Richard Russell - Bursting Bubbles Will Make Things Far Worse

"With gold, silver and stocks on the move, the Godfather of newsletter writers, Richard Russell, issued this warning in a note to subscribers: “I continue to believe that we are in a primary bear market, one that is, and has been, disguised by the Federal Reserve's series of QEs. Bernanke's theory is that if the Fed creates enough “money,” then sooner or later deflation and sluggish growth must turn into inflation and faster growth.”

 

Richard Russell continues:

 

“The problem with Bernanke's theory is that the economic world is caught in a massive world-wide cycle of deflation -- more goods produced than can be consumed. Normally, the deflationary trend would fully express itself through a primary bear market that would get rid of the weak hands and those who don't deserve to survive. This would result in stocks declining to the point where they would once again represent great values.

 

The theory espoused by the world's central banks is that they can control the planet's economic cycles. Actually, I believe what is happening is that the seemingly endless flood of fiat currency is creating a series of bubbles, which, in the course of time, is fated to burst. The bursting of these various bubbles will result in the bear market being far worse than would otherwise have been the case. As Shakespeare put it, “What fools these mortals be.”

Following the 1929 crash, the stock market embarked on a huge recovery that lasted into early 1930. Most present-day analysts are very familiar with the 1929-30 episode. So today's stock market had to do something different in order to draw retail investors (and pros) back in to the market. 

What the market did this time was to produce an even bigger and longer-lasting post-crash recovery. The recovery has lasted far longer than most experts expected and has carried the Dow within 500 points of its 2007 record high.

 

The 2008-09 bear market decline was swift and violent. It was over almost before most investors knew what had hit them. According to the law of alternation, the next bear market decline should be just the opposite in character of the 2008-09 decline. The next decline should be slow and lazy, with stocks sinking in a deceptive, leisurely manner, sinking in a lazy way that scares nobody.”

“The US gold coverage ratio, which measures the amount of gold on deposit at the Federal Reserve against the total money supply, is currently at an all-time low of 17%. This ratio tends to move dramatically and falls during periods of disinflation or relative price stability. The historical average for the gold coverage ratio is roughly 40%, meaning that the price of gold would have to more than double to reach the average. The gold coverage ratio has been there twice during the twentieth century. Were this to happen today, the value of an ounce of gold would exceed $12,000.” Scott Minerd, analyst, courtesy Investment Rarities, Inc."

 

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