Richard RUSSELL Says. . .

Top 11. Jun 13, 2004 3:21 PM

» Normxxx - DOW THEORY LETTERS: RUSSELL ON GOLD

DOW THEORY LETTERS: RUSSELL ON GOLD

by Richard Russell, Editor-in-chief | June 12, 2004
www.dowtheoryletters.com/dtlol.nsf

"Filing seeks to list and trade Equity Gold Shares of the Equity Gold Trust"

I assume this is the long awaited Gold ETF. If so and if passed, this would mean that gold could be bought and sold on the NYSE just like any stock. This would add tremendously to gold's liquidity (remember, most people don't know how to buy or sell gold, and if they buy it they don't know where to store it). As I understand it, behind each gold ETF would be an actual ounce of gold.

Volume dipped very low on the exchanges last week. Part of that may have been due to the fact that the exchanges were slated to be closed for three days. But I believe it had more to do with general confusion about the markets and about inflation vs. deflation. Add to that the super-high valuations and low short interest rates, and a great many people don't know what the hell to do in this market.

I've repeated the old market adage, "When in doubt, stay out." But even here it's no picnic. You stay out by going into T-bills or CDs or a money market fund and you get paid literally nothing. But nothing's better than losing your capital, and that's the frustrating story for the investor who wants to stay safely on the sidelines, at least for the time being.

On Friday Lowry's Selling Pressure Index collapsed to a multi-year low, meaning that there's very little desire to unload stocks at this time. But there's also little urge to buy, and we can see both of these phenomena via the current low volume on all the exchanges.

Another area of confusion -- one that I've been writing about. In the background we have the global forces for deflation, which stem from world over-production and its accompanying pressure on pricing power. Add the deflationary forces of giant Wal-Mart plus the Internet, and it's enough to give Alan Greenspan the "heebie-jeebies."

Against these deflationary forces we have our heroes, the central banks of the world -- led by the Greenspan Fed.

These guys (I believe they all talk to each other) are printing the paper that is calculated to hold deflation at bay. Remember, the classic monetary definition of deflation is too many goods lined up against too little money. The central banks know all about that -- and the theory is that if they pour out enough paper, deflation can't happen.

The problem is that somebody's got to USE the paper, and if American consumers are "tapped out," so to speak, they'll be cutting back on their spending and (God help us) possibly beginning to save.

So it's all very complicated and it very much "up in the air." Inflation or deflation? The Fed wins or it loses? Greenspan is a hero or a villain? The American consumer continues to consume or he cools it?

What's a poor investor to do? My suggestion has been to be very, very careful and to keep a heap of your assets in dollars. Gold is the only real money, so it makes sense to have a chunk of something real -- just in case the scenario turns out to be a true bummer.

Let's see, what else can I write about that's worth writing about? I know, I'll write about the dollar, which has been given a funeral by just about every expert around. But what does the market say about the buck?

Below we see daily chart of the US dollar. The blue histograms at the bottom of the chart are trending up, and that's a plus for the dollar. Note that both the 50-day and the 200-day moving averages are coming together at around 88-90. If the dollar should move to just above 90, that would be a sign of strength, and I should add "unexpected" strength.

We also see series of rising bottoms and rising tops, and that's a plus. BUT -- if the dollar drops below 88 that would be a decided negative. At any rate, those who are short the dollar haven't won the game yet. They might, but they haven't yet.

And that's about as much as I can say about the dollar, at least as much as I can say that makes any sense.

-- posted by Normxxx

Top 12. Jun 20, 2004 10:05 AM

» Normxxx - June 17, 2004

BEST OF RICHARD RUSSELL | June 17, 2004

The BS goes on and on. In today's Wall Street Journal, Michael Moskow (he's CEO of the Chicago Fed) writes about how superior the Fed is in tracking the rate of inflation. Moskow ends his article (which is entitled "The Inflation Game") with this sentence -- "Over the past 25 years, inflation has come down from double-digit rates to a pace consistent with effective price stability."

Can you believe this garbage? This guy is claiming that we've now reached price stability. Really, then how about this? In today's San Diego Transcript, I read that the median price of a resale home in San Diego is up 35.5% over the same period last year. You see, the great inflation today is taking place is in the price of homes -- which is just where the Fed wants it. Of course, home prices don't enter in the Dept. of Labor's inflation calculations.

