I took the bull and the bear out. Now we're
waiting for the answer -- it should arrive soon.
August 17, 2009 -- Russell prediction. . . "The coming
revolution" -- Americans living within their means.
.........................................
When the weekend comes around, if there's not too much going
on, I have some time to think. My hope is to be able to come up
with something that makes sense about the markets and the economy
and the nation. Here's what I've come up with --
Back in 1945 I could buy a loaf of bread for a dime. I could
take the subway from one end of NYC to the other for a nickel. I
could buy a good dinner for a dollar. I could see a double feature
(two movies, in case you didn't know) at anywhere from 15 to 65
cents. I could go dancing with my date in a top-grade NY hotel
(Pierre, Plaza) for $2.50. I was renting a three-bedroom apartment
in an upscale upper East side apartment house for $275 a month.
What has happened since 1945? Prices of everything have gone
up. Today, everything is OVERPRICED. I was making $65 a week back
in 1945, and I could live comfortably. Today I can't live on 10
times that amount. Today everything is just plain overpriced.
There's an economic "law" called "regression to the mean."
Today we're experiencing deflation. Consumer prices have dropped
more in the last year than they have in any year during the last 60
years. The price of almost everything is heading down. And if a
retail outfit like Abercrombie decides to hold its prices (nothing
is discounted or on sale at Abercrombie), customers simply skip the
store and shop elsewhere for lower prices.
And I'm wondering whether we're not in the process of seeing
prices regress to the mean. What do I mean by the mean? The mean is
the center of a series of numbers. For instance, take the series 1,
2, 3, 4, 5, 6, 7, 8, 9, 10. The mean is not the average of those
ten numbers. The mean is the middle, in this case 5.5 -- right in
the middle of the series.
I don't know where the mean of prices since 1945 is. But that
may be where prices are headed. If this is true, we could be
heading for the second great depression or at the least a huge
change in Americans' standard of living.
Ben Bernanke is probably aware of this, and he has bet his
reputation on defeating deflation. And the question I ask is -- how
far will the"gang of two," the Fed and the Treasury (Bernanke and
Geithner) go, in their battle to halt deflation and their quest to
bring back asset inflation?
Many years ago, in the 1960s, I used to correspond with the
great Hamilton Bolton, one of the founders of the Bank Credit
Analyst. In those days Hamilton warned that it was taking an
increasing amount of debt to produce a dollar of Gross Domestic
Product in the US. As I remember, back in those days it was taking
$3 of debt to produce $1 of GDP.
My old friend, Ian McAvity, has continued Ham's study (Ian
McAvity's Deliberations out of Toronto). In his latest report Ian
writes, "Over the 4 years to September '07 when the meltdown began,
nominal US GDP rose $2.86 trillion (25.8%). Total credit Market
Debt increased by $14.85 trillion (44%) over those 16 quarters,
this translated to $5.21 of new debt per every $1 of GDP. In the
two years to September '08, it rose to $6.49 of new debt to $1 in
GDP. Ballooning Federal debt to recapitalize banks isn't going to
translate into resurgent growth in consumer spending. Off the mat,
probably yes, but recovery is likely a long way off."
So today it takes $6.49 of debt to produce $1 of GDP. But
with consumers strapped for cash and loaded with debt, I expect
consumers to continue cutting back on their buying for many months
ahead and maybe for years ahead. For this reason, I expect the
debt-to-GDP to surge to new highs.
Americans are not stupid. They know that the current massive
debt building must end up with tougher times. And they are cutting
back as they prepare to face hard times. As it was in my boyhood,
debt is becoming a dirty word.
And I keep asking, how far will Bernanke, Obama and Congress
go in their quest to halt deflation? Is there some point at which
no amount of credit creation, no amount of injecting money into the
system, will cause consumers to spend? If the money is there and
available, will they come? I think we're about to find out.
And I wonder whether we've arrived at the point where
regression to the mean takes over. If so, that would fit in with
the thesis that we are simply experiencing an upward correction in
an ongoing primary bear market.
Primary movements tend to run to conclusion, no matter what.
They may be manipulated for a month or so, but not for long. If the
bear market is still in force, then when the current upward
correction becomes exhausted, the stock market will turn down again
with increased force. At that time Bernanke and Geithner will face
their baptism of fire. Trillions of dollars will have been wasted
in a loosing battle to turn the tide.
