Not much of substance in it that we haven't seen before but I did promise to post it...
November 15, 2003 -- There are a few times in an investor's life when the opportunity for huge profits lies ahead. Such periods in the stock market occurred in 1932, 1942, 1949, 1974 and 1980-82. People who loaded up with common stocks at those times and held those stocks made fortunes.
I believe another such a time is now. And I'm referring to the current young bull market in gold. Subscribers who have been with me during recent years were urged to buy gold stocks back in 1999. Those who did buy the suggested gold stocks and held those stocks now have substantial profits.
I believe that fortunes will be made in the years ahead by those who are now establishing major positions in gold and gold shares. I've said this a number times before, but I want to repeat it --
These primary moves last longer than anyone believe possible -- and they take the items higher than anyone thinks possible. We're now in a primary bull market in gold.
I believe gold (and very probably silver) will make fortunes for those who now take major positions in the precious metals.
I want to repeat something that a prominent Wall Street millionaire told me half a century ago -- tough words that I never forgot. "Russell, my boy" this gentleman offered, "Do you know why stock brokers never make big money in a bull market?"
I confessed that I didn't know."
He answered, "They don't make big money in a bull market, because they never believe their own bull shit."
In other words, the brokers tell their clients "what a great market this is," but they're just blabbing. If they really believed that it was a great market they'd be loading up on stocks themselves, which if course, they never do.
So this is my position -- I believe gold below and even somewhat above 400 dollars an ounce is dirt cheap. In view of the amount of Fed-generated fiat paper that will have to be churned out in coming years (it will be in the multi-trillions of dollars), gold is the cheapest thing around. The US government, states, cities, corporations and individuals are currently loaded with $32 trillion in debt. On top of that, the US government has additional unfunded liabilities of around $44 trillion, all of which will have to financed.
For these reasons, it's my thesis that gold at $400 an ounce is ridiculously cheap. As a comparison, gold today is less than half the price it was at its 1980 high.
I believe three or four or five years from now we'll look back at today's price of $400 dollar gold and ask ourselves, "Where the devil were we? What were we thinking about? Gold at $400 was cheaper than dirt. What didn't we recognize this back in the year 2003?"
As I see it, this is one of those rare times in an investor's life when he can buy an undervalued asset at a bargain price. This is a time when you can buy real money with fiat paper. At this time you can buy real money, gold, with "junk" fiat paper which is created "out of thin air" by the Federal Reserve.
Big profits have already been made by those who bought gold and gold shares two or three years ago. But that is nothing compared with what I see ahead -- as the bull market in gold moves on. We are now in the accumulation phase of the gold bull market, This is the phase where seasoned, knowledgeable investors build their positions -- even while the public and most neophyte "investors" are either ignorant of what's happening or at a time when the public actually dislikes the very product which could make them a future fortune.
But the secret to all this is the necessity to ACT. Knowledge is wonderful, but in this business, knowledge isn't worth a damn unless you have the courage to "pull the trigger" -- to ACT.
I've listed gold stocks and gold and gold funds until I'm dizzy, until some subscribers have written to tell me that I should "get off gold," that they're tired of hearing about it. So, dear subscribers, it's now up to you. Bull markets are great, knowledge is great -- but there's no substitute for acting. Act, act, act. ................................................................
There's something else that has been festering in this brain of mine, and I want to tell you about it. It underlies a lot of what's been happening over the last six or seven years. Here's the weird story, as I untangle it.
Back in late-1996 Fed Chairman Alan Greenspan noted that stocks were becoming expensive and the market was becoming "frothy." That was when he issued his famous "irrational exuberance" warning.
But stocks continued higher despite Greenspan's widely-advertised warning. Then, incredibly, Greenspan ignored his own warning and "bought" into the thesis that we were living in a new tech world, and that valuations were no longer a serious consideration. In fact, spouting his thesis of "productivity," Greenspan actually became a cheerleader for the last, crazy years of the great bull market.
When the market collapsed during 2000 to 2002, Greenspan finally recognized the seriousness of the situation -- worse, he realized how stupidly wrong he had been as a cheerleader for the biggest speculative stock market bubble in US history. Greenspan later lamely explained that bubbles can only be recognized after they had burst. This brought a laugh from Wall Street sophisticates.
But Greenspan knew what to expect after a great speculative bubble bursts. Greenspan has little instincts for the markets, but he does know his market history. After a great speculative bubble bursts, history tells you to expect a recession or worse.
What to do? Greenspan knew that if a recession hit, he would be blamed for it, blamed because instead of raising stock margins back in late-1996, instead of raising interest rates, instead of pressing against the wind as he should have, he opened the floodgates of money creation and allowed the bull market to literally "blow its top." Thus, Greenspan knew that his reputation would be destroyed if a recession and probably a severe recession hit, following the stock market collapse.
So to protect his legacy, Greenspan decided to "hold off the bear," at least hold off the bear until he was out of office. This would require driving interest rates down to a 45 year low, holding them there, and flooding the system with the greatest ocean of liquidity in US history. This, decided a desperate Greenspan, would save his legacy. As background, Greenspan would justify his position by insisting that the US was in danger of dreaded deflation, and that he, as chairman of the Fed, was there to see that it didn't happen.
