the dow ~richard russell comments

By way of celebration for the resurrected HC but mainly because it's a bloody good commentary, here's RR's comments from last night.

July 21, 2003 -- It looks increasingly as though Saddam's plan all along was not to confront the US forces directly, but to disband and engage in guerrilla warfare. Saffire in today's New York Times explains it very explicitly. "Troop losses drove Clinton out of Somalia, Eisenhower out of Lebanon, Johnson and Nixon out of Vietnam." So why not troop losses driving out Bush and the guys.

Writes Saffire,"one or two troops killed very day will ultimately demoralize the Americans." Saddam's guerrillas helped by terrorist allies from Syria and Iran, hold the fearsome hope that Saddam will return. Saddam's crew will commit a series of murders of "collaborators."
"Inside Iraq, with Americans out of the way, the Shiite majority would split, and when the Sunni military seizes power in Baghdad, the troublesome Kurds would separate, thereby triggering a Turkish invasion of the north."

And so on. The Russell take -- Iraq is the size of California. It will be an almost impossible job to patrol the entire territory. The expensive (in lives, money and morale) war is on. The rationale for the war has fallen apart. And now the aftermath of the war is falling apart. Now you know why there's always a Plan B in war (I learned this in the ghastly Italian campaign during WW II). The reason you always need a Plan B in war is that Plan A never works.

On another subject, my ex-wife, Paula, just back from Sun Valley with her husband, reports that "everyone in Sun Valley was talking about 'Russell selling his bonds.'"

Was I right? Was I wrong? It will take a while to find out. I note the spread between the 10 year T-notes and the TIPS has widened to 1.94 today. The bond market is seeing increasing hints of inflation. Remember, there are two kinds of inflation -- inflation in prices and inflation in the monetary area. Certainly, we're seeing inflation in the monetary area.

The Fed is doing it, they promised to do it -- they promised to keep rates down as long as necessary.

According to Jim Grant's "Interest Rate Observer", the annualized rate of growth in M-3, the broad money supply is 6.2% for three months, 5.9% for six months and a fat 6.8% for 12 months. In other words, the Fed is pumping, and folks that's monetary inflation.

The Fed's idea is that this persistent pumping will not only offset world deflationary pressures, but it will rub off on the economy, in due time. And soon everything will be "normal," and prices of stocks and homes will continue to rise, and then corporations will start investing again. And then, by God and by Greenspan, the good old USA will be back in the money again.

Anyway, that's the theory. Will it work? It better, because stocks have already discounted it working, which is why the S&P is selling at a sky-high 32 times earnings while paying a pathetic 1.6% in dividends.

What if the Fed fails and the nation slips into deflation? What if -- despite all the liquidity being made available by the Fed, consumers cut back on their spending, and corporations repair their balances sheets instead of investing? What if the economy turns down, and there's a rush to cut debt and then -- the ultimate disaster -- borrowing becomes a dirty word?

What if the velocity of money turns down with a vengeance, which means that the economy is slowing and nobody's doing any business? Then what? If all the above comes to pass, I think what we'd see then is a widening split between the best-grade bonds and the lesser-grade bonds.

But even then I'm not sure how well the bond market as a whole would do. Because in the above situation the Fed would be pumping harder than ever to hold off the bear -- and our foreign bond holders (remember them?) would be nearing the "get me out of here" stage. In that case, even the best bonds could be heading south.

Let me put it this way. Bonds are a call on the future. The buyer of a ten-year T-note knows that he will get his money back in ten years -- if he waits the full ten years. But the question is -- with the Fed telling the world that it will degrade the dollar, how much in real purchasing power will a dollar be worth in ten years? Who the heck knows. Let's just say -- "less."

With the Fed on a tear to degrade the dollar, what will hold up? The answer, as my lawyer wife often puts it is -- "It's unclear."

Aw, in the end everything boils down to a flow of funds. In the markets, that means -- PRICE or as I've so often stated, FOLLOW THE MONEY.

So what's Mr. Money saying about bonds? I'm looking at my up-to-the-second chart of the 30 year T-bond. Half-an-hour after today's opening the bond is down 18 ticks or just over half a point. For the first time since June 2 the September 30 year T-bond is trading entirely below its 50-day moving average. Nearby support is the March 21 close of 108.11.

