Richard Russell Comments

Trying to bring back the focus to the markets here...
AnnaP

Members' Area - Richard's Latest Remarks





November 1, 2002 -- Hey, you want to know the great irony of economics today? Here it is -- every nation in the world is dying to sell is goods and merchandise and commodities to the USA. And the USA pays all these poor bastards with junk paper money that is created out of thin air, created by our very own Federal Reserve.

The question is -- how much longer can this go on? How long will our overseas friends go along with this charade? I really don't know. But I do know one thing -- sooner or later this ridiculous trading will come to a halt. Sooner or later people and nations are going to demand something real in return for their goods and their merchandise and their commodities.

Say hello to gold.

I think a year or two years or maybe five years we'll be looking back at 319 dollar gold, and we'll be saying to ourselves, "Where the hell was I? Where was I when gold was selling like dirt for 319 dollars an ounce when the world was being flooded with hundreds and billions of dollars of credits. Why did I believe the Fed when it told me that gold was garbage and dollars were money?"

And so it goes. It reminds me of a story told about Einstein. Einstein was asked about infinity. He thought for a moment and said, "There are two things that are infinite -- space and human stupidity."

He's another irony. The dollar is weak. Today the Dec. Dollar Index broke to it lowest level since July. The 50-day moving average of the Dec. Dollar Index (107.70) has turned down, and the Dec. Dollar Index has plunged far below its 50-day MA. As I write the Dec. Dollar Index is at 106.02.

What does a country do to defend its currency? It raises rates, making its currency more attractive. But the US economy is so weak that it's now a "given" that the Fed next week will lower rates by a quarter of a point or possibly a half.

Meanwhile, as I write this morning Dec. gold was up 2.50 before falling back. Question -- why aren't the gold shares surging instead of reluctantly ticking higher? My opinion -- the gold shares have been whacked so many times, they've been battered back and forth so many times -- that investors don't trust them to move higher with gold. In fact, deep in their hearts investors don't trust the whole gold situation.

Big money, serious money, multi-million dollar money wants the metal, they want the safety of actual gold. When you hold gold you hold pure wealth that's ultimately beyond any government or government regulation to destroy.

Gold shares are different. Gold shares are common stocks. Gold shares are mining operations. Gold companies can be confiscated by nations, they can be trampled by regulations, they can be battered by rebel forces, they can be subject to mine problems, they can be taxed, and like AEM they can watered with the issuance of additional shares of stock.

Me, I like both. But I'm not kidding myself. Gold, the metal, is at the base of the wealth pyramid. Gold doesn't tarnish, it doesn't go out of style, it is our great barrier against the Fed's obsession with creating paper junk money.

Gold stocks are a great speculation when the metal moves higher. Many mines, particularly mines with low-grade gold, have big leverage when the price of gold rises.

As I see it, it's going to take time, maybe a lot of time, before investors believe that the bull market in gold is for real. In the meantime, as in all bull markets, gold will try to climb as high as it is able while NOT ATTRACTING the crowd. Remember, most of today's money managers were not around during the '70s. They've never seen a bull market in gold. And for the last 20 years, all they've seen is gold being bad-mouthed by the believers in fiat (paper) money.

OK, let's turn to the stock market. It seems to me that the market is very "sticky" on the downside. Just as the stock market has looked unimpressive on the advance from the October 9 low, the market has also looks unimpressive on any of its attempts to decline.

Here's what I think may be happening in the stock market. First, you have to realize that the one thing that money managers cannot afford to do is miss a big advance. They can take a beating with the "rest of the guys" as they've done all along. After all, everybody's "done lousy" in this bear market, "so I just lost with everybody else."

But you cannot miss a rally. You've got to be in there when the market's on a trip to higher levels.

And now we're moving into that well-advertised six-month period from November 1 to April 30 when the market "almost always moves higher."

Furthermore, we're in the "mid-term" of the well-advertised "Presidential Cycle." The mid-term is the second year of the Presidential four-year term. If you can catch the low of the Presidential cycle you are "almost guaranteed" profits in the coming year or so.

In fact, going back to the year 1914, from the low of the Presidential Cycle the market has always advanced, and the average advance in the Dow has been 50%. This year, 2002, is the year when the Dow should generate that magic low, the low which has sent the Dow up an average of 50% since 1914 without a single exception.

I believe that this is the reason we are seeing strength here and a reluctance to sell. The thinking here is that the market hit its low either in July or more probably in October, and from here on it's a "free ride" to higher levels courtesy of the Presidential Cycle.

On top of everything else, we have the 20 year cycle series of lows, including 1942, 1962, 1982, and this year 2002.