That, I believe, is the REAL story of the last seven years. Many analysts believe that Greenspan, politician that he has always been, has opened the monetary floodgates to ensure the re-election of George Bush, Jr. I don't think that's the real story. I don't think Greenspan gives a damn about George Bush. I think Greenspan is thinking of his own screw-ups and his own legacy. And that's why the market, following the October, 2002 low, has recovered as it has, and why this nation has built this monstrous edifice of debt.
At any rate, that's how Richard Russell sees the picture. And believe me, it's not a pretty picture. It's a picture that has been drastically worsened to save the legacy of one man, Alan Greenspan.
And that's all I have to say this weekend --
Russell .............................................................................................................................................................
The Daily Reckoning PRESENTS : As men move, so do markets. The public's willingness to "submit to the servitude of credit" is at an all-time high...and it does not bode well for the U.S. economy.
THE PSYCHOLOGY OF CREDIT AND DEBT
By Wendy Raffel and Robert Folsom
It's hard to shock people with numbers these days, especially when it comes to debt - so many folks have so much of it. An eight, nine, or ten-digit figure just doesn't impress...unless it relates, somehow, to "what will happen to me."
So let's assume that you already know there's "a lot of debt out there," and that you want to get right to the "me" part. Some patience, please; the "me" part is clear only in the context of "us"...us being the mass psychology that actually created the epic debt bubble.
Consider, therefore, a few facts about "us" - * Americans paid out approximately $63 billion dollars in credit card interest alone in the year 2000. * Undergraduate college students carry an average of three credits cards which total an average balance of over $2,000, reports the Louisiana State University's study of Youth Financial Literacy Statistics. * According to the same study, academic administrators say they lose more students to credit card debt than to academic failure. * The "late fees" charged by credit card companies have become the industry's fastest-growing revenue source, rocketing from $1.7 billion in 1996 to $7.3 billion in 2002. * Senator John Edwards claims that, "Almost half of all Americans pay the minimum [credit card] balance or less each month, running up large interest debts."
* The outstanding U.S. Public Debt as of August 18, 2003 was $6,776,165,078,368.71. The total working population of the U.S. is approximately 217,000,000. So if each hard- working American contributed their due, each of them would owe $31,226.58.
Then there's real estate. During the most aggressive interest rate-cutting campaign in its history, the Federal Reserve has helped millions of households convert their assets into debts. But this debt will produce no income, only the burden of repayments.
Yet the Fed's policy has not increased overall borrowing by businesses (despite the lowest lending rates since the 1950s), which could use the loans to create growth. So the Fed's attempt to expand credit has increased "bad" debt, even as "good" debt shrinks. This (among other things) is what the media somehow overlooked in the frenzy of "Fed rate cut" stories over the past three years.
Millions of families use their homes as a checkbook, via home equity loans and credit lines. In revolving home equity loans, for example, the debt has grown from $128.3 billion in January 2001, to an all-time record $243.4 billion as of June 2003. As a percentage of market value, home equity has fallen to the lowest level since the Fed began keeping records in 1965. And what will happen when the interest rates, which are not fixed at recent lows, start their inevitable rise? Many people may find it difficult to make increasingly large payments, especially if the unemployment level doesn't begin to drop.
The obvious solution to making larger payments would be to use savings. But, the savings rate of the average American household has dropped by two-thirds since 1989.
Why do we have so much debt and so little savings? Because we are a nation of consumers who live beyond our means. Our consumption exceeds what we can afford...hence the overuse of credit, and the debt extremes that come with it. The Federal Government has encouraged credit expansion, keeping interest rates low to facilitate the use of credit. Multiple sources of credit used to be the province of the rich, but now they're a rite of passage, a necessary step on the way to adulthood. You need a "credit record" to open a bank account, to get a loan, to buy a car or a house, to rent an apartment or even to get a job. And you want it for the sheer convenience it provides:
Pay at the pump. Shop on-line. Get 10% off your first purchase when you get an in-store credit card. Get a second mortgage with no appraisal fee. Put no money down and get two years interest free! Apply today and get a great fixed rate! American Express: Don't leave home without it. Visa: everywhere you want to be. Earn cash back each time you use your Discover card. These are more than tag lines from advertisers. The public's willingness to submit to the servitude of credit is a direct measure of their optimism - or pessimism - about the future, and a reflection of mass psychology and social mood.
The psychology of debt has a context - a broad pattern of behavior that produces very visible extremes: the stock market bubble, the real estate bubble, and yes, an immense debt bubble.
A pattern this large doesn't change overnight, but there's no doubt that a reversal from optimism to pessimism is underway. This is why the stock market peaked in early 2000, and why so many rallies since then have failed (the current rise notwithstanding). The reversals in the real estate and debt bubbles will be just as swift and sudden, and every bit as unexpected. "Once you understand the fundamentality of social mood change, you approach the socionomic insight," writes Robert Prechter in the foreword to his book, Pioneering Studies in Socionomics. "Conventional assumptions about the direction of social causality are not only incorrect but opposite to what occurs. Social events do not compel social mood, as is widely supposed; rather, the patterns of social mood impel social events. For example, the state of the economy does not underlie social mood; social mood underlies the state of the economy."
Understanding how "cause and effect" really work in social trends equips you to anticipate and identify stock market trends. You can't be on the right side of a trend you don't recognize - which is the plight of most investors, and of most households that carry too much debt.
The danger will only grow in the months ahead...yet - for individuals who understand the trend - so will the size of the opportunities. Regards, Wendy Raffel and Robert Folsom for The Daily Reckoning