So what's it all about? Simple -- the Fed wants to keep inflating the money supply while simultaneously playing down the rate of inflation. However, and this is important and nobody seem to be talking about it -- there are very definite global deflationary forces pressing down on the economies of the world. I've listed these deflationary forces many time over, and they include fierce Chinese, Indian and Asian competition, the price-leveling power of the Internet, world over-production and the price-cutting activities of the world's largest retailer, Wal-Mart.

I have to believe that Greenspan is well aware of these deflationary forces, and I have to believe that Greenspan's huge expansion of liquidity is calculated to battle or at least hold off the forces of deflation.

At this point, the stock market appears chronically overvalued, and the recent low volume on the exchanges may be telling us that people are becoming a bit sceptical regarding stocks that go nowhere on balance while at the same time providing little or no yield.

So where's is all of Greenspan inflation-creation going? It's going into real estate and housing. The word today is -- "Buy a house, buy two houses -- you can't lose. Buying real estate today is a total a no-brainer proposition."

In fact, I read where you can now put land or housing into your retirement program, and people are doing it. Seems that homes and real estate are beginning to replace stocks as the ideal place for your retirement money.

The question -- are houses overvalued today?

Answer -- Home values are now in "sky-high ville." The acid test -- there's no way today that you can buy a house, rent it out, and cover your costs. That situation has always meant that the price of a house has reached the over-valuation level. In other words, it's far cheaper to rent today than it is to buy a home.

To my mind, the great Achilles Heel of the US economy lies in real estate. When the real estate bubble finally bursts, home prices will turn down and we'll find out that real estate can be very illiquid as the volume of turnover dries up. I'm certain that Greenspan is well aware of this, and it's a major reason why he wants to keep "asset inflation" in force.

Basically, asset inflation today is synonymous with rising housing prices. The pin that can burst the giant housing bubble will be rising interest rates, and for this reason I expect at most a .25% increase in the Fed Funds rates, and if Greenspan could somehow get away with it, I know he'd prefer to keep rates at their current low.

Thus, you can expect the Fed to do everything in its power to play down the rate of price inflation while at the same time continuing to inflate the money supply. The Greenspan hope is to keep the punch bowl in place while doing everything possible to ward off the global forces of deflation.

Today the Labor Dept. announced that the Consumer Price Index rose 0.60 in May, the biggest increase since January 2001. But the "core rate" of inflation (minus food and energy) rose "only 0.2%, which is what analysts wanted to hear. On this "great news" the market headed higher, the 30 year Treasury bond rocketed higher, and the dollar sank.

One thing interested me about today's action, and it was this -- why did the very interest-sensitive 30 year T-bond surge up over two points as seen on the chart below? If the news was inflationary, the bonds should have "fallen out of bed." Instead they surged. Obviously the bond market liked today's news.

The daily chart tracks the long bond. Are we seeing a "double bottom" in the bond? Is the long bond starting to reflect deflation, and I mean global deflation?

On the chart it looked as though the bond was ready to break down below its preceding mid-May low. Instead, today the bond registered its largest one-day advance since last March. But I'll be neutral, and just say that I'm going to be watching the action of the 30 year T-bond with intense interest. With the CPI rising at a 7 percent annualized rate, why did this bond surge? Is the bond market beginning to march to the beat of a different drummer?

-- posted by Normxxx

Top 13. Jun 25, 2004 7:51 AM

» Normxxx - 24 June 2004

What's an Investor to Do? Sit Tight - In Cash, Gold and Gold Stocks

I guess the most decisive action today (24 June 2004) was seen in the gold and bond markets, so let's check 'em out. Gold broke out of its "head-and-shoulders bottom" pattern today when it hit the 400 level. In so doing, August gold pushed above both its 50-day and its 200-day moving averages. However, note on the chart that the (blue) 50-day MA is still well below the (red) 200-day MA -- the real move will start when the 50-day rises above the 200-day MA.

However, the move into the 400 area is a major technical plus for gold. As an aside, my gold advance-decline line rose to a new high today. The gold shares, as you know, are now lagging the metal. Relative strength between gold and the gold shares moves back and forth, usually each phase taking many months. Gold has been outperforming the gold shares on a trend basis ever since last February. Note on the lower section of the chart that the histograms for gold are turning positive.

