August 2007

Early in yesterday’s session, with the Dow Industrials off a hundred points but stubbornly refusing to give up any more ground, bears were sounding a despondent note in the Rick’s Picks chat room. It was mid-morning, and shares had leveled off for a couple of hours after having fallen in more or less orderly fashion since the opening bell. ‘Don’t bet that the wondrous [Plunge Protection Team] won’t pick a great point to jump in again,’ noted one trader, glumly alluding to the Fed’s surprise attack on bears two Fridays ago, when the central bank announced a 50-basis-point cut in the discount rate. Came this strychnine reply: ‘The bears sound so defeatist today that perhaps the DJIA is on its way to a refreshing 500-point decline. Don’t despair, pessimists! Our time will come.’

Alas, the Dow Industrials did not fall the implicitly hoped-for 500 points, only a mere 300. That would have been scant comfort to anyone looking for the NYSE to start reflecting reality rather than the increasingly pallid hallucination of a strong U.S. economy. Wasn’t it just last week that our hallucinator-in-chief, Treasury Secretary Paulson, pronounced the economy ‘very, very healthy’? Yeah, right. Even so, we’d be the first to concede that it is perceptions that matter most, and that the Plunge Protection Team’s efforts might therefore be better spent manipulating our awareness of the economy than goosing shares with well-timed forays into the S&P futures pit. A little LSD in the water supply, perhaps, and millions of otherwise clear-headed observers might start to see things Paulson’s way. Either that, or, we fear, they’d start seeing ‘666 ‘ tattooed on the foreheads of everyone who appears on CNBC.

Six-Sigma Event

Plunge Protection Team aside, even bulls must be wondering at this point what They will do to prevent the six-sigma event on Wall Street that might someday make us recall a piddling 300-point drop in the Dow with nostalgia. Surely They will do something!? In point of fact, the Federal Reserve, by lowering the discount rate and extending loans to 30 days, has already used up virtually every administrative tool it commands, save lowering the federal funds rate. On this subject, and the implications thereof, no one has been more lucid than Gary North. We’d stopped reading the guy a while back because he wouldn’t cop to the possibility, let alone likelihood, of deflation, notwithstanding the fact that a $500 trillion debt implosion lies in prospect for planet earth.

With the hour of crisis drawing near, though, North’s essays have been better than ever — and that’s saying a lot, since he is a polemicist of the first rank. But even with debt beginning to suck the life from the economy with the force of a black hole, he still can’t seem to choke out the word deflation. Indeed, he turns cartwheels, lest his own, pellucid logic lead him in that direction. Even so, we would strongly urge you to read his essay, ‘The Fed’s Next Move,’ since it makes an airtight case for a 50-basis-point easing on or before September 18, when the Open Market Committee next meets to set policy. This article is a must-read for anyone still unpersuaded that officialdom, working behind-the-scenes, is treating our ‘very, very healthy’ economy as though it were just an inch from disaster. North’s brand of insider baseball is the best we have come across from among the hundreds of URL links we receive each week. It may be a few days before the article is available to non-subscribers, but since it costs nothing to join North’s membership list, you needn’t wait. You can access his site by clicking here.

We rarely open a new position in the closing minutes of a session, let alone on a Friday moments ahead of the closing bell, but we did so last week, shorting the QQQQs three ticks off what turned out to be the intraday high. Betting against the house, we bought some October 48 puts for $1.31 just as DaCubes were kissing a Hidden Pivot rally target at 48.29 that had been sent out the night before. We must admit that the trade, now nicely profitable, looked like a goner from the start, judging from the way stocks closed near their very highs that day. We’d expected them to pull back back from the modest peaks they’d achieved, leaving intact for another day a thick slab of supply created earlier in the week. Instead, DaBoyz goosed the broad averages into the finale, impaling the aforesaid slab and setting the stage for a Monday short squeeze that astounded us simply by not occurring.

Chalk up the short-squeeze-that-wasn’t as yet one more sign that we are not in Kansas any more. Something has changed, and the stock market’s ability to scare hell out of bears has noticeably declined in recent weeks, notwithstanding the perfect storm concocted the previous Friday by Bernanke and Friends, when the Fed announced a cut in the discount rate just as the August call options were about to breathe their last.