As I write, the September 30 year T-bond is trading at 111.26. As a test, let's see if the September long T-bond can hold above support at 108.11. Would the Fed come in and buy bonds if the long bond approaches 108.11? We might find out soon enough.

How 'bout that dollar, because after all the dollar's what we're all working for? The Sept. Dollar Index is selling today at 96.60. This is below its 200-day MA, which stands this morning at 101.17. The 50-day MA of the Sept. Dollar Index is at 94.67, so the Dollar Index is well above its 50-day MA.

As long as the Dollar Index remains in a positive trend, that will be a plus for the bonds, but if the Dollar Index drops below its 50-day MA, thereby turning bearish, we'll have another negative that will be bearing down on the bonds.

Remember, a nation's currency constitutes a barometer of the health of that nation. Thus, the long-term declining trend of the dollar is no particular source of comfort to me.

Now we're talking very long term. Long term? I'm sorry to say it, but I'm no optimist for the US over the long term. Not the way we're going. I'm an advocate of the "follow the money" thesis, and I'm also an advocate of the "follow the direction of gold" thesis.

Throughout history gold, which is real money, has gone to the strongest. That rule has held for thousands of years from Rome to the Spanish to the Dutch to the British to the US.

In 1971 Nixon shut the US's "gold window." He did it because we were losing so much gold, that Nixon took what he believed were emergency measures. From that point on, "the new paper society" was born. Central banks created all the liquidity they wanted, and the public was told that paper was money and gold was for "filling teeth." As Joseph Goebels put it, "Repeat a great lie often enough and people will believe it."

Which is where we are today. The great lie is that central banks can create wealth "out of thin air" and that gold is not wealth. This monstrous lie has provided one great advantage for the brilliant and highly sophisticated subscribers to Dow Theory Letters. Advantage? You bet -- it has allowed us to accumulate gold at rock-bottom, bargain, give-away prices. As I write, one share of the Dow will buy 25.96 ounces of gold. I've predicted that before this bear market breathes its last, one share of the Dow will buy around one ounce of gold.

Hey, isn't that great, isn't that fabulous? Well, it is and it isn't. It is because if you own gold you'll be able to buy a lot more of the Dow. And you'll probably be a lot better off than your neighbor. But if gold is say 3,000 bucks an ounce and the Dow is selling at 3000, then the nation is going to be in ragged shape, and your neighbor will probably have walked away from his house, because his house is now worth considerably less than his mortgage.

So let's consider true extremes -- bonds which ultimately pay off in paper or "junk" money created by the Fed. Or gold, which is pure wealth, despite what the central banks of the world would have you believe. Which is the better bet for the future?

I pick gold, and it's a crying shame, and here's why. If the dollar was "as good as gold," then we could buy bonds and receive a nice return, and never have to worry about our bonds as a "store of value." As it is, bonds are now just trading vehicles -- you buy 'em when they're cheap and you sell 'em when you've got profits. As I said, it's a crying shame.
Now the Fed with its policy of "inflating forever" has forced rates down to the point where we get literally nothing for being safe in T-bills, and we get an actual zero for protecting ourselves with gold, which is the only real unquestioned wealth.

We take what the markets give us. Today it's giving us dirt-cheap gold, and it's giving us a very questionable future in dollars and dollar-denominated securities. Ah, timing, timing, timing. When to buy gold and when to get out of dollar denominated securities?

As a guess, I felt it was time to get out of bonds, and I did it. I don't know exactly how the timing of gold is going to work, but I do know that we are in a primary bear market, and in a bear market good things don't tend to happen. Moreover, in this particular bear market the Fed, instead of allowing the excesses to work off, is piling new excesses into the economy.

In the end, the Fed will render the wind-up of this bear market a lot worse than it would have been otherwise. Ultimately, and sadly, I must report that the Fed and the whole "fractional reserve system" will create a far worse stock and bond market and a far more attractive market for gold. Of this I'm convinced -- it's only the TIMING that I obviously can't be sure of.

If I was certain of the timing I'd probably be 90% in gold and the rest in dollars or some other currency. But I don't know the timing, darn it, and I'm sorry about that. And I apologize. After all, you guys and gals pay me $250 a year to give you decent useable information, and I can't tell you the time of -- well, of the third phase of this bear market when, as the vulgarians put it, when "the sh*t hits the fan."