Last night, amid amazing publicity from critics, the third
season of Mad Men began. Mad Men, according to MatthewWeiner, it's
creator, is about people's reaction to CHANGE.
I believe we are now in a period of historic change. I've
lived through four periods of great change. (1) The Great
Depression. (2) World War II. (3) 1959 and the beginning of the
"hippie" generation of the 1960s. (4) Today, and the beginning of
the great decline in the American standard of living.
Russell Comment -- Yes, this is an historic time of change.
Debt is piling ever-higher, deflation and world over-production are
driving prices down, and many people fear that the "American way of
life" is being lost.
Lost? How can it possibly be lost? Here are some figures from
Barron's.
$180.7 billion -- Federal deficit for July.
$1.27 trillion -- Total deficit so far in 2009, a record.
$332.2 billion -- Government spending in July, a record for
any month in US history.
$151 .5 billion -- US government receipts for the month of
July.
5.6% -- decline in monthly receipts from a month ago.
How did it happen? Fiat money, Fed-created inflation, and
spending beyond our means (yes, the government can spend far beyond
its means too). All this has put us in a precarious position. Can
more (enormous) spending get us out of this mess? Ah, that's the
question that is currently putting the best minds in the nation at
odds.
Russell says he could live comfortably in 1945 on $65 a
week.......but he was paying $275 a month for rent? That's
more than his entire salary. Is he making up the numbers or is his
recollection faulty?
he says he was renting a 3 bedroom apt...if he was single then,
maybe he was subletting 2 of the bedrooms?
don't forget there was no state tax then and hardly any sales
tax...i was only 3 yrs old in 1945, but i remember the prices in
the late 50s and early 60s before viet nam...
Richard Russell's Observations
Posted by steve on 17th of Aug 2009 at 09:19 pm
I took the bull and the bear out. Now we're waiting for the answer -- it should arrive soon.
August 17, 2009 -- Russell prediction. . . "The coming revolution" -- Americans living within their means.
.........................................
When the weekend comes around, if there's not too much going on, I have some time to think. My hope is to be able to come up with something that makes sense about the markets and the economy and the nation. Here's what I've come up with --
Back in 1945 I could buy a loaf of bread for a dime. I could take the subway from one end of NYC to the other for a nickel. I could buy a good dinner for a dollar. I could see a double feature (two movies, in case you didn't know) at anywhere from 15 to 65 cents. I could go dancing with my date in a top-grade NY hotel (Pierre, Plaza) for $2.50. I was renting a three-bedroom apartment in an upscale upper East side apartment house for $275 a month.
What has happened since 1945? Prices of everything have gone up. Today, everything is OVERPRICED. I was making $65 a week back in 1945, and I could live comfortably. Today I can't live on 10 times that amount. Today everything is just plain overpriced.
There's an economic "law" called "regression to the mean." Today we're experiencing deflation. Consumer prices have dropped more in the last year than they have in any year during the last 60 years. The price of almost everything is heading down. And if a retail outfit like Abercrombie decides to hold its prices (nothing is discounted or on sale at Abercrombie), customers simply skip the store and shop elsewhere for lower prices.
And I'm wondering whether we're not in the process of seeing prices regress to the mean. What do I mean by the mean? The mean is the center of a series of numbers. For instance, take the series 1, 2, 3, 4, 5, 6, 7, 8, 9, 10. The mean is not the average of those ten numbers. The mean is the middle, in this case 5.5 -- right in the middle of the series.
I don't know where the mean of prices since 1945 is. But that may be where prices are headed. If this is true, we could be heading for the second great depression or at the least a huge change in Americans' standard of living.
Ben Bernanke is probably aware of this, and he has bet his reputation on defeating deflation. And the question I ask is -- how far will the"gang of two," the Fed and the Treasury (Bernanke and Geithner) go, in their battle to halt deflation and their quest to bring back asset inflation?
Many years ago, in the 1960s, I used to correspond with the great Hamilton Bolton, one of the founders of the Bank Credit Analyst. In those days Hamilton warned that it was taking an increasing amount of debt to produce a dollar of Gross Domestic Product in the US. As I remember, back in those days it was taking $3 of debt to produce $1 of GDP.
