RICHARD RUSSELL: HYPERINFLATION? WHAT HYPERINFLATION?

Few investors have been more vocal about the potential collapse of the US Dollar than Richard Russell.  But as the recovery builds strength Russell has dramatically toned down his commentary about any potential hyperinflation and collapse of the USD.  In his Friday commentary he said the market action simply isn’t even remotely displaying a hyperinflationary environment or even an eventual hyperinflationary environment.  And he’s dead right (via Dow Theory Letters):

Comment — I read a lot about “the coming hyper-inflation.” If hyper-inflation is in our future, I don’t see it in the market action.

The precious metals are hesitating, the CRB Commodity Index is in a bullish trend but is now hesitating, XLE, the widely-followed energy exchange traded fund has been in a bullish trend but is now moving sideways, oil has been declining, and March oil is now selling below 86.

And what’s most important (nobody seems to be noticing this) is that Chinese stocks are most definitely in a down-trend. China has been the monster buyer of commodities, and if China is slowing down, that will put a big question market in the hyper-inflation scenario.

One other item — if we’re heading for hyper-inflation Treasury bonds should be falling out of bed. Not so, below is a daily chart of the 30-year US Treasury bond, and it’s hardly falling out of bed. If there’s inflation coming and certainly hyper-inflation, the bond market will smell it. From the looks of this chart, I’d have to bet deflation over inflation.

When ever I hear a consensus view of what lies ahead, I always check with the market. If the market doesn’t agree, I remain sceptical. As for the current hyper-inflation forecast, I’ll remain sceptical as long as the market is sceptical.

Source: Dow Theory Letters

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • yo

    I trade what the market says, too.

    But, to say that the market is always right sort of suggests a complete and utter forgetfulness of what we’ve been through the last few years, doesn’t it? Wasn’t the stock market and real estate market a little higher in 07 than they were in 08? Didn’t they suggest good times ahead for 08? I think so.

    The federal gov’t has more debt than it will ever repay. It doesn’t have to default, but it could. If it does, we’ll have deflation, of course. If they print their way out of it, I guess that would suggest, lol, a little inflation.

  • Frank

    Never had much faith in Russel’s ideas. Don’t get me wrong, I respect the man very much but he was too much in the “hyperinflation – collapse of the dollar – $5000 gold” camp. There is not a single chance we go into hyperinflation anytime soon. The market tells us that every day and has been doing so since the march 09 low. And what happens in a few years should not be on our minds. It’s hard enough allready to get a glimpse of what will happen the next few months.

    Dow theory can be very usefull. A much ignored and perhaps unknown dow theory expert is Tim Wood of cyclesman.info. He’s in the deflation camp and has been since before the 07 top in the markets. He has made some impressive calls on the stock market, bonds and the dollar. Intelligent guy who does his homework. Worth a visit. Like Mr Roche he is a guy from which I learn a lot. Let me use this opportunity to thank them both.

  • Coolidge Low

    It is way to early in the game to be making final outcome predictions. The Egyptian revolution did what Gandhi dreamed and bashed the image of “they are all terrorist” forever. If the dream spreads, oil could trade over $300 a barrel by 2017 as the remaining dictatorships will be unable to, or potentially unwilling to hold down the price of oil for us. Just one example of it is way to early to tell ………. and the markets are not always right. Just look at the Fed balance sheet. Ask, why do we need QE3.0?

  • Michael C

    The lag between massive money creation and increase inflation is 3 to 4 years. But with all the bad debt overhang the real question is” can the market destroy money faster than the fed can print it?”

  • Mark

    Those of you who believe the events in Egypt will lead to a Jeffersonian Democracy are in for a most rude awakening.

    There is not nor will ever be an Islamic Democracy on the planet.

    It is a contradiction in terms.

    I have lived with them in their lands and know of what I write.

  • Joe Johnson

    I’m not sure Richard Russell understands the difference betweeen inflation and hyperinflation. Inflation is that relatively slow erosion in the purchasing power of a dollar over decades. I’ve read it’s lost 95% of it value since the 30′s. Hyperinfaltion on the other hand is not something Mr. Russell is likely to smell from a mile away as he seems to think. It will happen fast and furiously as a result of total loss of confidence in the dollar as a medium of exchange and store of value. It’s the total collapse of a currency.

  • Steve

    Does anyone really think it matters if the dollar has lost 95% of it’s value since 1930? Who does that negatively impact? Seriously, I would like somebody to answer that question. I get the feeling that some folks think (maybe not you Joe) 0% inflation is the goal, not jobs and prosperity.