And to what end? Our colleague Larry Amernick notes that before the Fed acted, there were already billions of credit dollars going unborrowed, as evidenced by a spike in U.S. depository institutions’ net free reserves. Whatever the case, Wall Street did not pause for reflection that Friday any more than a cow would have paused to reflect on the proper response to a cattle prod shoved up its�. The Dow exploded for nearly 300 points in the opening minutes, raising the prospect, yet again, that bears might have to suffer one last fling at 14,000 before stocks do the Right Thing and begin to discount the specter of economic catastrophe glowering on the horizon.

Heading into the final hour on Friday, we raised doubts in the Rick’s Picks chat room that DaBoyz had the cohones to try and squeeze stocks above daunting layers of supply. And that wasn’t our only mistake. Get this: We inadvertently transposed a 667.10 Hidden Pivot target for October Gold that had been disseminated to subscribers Thursday night for purposes of getting risklessly long in Gold. The lamentable result was that, instead of enjoying a fabulously profitable $12 ride from within four ticks of the intraday low, we watched the whole thing from the sidelines. Oh well. We promised to hacksaw off our left hand to atone for this error, but chat-room regulars, a forgiving lot, seemed satisfied with the verbal self-flagellation and-defenestration of your editor.

Concerning DaBoyz and their always nefarious intentions, the bears just didn’t seem nervous enough on Friday to permit the painful indignity of being hoist by their own scrota. Wrong again. Instead of waiting for the weekend to pass, and with it any bad news that might have killed a short-squeeze on the launching pad, DaBoyz (aka, Dirtbags) applied a final-hour goosing that lifted the Indoos not merely above last week’s highs, but above a thick layer of supply created just before stocks collapsed on August 14. The Dirtbags must have felt pretty smug when the final bell rang, since they had left themselves in terrific shape to unload shares into a short-covering frenzy when stocks open Monday morning, or at least sell into a flurry of buying sufficient to hold shares unched-to-slightly-higher for the first crucial minutes of the day.

Mushroom-Cloud Offset

That’s how things should play out, barring the onset of World War III over the weekend. Come to think of it, even World War III might not curtail the ardor of buyers, since anyone who went home short on Friday would naturally be worried about a possible Fed response to the now-burgeoning mushroom clouds in the distance. In that regard, a 100-basis-point easing is probably equivalent, as an offset, to a 10-megaton bomb detonated above some expendable, second-tier city (i.e., one that has produced neither a pennant winner nor a Superbowl contender in the last decade. You know who you are — although, fortunately, the Islamists probably do not).

Anyway, barring the outbreak of World War III or worse, we expect the Dow Average to continue precisely to the Hidden Pivot target that was billboarded last week in Rick’s Picks. We’ll look to get short there, for sure, as how could we not? In the meantime, we’re psyched for this weekend’s Hidden Pivot seminar online, and the prospect of turning out a new cadre of agents provocateurs ready to do battle with Wall Street’s Forces of Darkness. See you in class!

We usually think of the Fed as operating quietly behind the scenes to help keep the credit-based economy lubricated. Not this time, though. The central bank has had to come out in the open, mainly because the troubles it has been trying so frantically to paper over are as visible as the plague of weathered ‘For Sale’ signs on our neighbor’s lawns. Given the extent of our credit woes, and the rate at which they have begun to metastasize, the Fed is no more able to work behind-the-scenes than a surgeon is able to treat systemic cancer non-invasively.

Now, the last thing in the world the Fed wants to do while it goes about its business is stir up a sense of drama. And yet, that is exactly what it has been doing, unavoidably so. A drum roll precedes Bernanke’s every move these days simply because so many millions of us, your editor included, are unable to imagine how the central bank is going to jump-start the weakest real estate market since the 1930s; or for that matter, how the bankers will ‘prevent’ a bear market that is both inevitable and too scary to contemplate. We sense in our bones, however, that the so-far half-point cut in the discount rate is not likely to trigger a buying stampede, nor even the sort of mortgage re-fi binge that might be expected to prop up a consumer economy that is poised to topple into a potentially bottomless recession.

Paulson’s Clumsiness

The Fed is walking a tight-rope with no safety net, and we all know it. And that’s why we cringe whenever one of our would-be rescuers wobbles. On CNBC recently, Treasury Secretary Paulson was up on the high-wire trying to ‘manage expectations’ in his clumsy way. The strain was showing, and his words fell to earth when he described the U.S. economy as ‘very, very healthy.’ A single ‘very’ would have been overkill, but the second was enough to trigger d�j� vu even in those of us who weren’t around in 1929 to hear similarly disingenuous pronouncements. We shall hear many more such false reassurances as the U.S. economy slips into a deflation whose depth will have no historical precedent. The messenger will only be doing his job, telling us no more than he thinks we can stomach. For now, it would appear, even a glimpse of the truth evidently has been deemed too risky to allow.