My old friend, Ian McAvity, has continued Ham's study (Ian McAvity's Deliberations out of Toronto). In his latest report Ian writes, "Over the 4 years to September '07 when the meltdown began, nominal US GDP rose $2.86 trillion (25.8%). Total credit Market Debt increased by $14.85 trillion (44%) over those 16 quarters, this translated to $5.21 of new debt per every $1 of GDP. In the two years to September '08, it rose to $6.49 of new debt to $1 in GDP. Ballooning Federal debt to recapitalize banks isn't going to translate into resurgent growth in consumer spending. Off the mat, probably yes, but recovery is likely a long way off."
So today it takes $6.49 of debt to produce $1 of GDP. But with consumers strapped for cash and loaded with debt, I expect consumers to continue cutting back on their buying for many months ahead and maybe for years ahead. For this reason, I expect the debt-to-GDP to surge to new highs.
Americans are not stupid. They know that the current massive debt building must end up with tougher times. And they are cutting back as they prepare to face hard times. As it was in my boyhood, debt is becoming a dirty word.
And I keep asking, how far will Bernanke, Obama and Congress go in their quest to halt deflation? Is there some point at which no amount of credit creation, no amount of injecting money into the system, will cause consumers to spend? If the money is there and available, will they come? I think we're about to find out.
And I wonder whether we've arrived at the point where regression to the mean takes over. If so, that would fit in with the thesis that we are simply experiencing an upward correction in an ongoing primary bear market.
Primary movements tend to run to conclusion, no matter what. They may be manipulated for a month or so, but not for long. If the bear market is still in force, then when the current upward correction becomes exhausted, the stock market will turn down again with increased force. At that time Bernanke and Geithner will face their baptism of fire. Trillions of dollars will have been wasted in a loosing battle to turn the tide.
Last night, amid amazing publicity from critics, the third season of Mad Men began. Mad Men, according to MatthewWeiner, it's creator, is about people's reaction to CHANGE.
I believe we are now in a period of historic change. I've lived through four periods of great change. (1) The Great Depression. (2) World War II. (3) 1959 and the beginning of the "hippie" generation of the 1960s. (4) Today, and the beginning of the great decline in the American standard of living.
Russell Comment -- Yes, this is an historic time of change. Debt is piling ever-higher, deflation and world over-production are driving prices down, and many people fear that the "American way of life" is being lost.
Lost? How can it possibly be lost? Here are some figures from Barron's.
$180.7 billion -- Federal deficit for July.
$1.27 trillion -- Total deficit so far in 2009, a record.
$332.2 billion -- Government spending in July, a record for any month in US history.
$151 .5 billion -- US government receipts for the month of July.
5.6% -- decline in monthly receipts from a month ago.
How did it happen? Fiat money, Fed-created inflation, and spending beyond our means (yes, the government can spend far beyond its means too). All this has put us in a precarious position. Can more (enormous) spending get us out of this mess? Ah, that's the question that is currently putting the best minds in the nation at odds.
I think it was a typo
Posted by padraigm on 18th of Aug 2009 at 09:15 am
My folks rented a place in NYC in 1940 for $40 a month.
Assume $27.50 a month.
Russell is 84. We can cut him some slack!
Pat
Typo is correct
Posted by jungfan on 18th of Aug 2009 at 09:18 am
I'm sure he meant $27.50 a month. No ordinary place rented for $275 a month in that time period.
joe
Right. My 2000 sq. ft.
Posted by bkout3 on 18th of Aug 2009 at 09:26 am
Right. My 2000 sq. ft. photo studio loft in Midtown Manhattan rented for $275. /month in 1973
Richard Russell's observations
Posted by hs1935 on 17th of Aug 2009 at 11:23 pm
Russell says he could live comfortably in 1945 on $65 a week.......but he was paying $275 a month for rent? That's more than his entire salary. Is he making up the numbers or is his recollection faulty?
Perhaps their was a spouse
Posted by Peridot on 18th of Aug 2009 at 09:11 am
Perhaps their was a spouse salary also.
he says he was renting
Posted by 8899 on 17th of Aug 2009 at 11:55 pm
he says he was renting a 3 bedroom apt...if he was single then, maybe he was subletting 2 of the bedrooms?
don't forget there was no state tax then and hardly any sales tax...i was only 3 yrs old in 1945, but i remember the prices in the late 50s and early 60s before viet nam...
End the FED!
Posted by jtverr on 17th of Aug 2009 at 10:36 pm
End the FED!
Russell's Observations
Posted by wes1944 on 17th of Aug 2009 at 09:46 pm
Wow! Thank you for putting this on the blog. I think Russell is right on.