<img Width="520" src="http://www.gold-eagle.com/gold_digest_04...">
http://www.gold-eagle.com/gold_digest_04...

Strangely, there are similarities between the gold action and the bond action. Today the interest-sensitive 30 year T-bond gapped up above its May 27 preceding peak. The histograms for the bonds have turned positive, and today the bonds surged above their (blue) 50-day moving average. Note, however, that the 50-day MA for the bonds is still far below the 200-day MA, which means that major upward momentum for the bonds is still lacking.

What so interesting about the bond action is that it has come in the face of the almost universal opinion that interest rates are headed higher. Of course, the bonds are down considerably from their March 17 peak, and this might only be a correction. Still it's interesting action and certainly opposite what's been expected.

<img Width="520" src="http://www.gold-eagle.com/gold_digest_04...">
http://www.gold-eagle.com/gold_digest_04...

Comments -- A fascinating situation today. Gold strong, long bond up almost a point, and dollar weak. Markets are acting as if they're still under deflationary pressures -- but like all markets they're looking ahead. What are they looking at? It appears to me that the Fed is actually not pumping enough liquidity into the system to ward of deflation. With durable goods down two months in a row and commodities now well off their highs or correcting -- this is probably what is rallying the bonds.

The Greenspan solution -- the Fed has to increase its inflationary activities, otherwise, the forces of deflation will gain the upper hand. And that's what the advancing gold senses. The need for "even more inflation from the Fed" is also what the dollar senses as it sinks lower today. Remember, the one thing the Fed cannot control is the international value of the dollar -- because the dollar is subject to international forces.

The strength of the world forces of deflation can be seen in that it's requiring such massive monetary and fiscal stimulus to ward off deflation!

BEST OF RICHARD RUSSELL | June 24, 2004 www.dowtheoryletters.com

Let's start with a few quotes from Jeremy Grantham, Chairman of Boston-based Grantham, Mayo, Van Otterloo & Co. -- in a letter to clients (I'm using this quote, by the way, because I agree with it). "We face the broadest overpricing of all assets yet recorded: global equities, global bonds -- and with few exceptions, global real estate. By far the most important single market, US equities, is particularly badly overpriced."

Could Mr. Grantham be right? I believe he is.

A Bloomberg rundown of almost 18,000 long-term funds, shows an average year-over-year increase of just 0.6 percent. Stock funds showed a 1.7 percent gain and bond funds showed a 1.6 percent loss.

For the year, so far, most of the major stock averages have done little. But don't despair, we have asset inflation. Wait, you may not have it in your neck of the woods, but we sure have it here in San Diego, which also happens to be the least affordable market in the nation. In San Diego the median resale price for listed San Diego County homes in May 2004 was $448,000, an increase of 35.56 percent from a year ago. Every lousy little "shack" here in La Jolla sells for a million bucks or more. I've never in my life seen such sheer insanity in housing.

So what's a poor investor to do? You want my honest opinion? Cool it -- just sit tight. I've been saying this for a while and I'll say it again -- sit in cash with the insurance protection of gold and gold shares. Markets are all overpriced, stocks yield nothing, bonds are questionable, and housing in general is off in space-ville.

We're in the midst of a "balance sheet recession," meaning a period when the air is being slowly let out of the great bubble -- it's a period where corporations are moving towards liquidity and solvency again. And it's a period where the American public hasn't even started to move towards solvency, let alone actually saving.

You don't believe it? Here's a headline and a lead paragraph from today's Financial Times –

"Corporate Loan Demand Tumbles. A slump in corporate borrowing has depressed pricing of loans to an eight-year low and raised concerns that banks may be mispricing risk to secure and retain business." Even Alan Greenspan noted this phenomenon in a speech last week, when he stated that corporations are now paying off more in debt than they're paying out in loans.

My prediction is that America's consumers will be next. Greenspan obviously suspects that, and this is one reason why he has been so hesitant to raise rates. Greenspan wants to let the air out of the great US bubble as slowly and carefully as possible. His dream would be to see the US consumer slowly become solvent again and this happening without a stock market collapse or a recession. Can it be done? I think we'll know within the next year or so.