To paraphrase Tinkerbell, ‘A little more fairy dust, and u-u-u-p we go!’ We boasted here yesterday that we could short the market almost risklessly no matter how strong it acts, and so we did. Our trading vehicle was the Diamonds (DIA), an ETF that tracks the cash Dow average point for point, and our precise target was 132.00, a Hidden Pivot. The Diamonds fulfilled the forecast almost exactly with a powerful surge on Wednesday’s opening to 132.10. This allowed us to buy October 130 puts for 3.20, somewhat less than anticipated. For the next six hours, DIA was unable to rally more than a hundredth of a point above the initial target, and briefly pulled back to as low as 131.35. However, with 30 minutes left in the session and no real sellers in sight, DaBoyz seized the advantage, popping DIA above the morning lows to an intraday peak at 132.40. On a stop, we unhesitatingly exited our options at that time for 3.00.

The niggling loss we incurred was not without value, since the outcome told us exactly where the Dow is likely to head next. We’ll try shorting there as well (see Rick’s Picks for the exact number), risking the usual nickels and dimes to try and catch what could always turn out to be an important top. Since the rally target is also our minimum upside projection at the moment, there may even be an opportunity for us to run with the crazed herd for a few hours. That’s about as bullish as we get these days: bringing ourselves to ‘like’ the market for an hour or two at most ‘ provided it keeps generating bullish impulse legs on the 15-minute chart. Drop all the way down to the one-minute bars and it would be fair to say that we can no longer be fooled by the stock market, even for a minute. Taking the element of surprise out of the stock market can make tape-watching pretty dull, if not quite unbearably predictable. And that’s just the way we like it. Stop by the Rick’s Picks chat room sometime if you’d care to see how mellow a trading day can be.

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Online Seminar: Last Call

There are now eight students signed up for this weekend’s online Hidden Pivot Seminar, so it’s still a relatively small class if you’d like to attend. For the convenience in particular of participants from the U.K., the seminar will begin on both days at 4 p.m. London time (11 a.m. EDT), allowing students a leisurely Saturday and Sunday, as well as a dinner on Saturday night at a fashionable hour.

If you’ve ever wanted to forecast stock and commodity prices as accurately as most gurus who do it for a living. this may be the best opportunity you will have to pursue that goal. To reserve a seat, simply click here, then on the ‘Upcoming’ tab.  Detailed information about the course itself and the Hidden Pivot Method can be obtained by clicking here. All who do so will also receive a free Hidden Pivot calculator.

Free to All Graduates

Incidentally, all seminar grads now have free access at all hours of the day to a recorded version of the seminar, as well as to the Q&A forums held in conjunction with each class. In addition, I am in the process of creating an advanced tutorial built around some especially difficult charts. It will be available to seminar grads for a nominal fee.

The chart below shows the Industrial Average working on a bullish flag. This is accumulation, plain as can be, and it suggests the stock market is looking for a reason, any reason, to grab shorts by the balls and squeeze them for a quick 200-400 points. Search brokerage houses from Maine to San Diego and you wouldn’t find a single investor with a compelling reason to buy stocks at these levels. But neither would you find any bears eager to get short, given the strafing they took last Friday when the Fed announced a surprise cut in the discount rate.

Between the two camps, bulls with nothing whatsoever to be bullish about, and bears wary of a Bernanke-instigated Pearl Harbor, you can see why the stock market for the time being has opted for heart-stopping tedium. But make no mistake, unless World War III erupts in the days ahead, the pattern shown in the chart all but guarantees a resolution to the upside.

When it comes, and it will, there are two Hidden Pivot targets above that we can use as telltales. Both have been precisely identified in the Touts section of Rick’s Picks, with the lower of the two representing our minimum upside projection for the near term. If it is breached by more than a few ticks, however, or if the Indoos settle above it overnight, we should expect the higher target to be reached almost for certain and soon thereafter.

We are eager to try shorting at both targets, risking just small change in the process. A tight stop-loss and the use of Diamond options, or possibly the Mini-Dow contract, will allow us to meet the next gratuitous, brainless upthrust with no more anxiety than we might feel upon learning that the pimento filling was missing from an olive in our salad.