Nevertheless, I think what we'll do is just watch everything carefully, and as gold works higher we'll up our percentage of gold and gold shares and lower our percentage of other securities. In the meantime, I'm out of bonds and I've put the proceeds in T-bills. It's far from a happy solution, it cuts the devil out of the money coming in. I'm mad as hell about it --but hey -- the Fed made me do it!

TODAY'S MARKET ACTION -- Let me put it this way -- it was not a nice day. My PTI was down 8 to 5289 with the moving average at 5281. PTI remains bullish by 8 points.

The Dow was down 91.48, saved by MMM which was up 6.25 to 136.43. Without MMM the Dow would have been down around 137, but let's not adjust, let's just wonder whether those buying MMM today are going to be correct. Four Dow stocks were up today, 26 were down.

August crude was down .18 to 31.78. Jan. natural gas was up .72 to 5.65.

Transports were down 3.74 to 2572.55.

Utilities were down 4.03 to 233.56.

There were 835 advances and 2439 declines. Down volume was 78% of up + down volume.

There were 63 new highs and 26 new lows. My High-Low Index was up 37 to 6741.

Total NYSE volume was a shrinking 1.22 billion shares.

S&P was down 14.52 to 978.80.

Nasdaq was down 27.02 to 1681.48 on 1.44 billion shares.

My Big Money Breadth Index was down 10 to 684.

Sept. Dollar Index was down .44 to 98.38. Sept. euro was up .54 to 113.23. Sept. yen was up .09 to 84.49.

German DAX was down 79 to 3207. Sept. Nikkei was down 25 to 9470.

Bonds were clobbered -- Sept. 30 year T-bond was down a huge 210 ticks to 110.00 to yield 5.07%, high yield for the year. Sept. bellwether 10 year T-note was down 113 ticks to 113.03 to yield 4.17%. Fun may be over for bonds and for refinancing mortgages.

August gold was up 3.70 to 351.00. Sept. silver was up 2 to 4.75. Oct. platinum was up .40 to 685.00. Sept. palladium was down 3.00 to 167.96.

Gold/Dollar Index ratio was up 5.30 to 364.00.

One share of the Dow buys 25.91 ounces of gold.

The Gold advance-decline line was up 18 to 1170.

XAU was up 2.18 to 77.06. HUI was up 5.28 to 149.55.

ABX up .43, AEM up .24, ASA up 1.45, BGO up .08. GFI up .34, GLG up .43. HMY up .45. NEM up .87, RANGY up, RGLD up .41, WHT up .05.

Warning -- I'm reading a LOT of baloney and tech jargon about gold. Most of it is worthless. Forget the nonsense, we're talking about the primary trend of gold now -- and it's up. Gold has been and is erratic in its actions. The gold devil will try to keep you out of gold, and it will try to scare you into selling your gold. Ignore the gold devil and stick with the primary trend.

STOCKS -- My Most Active Stock Index was down a 13 -- to 215. The Index looks toppy.

The 15 most active stocks on the NYSE were -- NT up .07, NOK down .36, PFE down .85, GE down .61, LXK (Lexmark) down 13.91, AOL down .33, TXN down .78, HPQ down .84, JPM down .87, C down .90, TSM down.31, MOT down .29, SBC down 1.01, MU down .33, EMC down .01.

VIX was up 1.5 to 213.

McClellan Oscillator was down 70 to 233. This baby is very oversold and staying oversold. Not a good omen.

CONCLUSION -- If you're a bear, well, today was a start. If you're a bull, maybe this is just a dip -- and after all, the market was severely overbought. So we don't really know yet.

I'd say that if the S&P closes at 970 or lower, the top is in, and the stock market is in trouble, maybe major trouble.

You know the old Wall Street adage, "When in doubt, stay out." Call Richard Russell "in doubt." Well, in doubt about the secondary trend. As far as the primary trend -- it's a bear market, and before you all are old and gray, you'll see values in the stock market you won't believe.

The bigger you blow the balloon, the more air there is to let out when she finally pops. And despite Mr. Greenspan's hopes and wishes, Greenie, believe me -- she has popped.

By the way, Fannie Mae broke down today, down 1.45 to 65.32 at the close. Now that can't be good, can it?

