Richard RUSSELL Says. . .: 12/2005: RICHARD RUSSELL

» Normxxx - 12/2005: RICHARD RUSSELL

By Richard Russell | 3 January 2006
http://www.dowtheoryletters.com

The US is losing its manufacturing base to China. A huge migration of hundreds of millions of Chinese is moving into their coastal cities, and that means that Chinese competition for manufacturing will be increasingly intense as these people seek work, any kind of work, any kind of wages. The operative fact is this— WE ARE LOSING OUR MANUFACTURING BASE— PERIOD.

Now we are starting to lose our service base. Company after US company is outsourcing its back-office work to India. Large corporations like Google and Microsoft are increasingly turning to India for research as are many medical companies.

China and India are now graduating far more engineers than is the US. All of Asia is coming alive and ready to produce and create— at 10 percent of what it costs here in the US.

So China and India and Asia are producing manufactured goods and services at terrifically competitive prices. And what is the US producing? Basically— Federal Reserve Notes. Really, then why is the standard of living in the US STILL SO HIGH? The reason is that the world still accepts Federal Reserve Notes (US dollars) as the reserve currency, created by the Fed at no cost and in any quantity that the Fed desires.

Yes, China and India and Asia's central banks are also producing junk paper money. But the difference is that they are also producing something of value and relatively speaking, we are losing— we're losing in manufacturing and we're losing in services.

The investors of the world are not stupid. The markets of the world are not stupid. They see the inequities that I've described above. They see the writing on the wall. The writing on the wall says that paper money is doomed because there's nothing behind it. All balloons eventually deflate and the world's paper money system is a balloon— full of propaganda, hog wash and hot air.

And suddenly, the great unconscious of the investment world is saying, "All paper is sinking in purchasing power, it's time for me to accumulate true wealth. True wealth is gold. And that, in one sentence, is why gold is rising. Seasoned, experienced, history-wise investors know the great secret— TRUE WEALTH IS NOT PAPER— IT'S GOLD. The great secret— gold is not rising solely because of inflation, gold is rising because faith in fiat money is declining..

Once an item is in a bull market as gold is now, at some point people start asking, "What's going on? What's happening? Why is gold rising day after day?"

At that point, and we are not there yet, the process speeds up. More and more people come up with answers. And the answer is— "Fiat paper is a fraud. I'm working for something my government can manufacture with no sweat, with no work, with no creativity— with just a click of some damn computer. Listen, I want real money for my work. I want gold."

I read dozens of advisories every day. Most are bullish on the US economy, and most are bullish on the US economy for 2006. But literally none are talking about what I've talked about above. I've said before that the Achilles Heel for the US is the dollar. Currently, the dollar has been strong. It's been going up against its two major competitors, the euro and the yen. Of course, the reverse side of the strong dollar is that the new "expensive dollar" is going to kill our exports. As the dollar rises, US goods for export become more and more expensive.

But somewhere ahead as the economies of the world take in the fact that the US is losing both its manufacturing base and its service base— the world will realize that the US has become a "a tissue-thin, paper-tiger economy."

When that realization takes place, there's going to be a panic to get out of dollars. This will trigger the third phase of the gold bull market. And that, dear subscribers, will be something to see.

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-- posted by Normxxx