Let me explain something. The S&P 500 contains the stocks of the 500 biggest-cap corporations in the nation. At one time financial stocks comprised only 7 percent of the S&P. Ten years ago the financials comprises 12.8 percent of the S&P. Today financial stocks comprise a huge 20.4 percent of the S&P, and this doesn't include GE, GM, Ford and the like. These three run huge financial operations. If they were included, financial stocks would probably comprise 30% of the S&P.

It's the financials (due to the low 1 percent Fed funds) that have been the big performers over the last few years. But now with interest rates probably heading higher, the financials may have "had it" on the upside. . . .

The stock brokerage business is very sensitive to forthcoming trends in the stock market. And the reason is obvious. The brokers live on volume, deals, transactions. When business is good, the brokers do well, as in bull markets. When business is lousy, when volume dries up and the deals are few and far between, as in bear markets, the brokers do poorly. . . .

Here's another area I want to talk about. There's no question but that we're seeing inflation in housing. US consumers have fallen in love with the whole idea of owning a home (with many owning two homes). And particularly on both coasts home prices have gone wild.

But over the weekend I went through a long list of commodities. And in item after item, from wheat to corn to soybeans to copper to the commodity indices I see prices backing DOWN. Even oil seems to have hit its high just above 40 and is now struggling. And yes, lumber, which recorded its high on May 7, has come down substantially and is now well below its 50-day moving average.

Now I'm not an Alan Greenspan fan, but the Greenman is no dummy. He must see what's happening, and my guess is that he'll even be reluctant to raise rates a quarter at the end of this month. But he'll do it, because the market is positioned for it, and Greenspan doesn't like to "double-cross" the market. Besides, if Greenie doesn't raise Fed funds a quarter, the market will take that as a sign of weakness, a sign that the economy can't even "take" a quarter point rise.

So I've given you my view of the way events are shaping up here in mid-2004. And lot of questions remain -- at least they do for me. For instance --

Could Greenspan be losing the battle against deflation?

Are bonds really headed down as almost every analyst is warning?

Is the US dollar really headed into the cellar as literally every analyst is warning?

Is the upward correction in this primary bear market running out of stream?

Are US consumers "tapped out" and ready to cut back on their buying?

If there is one stock that could be the KEY to the US economic picture is it Wal-Mart?

Can the housing bubble continue to inflate? And what happens if it bursts? As an aside, the Australian housing bubble now appears to be bursting. . . .

-- posted by Normxxx

Top 14. Jul 6, 2004 12:43 PM

» Normxxx - 3 July 2004

Russell On Dow, Gold & US Dollar

By Richard Russell | July 3, 2004
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsf

Economists were expecting a 250 to 350 thousand rise in unemployment. The figures announced this morning was 112,000, which was less than half the median expectation. On the news the long T-bond surged 1 and 20/32nds and the Sept. Dollar Index dropped .70, breaking below the support in what looks suspiciously like a "head-and-shoulders" top."

The two paragraphs below are from the always excellent King Report (July 1 report) --

"A stunningly disturbing Chicago PMI trumped the Fed rate hike. The action in the markets yesterday suggested a change in economic perceptions. It could be the beginning of the end. The ugly ChicagoPMI details: 56.4 expected; employment fell to 53.6 from 54.8; production collapsed to 53.9 from 71.1; new orders collapsed to 56.8 from 74.4; prices paid jumped to 84.5 from 80.

"You can forget all the post mortems on the Fed decision and communiqué; the real talk in the money world yesterday was the astonishing collapse in the Chicago PMI."

I keep harping on the thesis that following a burst bubble (learning from the Japanese experience) it will require massive inflation to keep the US economy from sinking into recession and deflation.

Along these lines, M-3, the broad money supply, was down $10.4 billion for the latest week ended June 21.

This morning the Sept. 30 year T-bond was up 1 and 18/32nds to 108.13. This was a new high on the rally that started on May 13, at which time the bond was selling at 101.24. So is the bond market thinking inflation or deflation? You make the call.

On the rebound from the 2000-2002 down-leg of the bear market, the Dow regained 78 percent of its losses, the S&P regained just short of 50 percent of its losses, and the Nasdaq recovered 26% of its losses. Conclusion -- the blue chip D-J Industrial Average put in, by far, the strongest performance.