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Online Seminar: Last Call

Six students are on board so far for this weekend’s online Hidden Pivot Seminar, so if small class-size appeals to you, this will be an ideal session to attend. For the convenience in particular of participants from the U.K., the class will begin on both days at 4 p.m. London time (11 a.m. EDT), allowing students a leisurely Saturday and Sunday, as well as dinner on Saturday night at a fashionable hour.

If you’ve ever wanted to forecast stock and commodity prices as accurately as many gurus who do it for a living. this may be the best opportunity you will have to pursue that goal. To reserve a seat, simply click here, then on the ‘Upcoming’ tab.  Detailed information about the course itself and the Hidden Pivot Method can be obtained by clicking here. All who do so will also receive a free Hidden Pivot calculator.

Free to All Graduates

Incidentally, all seminar grads now have free access at all hours of the day to a recorded version of the seminar, as well as to the Q&A forums held in conjunction with each class. In addition, I am in the process of creating an advanced tutorial built around some especially difficult charts. It will be available to seminar grads for a nominal fee.

Here’s a front-page headline from the New York Times that gave us a chuckle the other day: ‘Few Heard Ticking Credit Time Bomb.’ Few who are not deaf, dumb and blind, perhaps. However, for the millions of sentient humans who live outside the warp in which the Times evidently is fabricated each day, the ticking of the credit time bomb was about as hard to detect as a giant asteroid bearing down on Cleveland. Seems no one at the Gray Lady thought to Google the words ‘credit crisis’ in recent years, since that would have turned up millions of leads that some enterprising reporter could have checked out.

Both the Times and The Wall Street Journal have been doing some heavy catching up recently in the wake of revelations concerning the true condition of the U.S. real estate market. It took the bankruptcies of some big mortgage lenders, as well as subprime leverageur Bear Stearns’ narrow scrape with death, to call attention to potentially disastrous problems that the financial-newsletter world has been heralding for years.

Deflation Is Next

The Times, the Journal, and other status quo purveyors of news must surely regard the mortgage crisis as something to be resolved in due time, presumably by an inevitable upswing in home prices and a little help from the central bank. But such thinking only confirms that they are as clueless now as they were when the real estate crisis reached critical mass nearly two years ago. And, we are certain, they will be equally clueless when the expected upswing in home prices fails to materialize and deflation tightens its death-grip on the U.S. and global economies.

By then, the praise and respect the news media have mindlessly heaped on former Fed Chairman Alan Greenspan will be under reconsideration. For the record, let us say that he has already been tried and convicted by the vast newsletter world as the main instigator of a credit blowout that could only have ended as this one is about to: in a global bust. Three generations after the start of the Great Depression, the eggheads, pundits and wonks are still looking for a culprit. Was it the Smoot-Hawley tariff? Too-tight credit after the market crashed? The next time around, when the saga of the Second Great Depression is told, they need look no further than a Federal Reserve that succeeded in turning the concept of ‘free lunch’ into America’s one true mainstream religion.

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Online Seminar: Last Call

Six students are on board so far for the August 25-26 online Hidden Pivot Seminar, so if small class-size appeals to you, this will be an ideal session to attend. For the convenience in particular of participants from the U.K., the class will begin on both days at 4 p.m. London time (11 a.m. EDT), allowing students a leisurely Saturday and Sunday, as well as dinner on Saturday night at a fashionable hour.

If you’ve ever wanted to forecast stock and commodity prices as accurately as many gurus who do it for a living. this may be the best opportunity you will have to pursue that goal. To reserve a seat, simply click here, then on the ‘Upcoming’ tab.  Detailed information about the course itself and the Hidden Pivot Method can be obtained by clicking here. All who do so will also receive a free Hidden Pivot calculator.

Free to All Graduates

Incidentally, all seminar grads now have free access at all hours of the day to a recorded version of the seminar, as well as to the Q&A forums held in conjunction with each class. In addition, I am in the process of creating an advanced tutorial built around some especially difficult charts. It will be available to seminar grads for a nominal fee.

Before we join the stampede to buy the Dow Industrials back up to 14000, let us consider what stock market investors would be contriving to ignore. Here’s a short list of nettlesome realities from David Rosenberg, Merrill’s Lynch’s chief U.S. economist:

‘The American consumer, 70% of US GDP and 20% of global GDP, is losing its resilience. Auto sales have fallen for a record seven months in a row and slipped to a 9-year low of 15.2 million units (at an annual rate) in July and there is no sign of pickup in the first half of August. Consumer spending in real terms has stagnated over the February-July period, which is a stretch of weakness not seen since the double-dip of 2002. Chain store sales were flat sequentially last month and fully 62% of the retailing universe missed their already-lowered sales targets in July. While employment growth in the nonfarm payroll survey has indeed stayed positive, though moderating, the Household survey has actually flagged a stagnant labor market since February and this measure is far more reliable at turning points.’

