More vintage Russell...December 9, 2002 -- We are so inundated...

More vintage Russell...




December 9, 2002 -- We are so inundated with various government statistics that we lose sight of the basics, the fundamentals.

The number one fundamental for creating prosperity is saving and investing. But what's this country concentrating on? Answer -- SPENDING. Get the consumer to spend. Keep him spending. How are the stores doing? Is Wal-Mart selling enough? Are Americans buying enough cars? How are homes selling? Spend, spend, spend, you poor devils and keep building up your debt. Let's spend our way into a new round of glorious perma-prosperity.

Unfortunately, it's all pure bunk. This nation should be saving. This nation should be investing in new ideas, new technology, new ways to compete in a world that is now viciously competitive. But no, the new way to prosperity is to keep the poor, over-spent, out-of-savings American consumer spending his fool head off.

Decades ago I remember Hamilton Bolton (he was the brilliant founder of the Bank Credit Analysts) noted that the way this nation was going, it was taking more and more bank credit to produce less and less in Gross Domestic Product.

Was he right? Damn right he was right. Since the beginning of 1998 the US under the Greenspan Fed has produced $9.1 trillion of credit market debt. And what has all that debt generated? It's generated Gross Domestic Product of about $2 trillion. In other words, it's taking about $4.5 trillion in bank credit to produce $1 trillion in GDP. Economically, we're running up the down escalator.

Right now the Fed is sending M-3 (broad money supply) surging at an annualized rate of over 20%. And what have we got for it? Maybe a case of rising inflation. Where's the inflation going? At this point it's going mostly into housing.

The various Fed governors have been telling us for months that "everything's OK, and that better times lie ahead." Blather, baloney, propaganda -- they may be right and they may be wrong. Most of these yo-yos are just spouting the Fed line.

But every once in a while a Fed governor comes along who says something really important. He "spills the beans." That's exactly what Governor Ben. S. Bernanke did on November 21, 2002, in a critical speech before the National Economists Club in Washington D.C. I took Benanke's speech to be the official Fed line.

Here's just one paragraph from that speech, and you should memorize it. Let's have it, Governor --

"What has this got to do with monetary policy? Like gold, US dollars have value only to the extent that they are strictly limited in supply. But the US government has a technology called a printing press -- or today it's electronic equivalent, that allows us to produce as many US dollars as it wishes at essentially no cost. By increasing the number of dollar in circulation, or even by credibly threatening to do so, the US government can reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

There it is. It's an extraordinary statement. Was Bernanke scolded for this statement? Was Bernanke fired? Did Greenspan deny the statement? Absolutely not. Bernanke was simply telling the world (officially) that there is no way the Fed is going to allow the US to deflate. Bernanke was saying that the Fed could print dollars so fast and so furiously that the nation would literally be floating on and sea of paper.

"Of course, they'd never do that." Are you kidding, they're doing it!

Which is one reason why real money (i.e., gold) is looking a lot better.

So while China is exporting deflation, the Fed is trying desperately to counter China's deflation by printing dollars or actually generating liquidity. The battle is on. On a surface level, it's almost a ridiculous, comic battle. On a deep level, it's a deadly serious, even tragic battle.

Next we're beginning to see something I've long warned about -- competitive devaluations. "Japan Sees Hope in Weak Yen" is the headline on page 14 of today's WSJ.

The Japanese are trying to talk the yen down. Why? Obviously, to provide an advantage for Japanese exporters. But there's another reason and the Journal answers it. "Economists say another possible motivation is that Japan is afraid of a sharp fall in the dollar -- for example due to the high US current account deficit or a possible war with Iraq -- and wants to build a buffer so the yen starts any rise from as low a level as possible."

At the same time the US would like a weaker dollar to stimulate US exports. In fact, it's clear that one reason that O'Neill and Lindsey have received their "walking papers" is that they were not clear either on a lower dollar or tax cuts, and it was not clear that they were in favor of an all-out "restimulation" of the US economy. Bush wants tax cuts, spending, and the hell with the resultant deficits. Aren't deficits stimulative? Yeah, up to a point. Beyond that point they become dangerous.

One more comment: I saw this on Bloomberg this morning --

China foils expansion by Citigroup and General Motors. A year after joining the World Trade Organization, China is balking at boosting foreign investors' access to its 1.3 billion consumers. While local sales have risen in Citigroup, General Motors Corp. and other overseas companies, regulations aimed at protecting domestic companies are curbing their next phase of expansion: selling a wider range of goods and services in more Chinese cities to compete with local rivals.

The delays means China is reaping more benefits from the WTO membership than its trading partners are. China's economy, Asia's second largest, grew 7.9% percent in the first three-quarters of 2002, the fastest of any large world economy.

Russell Comment -- It's clear the China has no intentions of allowing US corporations to move in lock, stock and barrel, along with US bankers taking over the financial infra-structure of China. China wants to run China, something US businessmen are learning, and learning the hard way.


Stock Market -- Stock weakness in December if very unusual, and it's particularly unusual during a mid-Presidential year. In fact, since 1918 following every mid-Presidential cycle low, the market has been higher into the next election. The mid-Presidential cycle low of the current cycle is taken to be the October 9 Dow closing low of 7286.27.

Only once since 1918 has the Dow been lower than the mid-Presidential year low. That year was 1930, just as the Great Depression was about to begin. So it will be of great interest to see whether this market can move up and out between now and the end of 2003. If it can't, the implications are that the market and the economy are in extreme trouble.