Question -- What should we do about it?

Answer-- I've already suggested that subscribers but ETFs ( Exchange Traded Funds) including DIAs (Diamonds which are proxies for the Dow), SPYs or Spyders (proxies for the S&P Composite) or QQQ (Cubes or proxies for the Nasdaq).

Of the three, I prefer DIAs since it find it hard to believe that any advance will not include or even feature the Dow.

For those who have already bought the Diamonds, I'd say hold them. For those who have done nothing, I'd say that it's worth buying some Diamonds.

The period ahead should provide a most interesting test of the strength or weakness for this market. As I said, the average advance in the Dow from the low of the Presidential Cycle to the ultimate high has been 50%.

The worst performance since 1914 was the 23.4% rise in the Dow from the December low of 1930 to the high recorded in February of 1931 (of course, those were bear market years).

The best performance was the 81.2% rise from the low of Dow low of January 1986 to the high recorded in August of 1987.

Item -- My PTI has been bearish (under its 89-day moving average) for the last seven months or ever since in broke below is MA last April. As of yesterday the PTI was at 5223, just 15 points below its moving average which stood yesterday at 5238.

It wouldn't take much for the PTI to advance above its moving average, thereby turning bullish. For those who have bought the Diamonds or who are now buying them, a bullish PTI would go a long way to confirming that you are on the right track.

So question -- should you play the Presidential Cycle? It's up to you. For those who want to trade, this is probably as good a time to trade as any. How many diamonds should you buy? Buy the amount of Diamonds you feel comfortable with.

TODAY'S MARKET ACTION -- My PTI was up 6 to 5229, just 9 points below its moving average, which stands at 5238.

The Dow was up 120.61 to 8517.64. There were no movers in the Dow today, but 24 of the 30 Dow industrials were higher. Furthermore, the Dow has assumed the pattern of a "head-and-shoulders bottom" A breakout to the upside could take the Dow to its 200-day MA, which today stands at 9293.

Dec. crude was down .09 to 27.13.

Transports were up 55.61 to 2315.68.

Utilities were up 1.50 to 199.75.

There were 2324 advances and 898 declines. Up volume was 75% of up + down volume, not a powerful day but we haven't had any powerful up-days on this entire rally -- and yet it keeps going.

There were 32 new highs and 39 new lows. My High/Low Index was down 7 to minus 8299, a new low.

Total NYSE volume was a contracting 1.45 billion shares. Institutions not yet coming in.

S&P was up 15.23 to 900.99.

Nasdaq was up 30.96 to 1360.71 on an expanding 1.82 billion shares. Investors believe they're seeing bargains in tech -- as Nasdaq volume expands.

My Big Money Breadth Index was up 4 to 727.

Dec Dollar Index down 55 to 106.27. Dec. euro up .70 to 99.41. Dec. yen up .32 to 82.00.

Dec Nikkei up 135 to 87.55.

Bonds lower; Dec.30 year T-bond down 10 ticks to 110.11 to yield 5.02%. Dec. 10 year T-note down 15 ticks to 114.08 to yield 3.97%. Dec. muni futures down 3 ticks to 106.30.

Dec. gold closed up .80 to 319.20. and above its 50-day MA, which stands at 318.10. Gold now on a "buy" signal. Dec. silver down a penny at 4.49. Jan. platinum was up 5.80 to 577.60. Dec. palladium down .75 to 309.75. As for me, I bought more kruggies at the close today.

Gold/Dollar Index ratio was up 2.35 to 300.42 and climbing well above its rising 50-day MA, which stands at 295,00.

XAU up 2.97 to 66.41. HUI up 4.74 to 155.53. The 200-day MA for HUI is 111.13, and HUI is above it. The upside target for HUI is to climb above its 50-day MA, which stands at 121.16.

NEM up .76, PDG up .33, ABX up .45, AU up 1.99, AEM up .28, GFI up 85, GG up .28, GLG up .39, HGMCY up .90, MDG up 83.

All 18 gold shares that I monitor were up today. Gold A-D line at a high of 1036.

STOCKS -- My Most Active Stock Index was up 9 to 202.

DIA up 1.55 to 85.39.

The 15 most active stocks on the NYSE were -- THC down 1.75, AWE up .72, GE up .10, HCA up 1.74, C up .54, EMC up .33, AOL up .40, PFE up .37, T up .48, T up .48, HD down .48, XOM up 1.00, GPS u .68, CPN up .27, TXN up .93, HI down .44.