Rosenberg says any Fed easing at this point will be pushing on a string, and we find that hard to refute. Think about it. In an economy that is 70% consumption, any Fed stimulus boils down to one goal: getting consumers to spend. But how, now that the ‘wealth effect’ of soaring home prices has moved very sharply in the opposite direction? Indeed, if you are a typical homeowner, your property has lost about 7 percent of its values in the last twelve months alone. If the house appraised for $350,000 the last time you refinanced, that means it would currently fetch only $325,000 on the market. You would be ‘under water,’ so to speak, and it would take a price rebound of nearly 8% just to bring you back to even.

We seriously doubt Joe Homeowner will be in a spending mood at that point, since he would not be feeling anything like a ‘wealth effect’ ‘ only a sense of relief, perhaps, from not having drowned financially. That is hardly cause to celebrate with the purchase of a big-ticket item, even in binge-besotted America. Actually, given the sobering ‘ and for many, scary — condition of the residential real estate market right now, we think it would take a swelling to something like $400,000+ to fully rekindle Joe’s lust for consumer goods that he could never quite afford to begin with.

The Dollar Problem

And that would entail pumping up the housing market, not with a rolling start as occurred when the country was emerging from the dot-com bust six years ago, home prices largely unaffected, but in the midst of today’s near-crash in real estate. Think of a weightlifter trying to heft 300 pounds above his head. If he can get the bar to his chin and then jerk it the rest of the way with one neat thrust, no problem. But let all that weight cause the strongman’s arms to buckle even slightly before they reach full extension, and the task becomes nearly impossible. That is exactly where the housing market is now: needing not merely a little easing to turn things around, but a credit stimulus more powerful, even, than the one applied post-9/11 ‘ a stimulus that saw the Federal Funds rate fall from 6.5 percent to 1 percent in less than two years.

Problem is, the dollar was quite strong when this unusually bold spate of easing began. But the buck has depreciated by a third since, with a corresponding fall in the dollar index to a recent 80 from the post-9/11 high just above 120 (see chart). To begin easing aggressively now would risk sending the dollar into oblivion. Yet, nothing less than that will suffice to re-ignite a housing boom.

Investors appeared nonetheless to have breathed a sigh of relief on word Friday that the Fed had lowered the rate it charges banks to borrow by 50 basis points. As a result, the Dow Average ended the week 500 points above its recent lows, returning to the plus column for the year. But we seriously doubt the euphoria will last for more than another day or two. Should the stupidity persist beyond that, we have no plans to fight the tape. But that doesn’t mean we’ll march with all the lemmings over the cliff.

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Online Seminar: Last Call

Six students are on board so far for the August 25-26 online Hidden Pivot Seminar, so if small class-size appeals to you, this will be an ideal session to attend. For the convenience in particular of participants from the U.K., the class will begin on both days at 4 p.m. London time (11 a.m. EDT), allowing students a leisurely Saturday and Sunday, as well as dinner on Saturday night at a fashionable hour.

If you’ve ever wanted to forecast stock and commodity prices as accurately as many gurus who do it for a living. this may be the best opportunity you will have to pursue that goal. To reserve a seat, simply click here, then on the ‘Upcoming’ tab.  Detailed information about the course itself and the Hidden Pivot Method can be obtained by clicking here. All who do so will also receive a free Hidden Pivot calculator.

Free to All Graduates

Incidentally, all seminar grads now have free access at all hours of the day to a recorded version of the seminar, as well as to the Q&A forums held in conjunction with each class. In addition, I am in the process of creating an advanced tutorial built around some especially difficult charts. It will be available to seminar grads for a nominal fee.

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Fed Just Stupid?

Below is an interesting note on all the craziness from the persepctive of Larry McMillan, an options expert’s expert.  If you’re interested in his Daily Volume Alerts, call 800 724-1817 for details.