Let's see what tomorrow brings,

Your obedient servant,

Russell

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Russell Comment -- Let's see, where's the US Empire located today? Here's a partial list of our 255,000 troops that are located abroad, and just where they are located. UK -- 14,000; Germany -- 71,000; Italy -- 11,900; Bosnia and Herzegovina -- 8,300; Saudi Arabia -- 4,800; Kuwait -- 4,300; Afghanistan -- 7,500; South Korea -- 38,000, Japan 39,700. Iraq 148,000.

The US spends $399 billion a year on defense. That's as much as the net 20 nations including Russia, China, Japan, UK, France, Germany, Italy, India, Saudi Arabia, and others. A lot of nations have tried this. I think they ended up with their currencies in the poor house.

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Happy many returns and congratulations Mr. Russell!!
I wish you a wonderful day and especially a great celebration of your 79th Birthday, you deserve it as everybody does who has a fulfilling life and enjoys it without regrets!

I would like to thank you so much for your advise to buy and read Richard Duncan`s excellent book "The Dollar Crisis". I can only hope as many people as possible are going to read it!

With all my best wishes from a beautiful village in the middle of Switzerland

Freddy Vontobel

Russell Comment -- Thanks Freddie, and subscribers, please read this book!
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Below is just a small sample of a most fascinating conversation between Jim Rogers, Marc Faber and Daniel Gergen. The full piece is a very long one, and it can be seen on the site below, and if you have the time I highly recommend it.

http://www.financialsense.com/transcriptions/Riverside.htm


MARC FABER: I think what is happening now is that the Fed is pumping money into the system, that boosts consumption in the US and it leads to a credit bubble. But the production doesn’t grow in the US. But, it grows in China and Vietnam and India and other places. We have actually a Fed policy that is designed to almost impoverish America and transfer the wealth to countries that are producing the goods that are then consumed in the United States.


DANIEL YERGIN: Do you all believe that China will eventually be the low cost source for everything?
MARC FABER: For manufactured goods, there is only one country that can compete with them at the present time and that is Vietnam. But, for commodities and especially for agriculture commodities, they have a water problem. There is not enough water in China. So that they will have to import. Plus, the Chinese are very smart. They are not moving the heavy artillery throughout the world. What they do is become very good customers of other countries so they gain economic influence in countries like Indonesia, Myanmar, Australia, all the African countries. So they will have their connections throughout the world and suddenly it will be a huge geopolitical power. Huge.

JIM ROGERS: They are the largest customer in the world now. Everybody tries to be nice to their customer. That is the best investment advice I could give you [Dan]. You, although I want investment advice, teach your children Chinese.

DANIEL YERGIN: My son is about to go to college, his freshman year. He has already determined he wants to learn Mandarin Chinese his first year. I told him to wait till his second year.

JIM ROGERS: Whatever he wants to do. I hope my new daughter learns Chinese. I hope I learn Chinese.

MARC FABER: You should open an English school in China. They all want to learn English so they can work and do business with Western Countries.

JIM ROGERS: I could do both. I could have a school in China for foreigners to learn Chinese and I can teach the Chinese English.

DANIEL YERGIN: So you say the reason to learn Chinese is because that is where the world economy will be moving?

JIM ROGERS: I own the Yen. I own the Euro. I own the Singapore dollar. I own the Australian. I own a lot of currencies. But I don't like any of them.
MARC FABER: That is because you are a rich, young man. But there are people of more modest means, who may only have a choice of one currency. So I look at it this way. We have in the world four major currencies. The Dollar, Euro, Yen, paper money and one hard currency: Gold. And then we have one more future major currency. It is the Chinese RMB. The Chinese RMB is the soundest currency in the world in terms of paper money. Gold is the only currency where the supply cannot be increased indefinitely. In other words, it cannot be monetized.

DANIEL YERGIN: Why is the RMB the strongest currency? Because of the reserves they hold?

MARC FABER: It is the soundest economy in the world at the present time. Last year, the Americans print money. Industrial production here is flat to down. No investment activity. But in China, industrial production is up 19%.


JIM ROGERS: The 19th century was the century of the UK. The 20th century was the US. The 21st century is going to be the century of China, whether we like it or not. Asia is certainly booming and that's where I would be putting money. Every week I move money out of the US.

Russell comment -- The above are just snippets from this outstanding and informative conversation.