In analysis, it often pays to see what the strongest stock average is doing. And below we see the story. This is a daily chart of the Dow. And the following are my observations.

The Dow failed to confirm the new recovery highs in the Transportation Average. Bearish.

The Dow chart depicts a series of declining peaks. Bearish.

The shorter (50-day) moving average turned down on March 9. Bearish.

The blue histograms at the bottom of the chart are just breaking below zero. Bearish.

RSI at top of chart rallied above it previous peak, unconfirmed by the Dow. Bearish.

My conclusion based on the action of the Dow is that this market is facing potential major trouble.

The next chart I want to show is a daily chart of the US dollar. This too, is not a pretty picture. Here we see the Dollar Index breaking below its June 8 low. We also see the (red) 50-day moving average new well below the (blue) 200 day moving average. Note that both of these MAs are now trending down, meaning the momentum for the dollar is to the downside. On top of everything else, the blue histograms are about to turn negative. As I said, it's not a pretty picture.

There's an irony in the current situation. The weaker the US economy, the more the need for the Fed to increase liquidity and the greater the need for the government to spend and run deficits -- both processes calculated to ward of the forces of deflation.

But the more the Fed inflates, and the larger the government deficits, the weaker the dollar. If the Fed and government are successful in warding off deflation, the dollar's fate is still in question. If deflation takes over, the international value of the dollar could cave in -- since deflation would crush the US economy and turn foreigners bearish on the dollar.

Either way, the dollar would be in danger. Which is one of the important reasons to hold gold.

As I see it, the US economy is showing signs of slowing down. This means that the Fed will be extremely hesitant to raise rates any further, particularly prior to the November election. The current low (1.25 percent) Fed funds make the dollar unattractive from an interest and income standpoint.

Thus, the whole stock market-US economy picture now seems to be in limbo, with the possibility that the stock market and the US economy could tip either way.

On this basis, the stock market remains both confusing and unattractive for retail investors. This is reflected in the current low volume on the exchanges. Nobody really know what to do, and this leaves the day-to-day trading to the hedge fund managers, program traders and the speculators.

-- posted by Normxxx

Top 15. Jul 8, 2004 8:00 AM

» Normxxx - Careful, quiet accumulation

Careful, quiet accumulation

By Richard Russell, Dow Theory Letters | July 8, 2004
Extracted from the July 7, 2004 edition of Richard's Remarks

The chart below is from Bill Gross's always excellent column on the Pimco site. Bill, who lives about 60 miles north of here, goes in for yoga and meditation and other mind-calming exercises. After studying this chart, you can see why Bill wants to stay calm -- since total credit market debt is now higher, as a percentage of US GDP, than it was back in 1929.

Consequently, Mr. Gross is afraid that this nation (and I'm referring to the US) is not exactly positioned for any unpleasant surprises. So what do we do? Well, I guess we pray that all upcoming surprises will be pleasant.

But wait -- just in case the next surprise is less than pleasant, it might make sense to hold a little (or a lot) of gold.

Everybody (naturally) is now jaw-boning about the coming election. So I think this is interesting. Since 1928 there have been 20 elections, and therefore 20 election years. Of those 20 election years, there have only been 5 in which the S&P was down. Which isn't that unusual, since it is well-known that the incumbent administration will do anything and everything possible, economically speaking, to ensure that their party will remain in power.

The five negative presidential election years were 1944 (S&P down 0.2%); 1952 (S&P down 2.1%); 1960 (S&P down 3.4%); 1976 (S&P down 0.5%) and the latest 2000 (S&P down 2.6%). In other words, the S&P has never been down more than 3.4% in a presidential election year (statistics courtesy of InvesTech Research).

The S&P closed the year 2003 at 1109. This morning the S&P was trading at 1116 -- up less than 1%. So in view of the above statistics, it will be instructive (and even fun) to see how this year ends. And remember, the S&P has never closed down more than 3.4% in an election year.

Let's see, what's our "chart of the day." How about the dollar? Today the Dollar Index broke to its lowest level since April 1. I've already written that the Dollar Index is in a "head-and-shoulders" top pattern, and it looks to me as though that bearish pattern is in the process of being completed.

The Dollar Index is now trading below its 200-day moving average (red line), and its 50-day MA has now turned down. The blue histograms at the bottom of the chart, after being weakly above the zero line, are now turning down.