A few more -- GM up .77, DCX up .62, KSS up 2.55, COST up .61, WMT up .100, CSCO up .43, AXP down 12, AIG down .70, GS up 1.85, MWD up 1.47, EBAY up 1.55, MOT up .25, DELL up .37, DD up .86, MO up 1.66, QCOM up 1.15, MMM up 1.11. CAT up 1.26, DIS up .33, KO up .35, EK up .63.

VIX coming down at 33.98 today, meaning option-writers are less worried.
McClellan Oscillator jumped up to plus 170 and getting near to overbought. But market should be OK as long as the Oscillator is in plus territory.

CONCLUSION -- Market acts like it's tired of being bearish. Yeah, you can get tired of being a bear, and that may be what's happening. Bear markets, like bull markets, inhale and they exhale. This bear market may be ready to exhale. Ahhhh, let your breath out -- feels good after months of inhaling.

If you want to play the upside, keep it simple, very simple. Just buy those Diamonds (DIA) on the Amex. They're all you need. If you already bought 'em -- hold 'em.

Have a great weekend, but don't overdue it. As my mother used to say, "Everything in moderation."

Mom drank a little, smoked very little, quit smoking when she was 40, ate what she wanted when she wanted, hated exercise -- and lived to be 92.

What was her secret? Moderation (and er, great genes). She was a blue-eyed, blond beauty. But when she was 90, she looked in the mirror and said, "I've had enough. I don't like my looks any more, and I never wanted to live this long anyway." Mom took to her bed at 90, lost interest in the world, lived on as little as possible and died two years later. I asked the doc what she died of. He said, "She died because she had enough, no disease, no health problem at all, she just had enough."

As for me, I feel fine, am cutting way down on the carbs, and still very interested in the world and everything in it. Looking forward to Thanksgiving when my wandering boy, Ryan, finally returns -- he's been traveling for a year and last heard from in Prague, where I gather he's having a hell of a time. He writes that he met a terrific Dutch girl in Portugal, and he's going to see her before heading home. Ah to be young, six foot two, handsome and adventurous. Makes me wish I could do it all over again (although I'd prefer to skip WW II).

Signing off --

Russell


The e-mail below is most interesting and most important. The writer believe that we're already in a state of hyper-inflaltion, and he presents a damn good argument to that effect. His answer for you and me -- GOLD.

Subject: Trade Reparation, Hyperinflation and Gold

Dear Richard,

I feel honored that you would share my thoughts with your other subscribers. Some of my ideas may seem to come from a bit of a different angle than your typical American subscriber since I am an ex-pat of some 25 years now and lived in Japan during their roaring 80's, almost a mirror image of the roaring 20's in the U.S. I feel a hundred years old.

It is more than evident now that the world financial system is coming to a crossroads that will result in a complete and total overhaul not dissimilar to a Bretton Woods. The magnitude of credit and debt creation, manipulation and pure speculation in thousands of different markets worldwide is beyond anything we can comprehend. The size of the numbers speak for themselves. If history tells us anything, war will be a part of the mix, unfortunately.

What follows has been bothering me for some time now. It is something that most people may find absurd or maybe a bit nonsensical, but then again there is a lot of that going around nowadays. Let me speculate....



TRADE REPARATION, HYPERINFLATION, AND GOLD


In early 1923, German railroad workers went on strike for an increase in weekly wages. They were asking for much more than the 2,500,000 marks they were presently earning. A few days later they settled on a 9,000,000 mark weekly wage. A week later their 9,000,000 marks bought less than the 2,500,000 marks they were earning a little over a month before.

Yes, this was the infamous hyperinflation of Weimar Germany in 1922-1923. When shops would close and update their prices hourly and higher. When an old lady would have to bring a wheelbarrow of billions of paper marks to buy an apple, only to be mugged beforehand and have her wheelbarrow stolen from her. When the German mark was used as wallpaper or toilet paper. How could this happen?

Simply. The Germans lost the First World War and the allies handed them a reparations bill (132 billion gold marks) that they couldn't pay. Not only did the allies demand payment for damages, but also imposed restriction on German industry, even annexing parts of industrial Germany to Poland. Germany fought back by suspending payments in gold in order to expand the supply of paper money and pay for the war with fiat currency. By 1921 the German mark had plunged to being worth only one-third of a cent on foreign exchange markets. This didn't stop the German government from running up huge budget deficits and putting more marks into circulation. War reparations were destroying what little was left of Germany after the war, and laying the
foundation for what was to be the greatest hyperinflation of modern times.