  • http://www.pragcap.com Cullen Roche

    When people cite that fact they always leave out the fact that incomes have more than offset any lost value in the dollar. So yeah, a carton of eggs costs a lot more, but we all make a lot more money and we’re a hell of a lot more productive. Anyone who thinks Americans are worse off today than they were in 1913 is out to lunch….

  • LZ

    Zimbabwe people must have got huge raise every day given they need a truckload of cash to buy a meal. That should also be more than offset official CPI number I guess.

  • Ilya

    The question that separates inflationists from others is whether people have the right to keep the capital they earned and saved. You decide on the answer. And if we like democracy so much why not vote on outright tax on capital? Do governments resort to iflation because they do not believe they could legaly push through the spending increases and tax increases that inflation covers up? Aufully undemocratic in my opinion. Whether inflation can coexist with increase in prosperity is a different point. A dictatorship (take Chili under Augusto Pinochet) can coexist with prosperous economic times. How many want to trade in freedom for a little income? Great short term trade not sure about long term. Inflation does help equity and commodity investors over fixed income of course. So for all equity bulls it is a liittle bit of a helping hand inless it goes out of hand.

  • http://www.pragcap.com Cullen Roche

    Not an apples to apples comparison. Their productive capacity collapsed so naturally, the currency did not have any value…..Is that happening in the USA? Absolutely not.

  • Anonymous

    Is the US debt/dollar grow fater or wealth/produce faster?

  • Max

    This guy sounds like a total idiot. The consensus is hyperinflation? On what planet?

  • Mike

    It’s absurd to compare wages in 1930 to earning power now. Earning power now has gone no where for the middle-class in the last 15 years at least! Sure just like housing charts that love to compare 5 year charts that tell you buy cause prices have fallen. Well just 10 year chart and prices weren’t so high. And where are wages now? I’d say wages are stagnet to at least 10 years ago. Why? Because wages never followed the housing bubble. Think realtors and loan writers are living the high life now? Bubbles, these comparisons don’t always take into account these fake economies and bubbles. It’s not all upside with bubble economies which the United States has been extremely living since the end of the cold war. Wages just are not keeping up. I wonder what will happen if gas hits $4 or $5 a gallon? You think companies will just give you a raise to offset? Or will the economy stubble like it did just a few years ago?

  • Chris

    Contrary to popular understanding, the USA is not specifically a Democracy, but a Democratic Republic. We democratically elect people to represent us as a government wich then makes important decisions for us.

    That is why, in the US at least (based on the name you’re posting under I would not be surprised to find out you are not in the US, we don’t do things like “vote on outright tax on capital”.

    Best

  • JH

    The rub here is although income has increased along with inflation, so have taxes to a disproportionate degree. The governments and the banks have been the real benefactors of the inflationary system. The common worker is loosing ground when you consider taxes, fees and other costs of modern living into the equation.
    As far as hyperinflation goes, I am seeing some very disturbing trends moving in the direction of replacing the dollar as the worlds reserve currency. If the dollar does loose that status, the resulting loss in it’s value would be worse than most people think.

  • LZ

    so what is real median household income compared to 1970? is the number significantly higher? I ASSUME CPI number is ALWAYS true here.

  • http://www.NapaWealth.com Tim Ayles

    Joe –

    I wrote an article some time back with helpful graphs to show this phenomena that the dollar losing 95% of it’s purchasing power is not a big deal due to wages as Cullen replied:

    http://seekingalpha.com/article/248003-the-end-of-america-not-quite

    Oscar Wilde in 1892 wrote: “What is a cynic? The man who knows the price of everything, but the value of nothing.”

    Don’t just look at the price it takes to buy something, look at the labor it requires to obtain it. I have asked the question:

    “If I have to work 15 minutes to buy 1 gallon of gas at today’s price of $3.00 per gallon, compared to 10 years from now when I may have to pay $10.00 per gallon, but only have to work 10 minutes to afford it, does the price actually matter to me?”

    You would be wise to figure that answer out.

    Adam Smith got it 235 years ago when he said:

    “The real price of everything, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it…. But though labor be the real measure of the exchangeable value of all commodities, it is not that by which their value is commonly estimated…. Every commodity, besides, is more frequently exchanged for, and thereby compared with, other commodities than with labour.” – Adam Smith, The Wealth of Nations, 1776

  • http://www.NapaWealth.com Tim Ayles

    Median income is faulty for your argument here. It just measures the number in which 50% are below and 50% are above.

    let’s say we have a group of people people:

    $5
    $6
    $7
    $30
    $35
    $40
    $41
    $42
    $43
    $60
    $100
    Total $409 of income and the median is $40 as 50% of the people have less than that and 50% have more.
    One year later, the income looks like this:
    $38
    $38
    $38
    $38
    $38
    $39
    $100
    $100
    $100
    $100
    $100

    The median income drops to $39, thus looking like a loss of income, but the total income rose to $729 for a 78% increase in total income.