<img Width="520" src="http://www.321gold.com/editorials/russel...">
http://www.321gold.com/editorials/russel...

The renewed weakness in the dollar has not been lost on gold. Today August gold surged over nine dollar to close above 400 -- again. On June 24 August gold closed at 403.50. This was the highest gold since mid-April. Therefore, I would consider any close by August gold above 403.50 as a technical plus.

I can't prove it, but after watching gold action since 1960 I have to rely a lot on my "instinct." My instinct (or is it my guts?) tell me that gold is under careful, quiet accumulation.

[Normxxx Here: DISCLOSURE: I am currently not invested in Gold, since I believe that there is more than the usual risk here of Gold heading sharply south again. If not, there should still be time to get on board. ]

-- posted by Normxxx

Top 16. Jul 8, 2004 9:03 AM

» Normxxx - More on Gold

More on Gold

The whole gold market is really loose right now, with so many cross currents pushing prices to and fro. This can be a tough environment to trade in, and so it may be one of those times to avoid trading rather than risk getting caught in a rip tide. Our expectation is for a negative outcome for the gold market, due to a number of factors, and also due to the likely reassertion of resistance for the XAU at the 50% retracement level. A better time to try and play the long side in gold is likely several weeks away, and it is better to live to fight another day than to try to swing at knuckleballs on a windy day.

-- posted by Normxxx

Top 17. Jul 8, 2004 10:15 AM

» Normxxx - Battle of the Titans

Battle of the Titans

By Bob Moriarty | July 8, 2004

Below the surface and well under the radar scopes of most investors, a monumental battle takes place between giant forces. We can think of inflation as the irresistible force and deflation the immovable object. For those with good memories, try this test from yesteryear.

What happens when an irresistible force meets an immovable object?

Unmeasurable energy.

Well, we better find some way of measuring this force and figuring out how to cope with it because as sure as God made little green apples, inflation is in the midst of an historic battle with deflation.

Even the well lettered often confuse themselves with the issue of what inflation is. Actually it may be more important to know and understand where inflation comes from. If we understand where inflation comes from, perhaps we can figure out the real problem.

Here's something you have never read before. With the exception of wartime periods, between 1783 and 1913, inflation was zero. Essentially we had no inflation. But as soon as the Federal Reserve system came along, here comes inflation. If you go here, you can compare today's dollars with those of yesteryear. Using the government's own figures, we can soon see that to equal the purchasing power of $100 in 1913, we would need $1840 today. All the product of the Federal Reserve system.

[Normxxx Here: On the other hand, we have largely eliminated the '30s style busts which were quite common from 1783 to 1913 (including the Panic of '07!) Also, the cost of things in labor time of the average skilled worker is about a tenth what it was in 1913! Only people on fixed incomes suffer from moderate inflation. ]

The cause is simple. In a fractional reserve system, even a gold fractional reserve system, all money is created by loaning money into existence. And the more loans you make, the more profit you can make. It is a perpetual motion machine. Just as long as you keep expanding the money supply (inflation) everything works. Or until people borrow far more money than they can afford to pay back. At that point the system implodes and deflation sets in as the money supply collapses.

There is another titan on the block. It's called derivatives and these are financial instruments which derive their value from other products. An option, either a put or a call on the S&P, would be an example of a derivative. Actually the S&P would be a derivative as well, the measure coming from the value of the individual stocks. And preparing a package of mortgages could be a derivative where the fixed rate mortgages are sold to one group of investors and the variable rate mortgages to yet another.

Up until August of 1971 the United States was on a hooker's gold standard. It was and wasn't a gold standard. Here in the land of the free and home of the brave, Americans couldn't be trusted to own gold, it was illegal. But foreign governments could and did make claims on the gold hidden in Fort Knox and the vaults of the NY Fed. When Nixon dumped the gold standard for all time, investors worldwide began to make bets on the day-to-day value of currencies and interest rates. For better or worse, one of the main functions of a gold standard is to create stability. And without a gold standard, the financial system of the world began to wobble.

In 1971 the total value of derivatives world wide was too small to measure. It was possible to buy puts and calls on common stocks but all trades were OTC and negotiated individually for each trade. It wasn't until 1973 that the CBOE even came up with the idea of standardized strike prices and expirations. Currency trading and options took place on a formal basis even later.