Then, in 1923 French troops moved into the Ruhr industrial area of Germany, closing down factories in order to squeeze the gold out of the Germans. The Germans did the only thing they could and printed billions of marks to put up whatever resistance they could. The Reichsbank commissioned 2,000 printing presses to print around the clock in order to keep up with demand for the fiat paper money. Money was literally given to the people to spend in the confines of a complete socialist, welfare state. The mark fell from 20,000 to the dollar to 4,200,000,000,000 (that's trillion) to the dollar in a short period of nine months. The cost of an egg went for a quarter of a mark in 1918 ... to 5,000 marks in July, 1923 ... to the absurd cost of 80 billion marks three months later. It all ended when the mark was scrapped for a new currency called the rentenmarks which had a face value of 1 trillion of the old marks. Of course, Germany never really recovered and the economic landscape resulting from the hyperinflation of 1923 consequently brought Hitler to power. And we all know the rest of that story.

In retrospect, Weimar Germany, absurd and nonsensical as it was, clearly illustrates what actually can happen when a country is bankrupted and cornered with no way of offering anything of value to pay off its bills.


Fast forward to 2002. I hate to say it, but there is another Weimar Germany in the making and nobody wants to talk about it. Nobody! It has come about over such a long period of time and the bankrupting and cornering is being done so slowly and covertly that nobody notices or doesn't want to know. Nobody believes it can or will happen.

For the month of September, 2002, the U.S. racked up a record trade deficit of over 38 billion ($38,000,000,000) dollars. Not 3.8 billion. 38 billion! At this rate, the US is going to record a trade deficit of over 400 billion dollars just for this year alone. This is absurd.

To put this another way Richard, as you like to do: This is like all Americans cummulatively swiping their AMEX card at the BIS (Bank of International Settlements) each and every month to the tune of $35 billion plus. And, we've been swiping this card for over thirty years now. But since its an American Express (not GOLD) card, we never have to pay the debt back.

Why? Because it is NOT a GOLD card. It it were, we would have quit swiping long ago. These are hyperinflation numbers and the wheelbarrow would again be a hot commodity if these figures were taken to press. But they aren't.

At any rate, the debt ends up as just a bunch of digits recorded on a hard drive somewhere at the BIS in Switzerland and the Treasury in Washington. Month after month we receive goods and services free from the rest of the world and Greenie's niece at the BIS keys (Keynes?!) another 35 bil. on the debt side of the U.S. Treasury ledger into the computer. Our creditors just keep hoping that someday they will be allowed to cash out those digits into something of real, tangible value.

But the day is coming when our creditors are going to need the cash and cash out they will. Or it will be War. And the demand for payment, or Trade Reparations, will unmask the inflation that the FED and the U.S. Government has attempted to hide from us all -- for generations.

We already have hyperinflation, they just haven't had to crank up the presses yet. The trade deficits and all the monopoly-money, digital debts we have piled up are going to be paid back in cheaper, hyperinflated dollars. The numbers tell us hyperinflation.

The tide has already changed. U.S. credit is no longer good for 30 years; the 30 year bond is dead and illiquid. The 10 year bond is suppose to be the benchmark, but almost all monies raised by our government are in the shorter maturities, usually no longer than two years out. U.S. corporate debt for all practical purposes is junk. A bit more on the downside on Wall Street and everybody will be getting into cash, the little of it that exists.

The clock is ticking, the war is on, both inside and outside the country. Another election, another crisis. A lower, lower dollar. No more AMEX, no more swiping, no more Greenie, and no more credit. When it comes, it just comes, Weimar just happened..... and GOLD just sits there patiently waiting for all takers...

All the best,

JD

Russell Comment -- in case you're confused, JD is saying that the US extension of digital credit ("monopoly money") has been so enormous that it can be compared to the the historic inflaltion of Weimer Germany. And you know something, I'm afriad he's right. By the way, the great German inflation of the 1920s set the stage for the arrival of Adolph Hitler and the Nazi party.

I've said this before and I'll repeat it -- the installation of the Federal Reserve and the removal of gold from the US currency will turn out to be two of the greatest disasters ever to befall this great nation. If the Founding Fathers could see the damage the Federal Reserve and the removal of gold have done to this country, they'd be turning in their graves.


Jack Welch, a hero a year ago, is now seen as symbol of corporate greed. Sooner or later somebody's got to put an end to the ridiculous, outrageous sums of money plus perks that executive are pulling out of corporate coffers. After all, these are public companies owned by their stockholders, not personal fiefs for corporte executives.

Jack Welch, former head of GE retired with six residence in three states worth $30 million. He has security accounts worth $249 million. He has investments in limited parternships worth $14 million And he has GE non-qualified stock options worth $72 million. Welch has total assets of $456 million and a monthly income of $1.4 million.

Kinda digusting, thinks Richard Russell