    You are better off looking at standard deviations than just taking median income. It’s about as worthless for this argument as the average income, which is skewed by outlandish Wall Street robbery style incomes.

  • http://www.NapaWealth.com Tim Ayles

    The dollar is about to lose it’s reserve currency status?

    It is assumed that the rest of the world will stop accepting payments in US Dollars overnight for business transactions, and only if we subscribe to their information service will we be able to protect ourselves and family using their timely advice.

    Will the US Dollar lose the coveted reserve currency status from all the printing going on?

    Not any time soon.

    The US economy is still the biggest in the world by a large margin. The military, which we are not afraid to use, is the most powerful. Until another country holds title to either one of these claims, our reserve currency status will likely remain intact. While it feels as if China will surpass us soon as they maintain their rapid growth, they are still many trillions of dollars in GDP away. Think about this – if the US is the world’s largest customer, and China has become richer by selling to us, is China REALLY going to tell us which currency we can spend? Don’t we dictate what currency we are willing to give them? Who is truly in charge? If China stops accepting dollars, could we not easily find a group of other nations to do business with? Would us dumping China as a business partner not cause other nations to line up to take China’s place? Would any of these other nations refuse to do business with us in US Dollars?

    Until China or another country surpasses us as the world’s largest economy or strongest military, loss of our reserve currency status is not imminent, as sellers of fear would like you to believe.

    Granted, China is growing at roughly 10% a year, and we are only growing at 3%. I get that. Let’s do the math though and see if we should worry. If China is a $6 trillion economy, growing at 10%, they grow by $600 billion a year. If we are a $14 trillion economy growing at 3%, we grow by $420 billion a year. In this close to reality example, China is closing the gap at $180 billion a year, assuming compounding at these rates does not continue (which is won’t). At this rate – it will take China 44 years to even match the US in GDP. Can they continue to grow at 10% a year, while their largest customer grows at 3% for 44 straight year? We are a far cry from no longer being the largest economy. The biggest economy in the world should be blessed with the reserve currency.

  • Ilya

    Chris,
    I am well aware of a political structure of the US. My comment was a bit sloppy. The point is not changed though. Try to push a tax on capital through both houses or a n income tax that inflation brings with it. I did not mean a national referendum or a popular vote.

  • Obsvr-1

    It matters to the savers, those on fixed incomes.

    Many would be more secure if the wealth they produced would have been retained instead of transferred to others.

  • http://www.napawealth.com Tim Ayles

    One of the unfortunate things about our current monetary system is in fact the idea that holding cash or only fixes income is not a good thing. If you lose the ability to continue to trade an hour of labor for income, you best be able to invest in those who can still make this trade, or you will unfortunately fall behind.

    Even an 80 year old should still have some money invested in productive businesses for this reason.

  • http://www.pragcap.com Cullen Roche

    Tim, awesome comments today. Thanks for that. It’s great to have readers who make nice contributions. Can’t tell you how much I appreciate that.

    On your labor/inflation idea – just a thought. One way that I explain it to people is this – wages more than offset inflation because businesses are willing to pay more for labor. Why is this? Because workers only become more productive. This explains sticky prices. We are always evolving and advancing. We are not devolving. That is why a laborer refuses to accept less money next year than last year. They know they are a better employee. More efficient. So naturally, they are reluctant to accept lower wages. Hence, they demand higher wages. You can see where I am going with this – higher wages mean higher prices, however prices never advance at the same rate as wages because of taxes, savings and investment. I thought that might help with your excellent productivity examples.

    Best,

    Cullen

  • Marketnugget

    Yo, if you listened to the market signals in the years you indicate, then you would have been out of the market or short for the down cycle. It was not rocket science to avoid the obvious.

  • JH

    Perhaps you need to do some study on SDR’s. SDR is short for Special Drawing Rights. It is a synthetic currency unit that is made up of a basket of currencies. SDRs have actually been around for many years, but now they are being heavily promoted as an alternative to the dollar by the IMF. Russia and China no longer use dollars for trade between themselves, and Iran does not take dollars at all. I am sure you will soon hear about some of our neighbors in South America who feel they have an axe to grind gravitating in the same direction.