Today, the total value of worldwide derivatives, still mostly OTC and totally unregulated, is over $210 trillion dollars. This immense market consists mainly of interest rate-based instruments (89%) where even the issue of what constitutes a default is often in legal debate. The mere size of the market is so big (about 4.5 times the world's yearly GDP) that it is not "too big to fail" it is rather, "too big not to fail."

It should be obvious to anyone paying attention that the Fed has committed themselves to a destructive test of our financial system. (Which means for all practical purposes, the world's financial system). The Fed is going to print money at an ever-increasing rate until the system breaks. Where once the Fed attempted to manipulate interest rates and currencies in order to keep inflation at the desired rate of increase, it is obvious to anyone with eyes that now they just lie in all their figures. If you can't keep control of inflation, just lie about it, no one will notice.

But financial markets do notice and with the first increase in the Fed Funds rate now under their belt, the Fed has started a snowball rolling which cannot be stopped. And since the use of complex and misunderstood derivatives allows leverage to a degree never before in recorded history, the question is no longer, "Will the system fail?" But, "When will the system fail?"

The system will fail. It doesn't really matter how it fails, it will fail and gold will once more provide an alternative to government stupidity for those wise enough to see and prepare for a dismal future.

The note below came from a subscriber of Richard Russell and provides the best explanation of the inflation/deflation issue I have ever read. I wanted to share it with our readers.

From Richard's Remarks 7/6/04

Richard,

There are 3 aggregated balance sheets we need to track: government, corporate and individual. In the '90's one watchword was privatization, and one thing that was privatized was debt. Increases in government revenues at all levels went to increased spending (as in your own California) and to debt reduction. You may recall that Greenspan supported the Bush tax cuts on the grounds that federal government surpluses would eventually pay off its debts in full and force the feds to buy private assets. (Could he really have believed this?)

While governments reduced their debt levels in the '90's, corporations and individuals expanded their debts. In the corporate sphere perhaps the most bizarre expansion of debt was among corporations borrowing to buy back their own overpriced stock, instead of issuing new stock at historically high prices in order to reduce debt. (This was the economically irrational fruit of stock option plans, for the most part.) Meanwhile individuals borrowed for consumption and, to a lesser extent, to "invest." In sum public debt shrunk while private debt expanded.

Now corporate balance sheets are being repaired while individuals' debts continue to rise. "Luckily" the government has begun the process of re-socializing debt. Taxes have been cut while military spending increases and entitlement program spending starts to accelerate with inevitably expanding drug benefits and the coming drains on social security and Medicare from the boomers. It is clear that federal debt has only one way to go: up, and sharply up at that. As individuals hit the wall, as indicated for example by reduced expectations at Wal-Mart and Target and also by rising bankruptcy rates, the feds are stepping into the breach.

To oversimplify a bit, with no U.S. domestic savings the only buyers for government debt are abroad. Foreign individuals have already stepped aside, so that leaves foreign central banks trying to keep their own currencies from strengthening vis a vis the dollar. If the consumer stops increasing consumption (let alone reduces it), foreign trade surpluses stop increasing and their capacity to buy t-bills and t-bonds stops increasing. As the federal debt increases, then, the expanding supply can find only one home -- the fed. In a grand irony, Greenspan, if he's still around, gets to buy the debt he predicted would not exist. If the fed doesn't buy, then interest rates soar and we are faced with domino bankruptcies. This is the scenario that the fed has said it will avoid even if it has to resort to helicopter money. Of course monetizing the debt pushes inflation and weakens the dollar. Private debt is reduced in real terms, but it is not clear that private incomes will rise with inflation to the degree required to get the full benefit of that effect. The best part, of course, is that we get to repay those foreign holders of federal debt in lower valued dollars.

A financial accident might trigger a situation that leads to deflation, but if the economic process is allowed to unfold in stately fashion, it looks like inflation to me.

Best wishes to you from a devoted reader,

Jeffry Klugman

-- posted by Normxxx

Top 18. Jul 16, 2004 10:35 AM

» Normxxx - Drawing lines in the sand

Drawing lines in the sand

By Peter Brimelow, CBS.MarketWatch.com | 12:58 AM ET July 15, 2004

NEW YORK (CBS.MW) -- This appears to be a side-winding market -- but who is it going to bite?

