deflation Richard Russell snippet Dow Theory Letters May 16th, 2005 Extracted from the May 13th, 2005 edition of Richard's Remarks May 13, 2005 -- Question -- If deflation is almost impossible, since the Fed can neutralize any deflation simply by increasing the money base, why is the Fed so worried about deflation -- or, as the Fed puts it, "insufficient inflation"? Answer -- If there's a credit collapse, it seems to me that the situation could change very quickly and soon get out of hand -- in which case we'd have deflation. Look, we don't have to get into the theory of why deflation can or cannot occur. I go by what I see in the markets and in chart action. The fact is that the stock market has been deflating all year. Now the stock market has been joined by oil, commodity prices, copper, steel, aluminum, gold, Goldman Sachs Natural Resources Index, materials in general. I don't know what you want to call it, but I call it some kind or variety of deflation. You want proof? OK, check the daily chart of the CRB Commodity Index below. I'd call this a breakdown, wouldn't you? It sure isn't an inflation in commodities. How about copper, the metal that is used so universally that it's been given the name of "Doctor"? Yesterday we saw a huge downside gap, taking Dr. Copper to it lowest level since early February. In the meantime, the hottest item around is the US dollar. Why is the dollar at a high for the year? Good question, and I haven't read about or seen the definitive answer yet. Of course, the market answer is "more buyers than sellers," but how does that help us? I've been saying all along that when everybody is invested on one side of the equation -- watch out. And it's true, the biggest "given" around a month or so ago was that "shorting the dollar was the guaranteed path to profits." And it's true, even Buffett and Gates announced to the world that the dollar had nowhere to go but down. In this business, when everybody agrees on one thesis, it's almost a certain that this "thesis" has been fully discounted by the market. Thus everybody followed what was "agreed upon" and took a position against the dollar. So yes, the dollar's strength could simply be a matter of driving the dollar shorts to the wall. The other thesis that comes to mind is something I've talked about before. All debt must be paid off, some debt paid off in a hurry and some paid off over time. But you pay off debt with dollars, and if there's too much debt outstanding and there's pressure to pay off that debt -- that's going to create a demand for dollars. The greater the debt, the greater the potential demand for dollars to pay off that debt. Which is why I said that massive debt amounts to a massive synthetic short position against the dollar. Now I'm wondering if what we're seeing is a sudden demand for dollars. I'm wondering if what we're seeing is a short squeeze against the dollar brought on by hints of deflation. Remember, in deflation dollars become scarcer -- and in deflation debt becomes a dirty word. If, in fact, deflation is in the wind, there's going to be a mad rush to pay off debt, and that's going to generate an urgent demand for dollars. Could that be what we're seeing now, as the dollar rises to a high for the year? It's sure got me wondering. So do we have the two worst combinations -- a deflationary squeeze on debt and a huge short position against the dollar? Whew. Richard Russell Dow Theory Letters ©Copyright 2005 Dow Theory Letters, Inc. http://321energy.com/editorials/russell/russell051605.html
It's too bad most of this stuff was first written in April -- of '04. And back then, with t-notes near the lows of the range, it was the forthcoming higher rates that would cause deflation. Now with bond markets around the world hitting new highs, it's a sure sign deflation is upon us . . . Who knows, he might be right this time around, but you sure as hell didn't make any money playing for a short squeeze in the dollar or a deflationary spiral in commodities when this was first penned.
That article made about as much sense as me telling you my dick deflates at night and inflates in the morning.
Got it all wrong. The guy with the biggest debts is the Fed. Or, a central bank. These guys operate the other way around: they sterilize, or issue notes to remove currency from the economy, and they pay their debt to note holders in order to inject currency into the economy. I don't get it, the issue is obvious: the Fed is raising interest rates. Which has at the least two effects: * Makes the dollar more attractive, and * Increases the discount rate, which lowers all asset class values, including commodities, real estate, stocks, you name it... What's the surprise?
I said that here on ET too. Just b/c he's Richard Russell people listen to him. http://elitetrader.com/vb/showthread.php?s=&postid=752643#post752643 But for the little people like us, we ain't seen no deflation YET. Everything is high. RE, health care, gasoline(even after the recent decline), education, etc. It would be interesting to see deflation in this country... Strange feeling..
What does Gates know about where the dollar is going? A couple of years ago he even couldn't see where Internet was going either. This was supposed to be his business though.