  • Anonymous

    “Will the US Dollar lose the coveted reserve currency status from all the printing going on?
    Not any time soon.”

    30/50 years is any time soon?
    Think about 30/50 B.R.I.C. economy/military power. I thnk 30/50 ago american hardly see today’s US economy/military power leading gap reduced so much.
    After 2008 sub-prime crisis, the rest of the world start to question the
    US debt/dollar and plus about 5 years ago China and UAE were not allowed to buy Unical oil and port service compnay with dollar, what will they treat dollar in the next 30/50 years?

  • http://www.NapaWealth.com Tim Ayles

    Cullen -

    Have never thought of that – but it’s true. Thanks for pointing it out. And thanks for the hard work you put in to the free education everyone gets here.

    Tim

  • JWG

    “The limit of the Fed’s and Treasury’s ability to create money is the value and acceptance of the dollar and the bond in market transactions.

    The Weimar government never ‘ran out of money.’ Zimbabwe never ‘ran out of money.’ And if interest is paid ‘in your currency money’ you can never fail to service your debt either.

    What they did run out of were people willing to take their paper at its intended value, from the outside in. Outside means those who are exterior to their compulsion of legal tender.

    This is why the system breaks down unless you can extend an ever greater circle of coercion of paper valuation. Without the complicity of a few well placed allies like the Saudis, the dollar would already be done.” Jesse’s Cafe Americain, Feb. 14, 2011.

    It is essentially a question of timing, and faith: one month, one year, or one decade. Perhaps longer. Perhaps never. Place your bets.

  • anish poojara

    I live in India. Things are expensive and getting worse.

    But I understand that in US a box of Kraft Cheese still costs what it costed last year (except that instead of 12 cubes of cheese there are now 10).

    If this is not hyperinflation then what is it?

    IF property prices go up by 40-50% over 10 years it is called a bubble.

    So are Kraft cheese prices heading for a bubble?

    Anish Poojara
    India

  • http://www.pragcap.com Cullen Roche

    prices in the USA are actually up only marginally. Emerging markets have it far worse….we are still trying to crawl out from under deflationary trends….

  • http://casarei.co.za Stingray

    In most enterprises 20% produce 80%.
    Wherever you are in a democracy, the minority, politicians, that pander to the majority are rewarded the most. It is good to see how the two parties in America, no longer control. Democracy is now creating a minority, the undecided voters that can sway decisions. One day I hope parties will no longer be allowed. The individual will be given the right to vote for an individual. That person will be free to vote on any law according to his or her own concience, and I have faith in the general goodness of the individual not swayed by group phsycology. Again I do not believe anyone campaining for a seat in Government should be allowed to spend more than the next on their campain. I am afraid I see our present democratic ideal as a failed structure for creative governing. Governments are forever putting out fires that should have had preventitive measures before the fire. Printing more money gives one the illusion of the paper value of an asset being worth more, so the land owners, the share owners measuring their wealth in $ think they are wealthier as the asset adjusts to the value of the $, but the poor find the fuel, and food they buy costs more $. The fire they are putting out in one field is merrily burning in another. While printing more money will inflate the perceived value of an asset, the income of the poorere worker is being deflated. How long? How much? Before the majority demand more of a share. It happened in South Africa where I live, it has happened in Egypt, will it happen in America? Stingray.

  • will

    Who does the depreciation of the dollar really affect? Seriously? Every person, bank, and government that holds dollars or dollar denominated assets. Everyone will experience a drastic decline in purchasing power, and loss of overall net worth when wages don’t keep up or exceed that currency’s decline- which they are NOT- to debunk the guys statement that wages exceed monetary devaluation. Currently in the US they absolutely do not! Check the stats to prove it.

  • KP

    Tim,
    Your wage comments are true in a vacuum, but leave out segments of society – those who cannot stay employed at the top of their game as businesses are geared to contravene, and those who are retired. Neither can keep pace with the engineered dollar devaluation. Congressional unprotective laws, and private industry patterns of early termination of employees & retirement programs – not to mention bankruptcy, have made bogus generation after generation of promises – the social secutity COLI, the pension vesting delays, and the dishonoring low savings rate among many aspects all impoverish those following the “leaders” plan.
    Politicians have never been able to bring themselves to admit to the citizens that the revered retirement goal espoused, given the fiat money system that skims too much of the labor-profits to allow payoff of debts, is a mythical, unstainable statistic for the many — much like the fact that only a few can end up on the forward leading edge of a bell shaped curve.