Dow Theory Letters' endlessly creative Richard Russell wrote recently:

"I haven't written about lines for years. Robert Rhea, the great Dow Theorist of the 1930s, stated that a line existed when the Averages held within an area of 5 percent or less for an extended period of time. A line is an area in which either quiet accumulation or distribution is taking place. The problem is that we don't which one is the stronger. We have to wait, which means that we only know when the averages break out -- either above the line limits or below the line limits."

Curiously, this line seems to be an international phenomenon. The respected institutional service Bridgewater Associates said on in its Daily Observations on Tuesday:

"Looking around the world, it is hard to find many compelling bets. Most markets are discounting conditions that are at least reasonable, or close enough that you would have to squint to see the value. As a result, almost all markets are stuck in sideways trading ranges. Money is being made by trading against the trends when pricing reaches something approaching a misvaluation... Money is lost by following trends, which is what most people do."

Richard Russell, needless to say, is prepared to trade against the trend. He says:

"I'm going to break Rhea's rule, and jump the gun. I believe the averages will break out to the downside. I say this because my advance-decline line of the Dow is breaking down. I say it because my High-Low Index is deteriorating. I say this because my Big Money Breadth Index is weak. I say this because Lowry's Buying Power Index is in a "head-and-shoulders" pattern and is on the brink of breaking support -- at the same time Lowry's Selling Pressure Index hit a low on June 23 and has been trending higher ever since. I say it because the VIX [The Chicago Board Options Exchange (CBOE) Volatility Index ($VIX: news, chart, profile) has been low, indicating investors are complacent. I say this because the Dow ($INDU: news, chart, profile) has still failed to confirm the succession of new highs in the Transports. Lastly, I say it because we're in a primary bear market, and in a bear market most lines end up breaking to the downside."

Wednesday night, Russell added that "VIX tells me that nobody's buying puts, meaning that nobody thinks this market could be in trouble... Maybe I'm too far away from Wall Street.

"But Wall Street's having its own troubles. Merrill closed just off its low for the year, Morgan Stanley at a new low, Goldman just off its low, JP Morgan falling out of a 'head-and-shoulders' top today. Schwab absolutely collapsing..."

However, it's worth noting that another market veteran with a substantial Wall Street following, Don Hays of Hays Advisory, expects the break to be to the upside.

Under the pretty explicit heading, "Building a launch pad," Hayes recently wrote:

"Back in my old days when we were testing rockets in the Saturn V program, we had this neat count-down, and when it got to T-10 your alert senses really started to quiver. Was everything going to come off as predicted, as calculated? More times than not, they did, so the more you ran these test lift-offs, the more confident you became. That's a taste of what it's like to predict a lift-off in the stock market when you have a well-constructed platform of psychological conditions (i.e. Rydex ratio), monetary conditions (i.e. yield curve) and relative valuation (i.e. the IBES/First Call Model of relative valuation.)"

In June, Hayes argued with remarkable precision that we are in the second, sideways, phase of a new bull market that began Oct. 9, 2002: "I expect this second phase to last for 5-9 more weeks -- until the end of July, or maybe as late as the end of August."

Ultimately, Hayes expects "a super strong new cyclical bull market to emerge that will last until 2008, and excite investors as much as they became in 1999-2000."

No wonder Wall Street likes him!

-- posted by Normxxx

Top 19. Jul 16, 2004 5:57 PM

» Jas_Jain - Betting Against D Hays In Support of Russell ---Re: Drawing

In response to message posted by Normxxx:

--
Betting Against D Hays In Support of R Russell; FW: Drawing lines in the sand

Don Hays kept babbling about Baby Bull from Oct'01-Jan'02 when the worst of the decline still lay ahead. The S&P500 is below the level when he claimed to have given birth to the Baby Bull. Ever since that he has turned into a bubble-meister and is invited on various programs on Bull Marketing Entertainment Ticket that love bubble-meisters.

Richard Rusell, IMO, has been getting it right for the past several months that I have been reading his stuff. He also talks about the lack of interest in puts that I observed yesterday.

Jas
No Bull, None of the Time!

-- posted by Jas_Jain