“Speaking of the Fed, you may recall that in Friday’s letter (written late Thursday night ‘ before we knew about the Fed’s action), we stated that “the S&P futures closed with a zany premium,” almost 10 points above fair value. In retrospect, it’s pretty obvious that someone was tipped off. In fact, the big stock rally on Thursday ‘ that arose right out of the middle of a sharp decline in mid-afternoon ‘ now seems to have been partly inspired by inside information as well. Unfortunately, no one told the Asian traders who trashed their markets for over a 5% loss on Thursday night.
“Finally, I think it is reprehensible that the Fed announced their rate decision just prior to an option expiration.Some traders think Bernanke is so out of it that he didn’t really even know that his rate cuts would have such a devastating effect on some traders ‘ mostly $SPX market makers. Others, including Jim Cramer, seemed gleeful about the prospect. Either way, what is the purpose in putting some small option market makers out of business? And causing larger market makers (many of whom are the same banks and brokerages the Fed was supposed to be helping) some very large losses? The Fed could have made their announcement at any other time and allowed traders some leeway to move out of positions, but to cause a spike opening minutes before an “a.m. settlement” of $SPX options is irresponsible. All this will accomplish is to dry up the market for out of the money calls.
“Lest you think this is sour grapes, please note that I did not personally have, nor did any of our newsletter recommendations or managed accounts have short August $SPX call options going into expiration.”

Read John Kenneth Galbraith’s classic book on the 1929 Crash if you think there is something unusual about the stock market’s wild swings of late. In fact, such craziness was routine as shares worked their way toward the historical top of August 1929. We’re running a little ahead of schedule this time, having seen the Dow Industrial Average peak just above 14000 in mid-July. But that’s only a few weeks’ difference, and we’d be surprised if it turns out that history has not repeated itself, more or less.

Even so, no less a sage than Richard Russell, a permabear until relatively recently, put out a memo on Wednesday that gave bulls something to look forward to. Here is what he wrote, as posted in the Rick’s Picks chat room yesterday:

Just a ‘Hard Shake’?

“My take is that we’re seeing a ‘mini-bear market’ coming within the framework of a much larger primary bull market. I don’t think this is the end of the world, I just think we’re seeing the financial world being grabbed by the neck and shaken, shaken hard. At this point I want to go over the all-important 50% Principle again. The Dow rise from its 2002 low of 7286 to the 2007 high of 14000 took the Dow up 6714. points. The 50% or halfway level of that rise is 10643. As long as this “mini-bear market” halts above 10643, I will consider the primary trend of the stock market to remain bullish.”

Mind you, this isn’t some self-serving, narcissistic jackass who knows exactly what to say ‘ and would say it no matter what he believes ‘ in order to get in front of CNBC’s cameras. No, this is a guy who has seen it all, and who has experienced bear markets up-close in a way that might have destroyed any investor who had failed to imbibe the important lessons each time. But is Russell going to be right this time? We don’t think so, even if it is difficult to fault his technical logic. As he says, a 25 percent sell-off in the Dow, taking the blue chip average down to 10500, would not be the least bit unusual within the perspective of a long-term bull market. That will not much console investors and money managers who are planning to sit out the storm, since a 25% hit is bound to devastate quite a few of them. But there is no refuting the interpretation that a 3,500-point selloff, even over a relatively short period of time, would be as right as rain for a bull market that had become as extremely overbought as this one was.

This Is the Big One

But putting technical logic aside for a moment and focusing on fundamentals ‘ something we almost never do ‘ we are incapable of imagining that a 3500-point dive in the Dow would not topple the U.S. economy from its already shaky pins. Now, that’s a far more speculative assertion than Russell’s emotionless and guardedly optimistic take on the frenzied selloff that has seized stocks of late. Russell implicitly believes that a 3,500-point bear market would occur in a vacuum, with no mortal effects on the all-important U.S. housing sector. Either that, or he thinks it would have an impact, but not a fatal one. On that very crucial point we must disagree, especially since we have written for years that the U.S. and global economies were headed unavoidably toward a ruinous deflation. If so, than the deterioration we have seen so far ‘ in housing, but now in stocks as well ‘ must surely be the start of the Big One.

We’ve offered numerous, persusaive reasons why this is so, but one to consider now is that it is currently requiring nearly $9 of new borrowing to create a dollar’s worth of GDP growth. Writing in the early 1990s, we believed America’s consumption-based economy had maxed out because it took a then-unprecedented $2.40 of new borrowing to engender a single dollar’s growth. In retrospect, our error in timing was a failure of imagination. But that was before the country had leveraged out its housing stock to produce what in retrospect has been only modest economic growth in the last five years. There being nothing else for us to hock, we have serious doubts that Russell will be right.