Currently, we have the so-called "Santa Claus" rally, the rally that is supposed to start on December 24 and run through the first two days of the new year. But it's also well to remember this little poem -- "If Santa fails to call, bears may come to Broad and Wall."

TODAY'S MARKET ACTION -- You know what I love about the market? You don't? Then I'll tell you -- the market cuts through all the BS, and believe me, we're wading through a lot of it these days. If you're a bear, today was an interesting day. If you're a bull, you're on the wrong side of the market, and today had to cost you.

My PTI was down 4 to 5248. This put the PTI 6 points above its 89-day moving average, which stands at 5242. PTI bullish by just 6 points.

The Dow was down a fairly large 172.36 to 8473.41. The 200-day MA of the Dow is at a new bear market low of 9146. The 50-day MA of the Dow is at 8345. A Dow closing below 8345 would trigger a "sell" signal for the Dow and for the general market.

Two Dow movers today, IBM down 2.73 to 79.59 and MMM down 2.05 to 124.05.

Jan. crude up .27 to 27.20.

Transports down a large 66.14 to 2322.69, and it looks like a Transports upside confirmation of the Dow is a lost cause. Not good. UAL filed for bankruptcy today, and 83,000 UAL employees can now wonder where their future lies.

Utilities, the only stocks that offer decent yields, were up 1.49 to 200.44.

There were 920 advances and 2344 declines. Up volume was 170 million and down volume was 951 million. Down volume was 85% of up + down volume, so today was a pretty bad day and showed heavy selling interest.

Total NYSE volume was a light 1.14 billion.

S&P was down 20.23 to 892.00.

Nasdaq was down a good-size 55.35 to 1367.09 on 1.42 billion shares.

My Big Money Breadth Index was down 4 to 712. This is its lowest level since Oct. 10, and it's not a good indication when this Big-Cap stock index leads on the downside. You remember this one -- follow the money? I should revise it to -- "follow the big money."

Dec. Dollar Index was down .10 to 105.28. Dec. euro was up .09 to 100.97. Dec. yen was up .26 to 81.05.

Dec. Nikkei was down 135 to 8755.

Bonds, despite the consensus opinion of the experts, continue to hold. March long T-bond was up 19 ticks to 109.26 where it yields 4.94%. Dec. 10 year T-note was up 12 ticks to 112.19 to yield 4.05%. Why the strength in bonds? The Russell guess -- because bonds don't see any upturn in the economy this year and possibly next.

Gold taking a breather? Feb. gold down .60 to 326.50. I bought more NEM, GG and BGO today. Am I nuts? It's your call, or actually it's the market's call. Feb. gold now bullish and above its 200-day MA (315.30) and also above its 50-day MA (319.70). Gold on a "buy." But be ready for its nightly decline. Who the devil is selling gold down every night. I know it can't be Greenie. Would he do that to the only real money we've got?

March silver down 3 to 4.61. Jan. platinum up 2.10 to 599.90. March palladium down 2.25 to 249.00.

Gold/Dollar Index ratio was down .20 to 310.20. Above 311.50 and it's an upside breakout.

Gold advance-decline line down 3 to 1108.

XAU down .30 to 70.99 but XAU is above its 200-day MA. HUI was down .72 to 125.72, and HUI above both its MAs and bullish.

ABX down .24, AEM down .28, DROOY up .08, GLG up 20, RGLD up .75 (acts extremely well), NEM, the leader, down .02.

STOCKS -- My Most Active Stock Index was down 11 to 214.

The 15 most active stocks on the NYSE were -- AOL down .85, NOK down 1.41, GE down .47, C down 1.41, PFE up .41, TXN down 1.26, GLW down .46, HD down .31, XOM down .6 8, PCS down .58, EMC down .34, CA down .88, SGP up 1.22, AMD down .67, TYC down .40. Quite a bit of damage today in the most actives.

Few more -- GM down 1.08, DCX down 1.19, MER down 1.42, AIG down .92, GS down 1.05, JPM down 1.17, KSS down 1.88, COST down .95, TGT down 1.63, KBH down 1.01, MRK up .18, UTX down 1.41, CSCO down .68, INTC down 1.08, QCOM down 2.29, DD down 1.28. WMT down 1.19 to 51.85.

Wal-Mart is the discount retail monster. If WMT is in trouble, retail is in trouble. WMT's 200-day MA stands at 55.14. Below it is the 50-day MA at 53.99. WMT over the last three days has closed below its 50-day MA, and it therefore bearish. At today's 51.85 close, WMT like so many other retail stocks, is not looking good.

The retail group has topped out. So have most of the home building stocks. For my money, the US economy is still in recession. And I don't see the picture getting any better. Either does George Bush Jr. which is why O'Neill and Lindsey are looking for jobs. O'Neill out and today John Snow (CEO of CSX) is in at Treasury. So the nation has Snow for Christmas. Will that help? I doubt it, but what do I know?

VIX was up 1.79 to 34.47. Option-writers increasingly nervous, and so far they've be right. When these guys get worried about the market, they raise the premiums on the options they sell thereby protecting themselves.

McClellan Osc. closed at minus 55. A "Sell" signal.

CONCLUSION -- This is the time of the year when stock are supposed to act well. If stocks can't look good in December, it's not a happy sign. But today is only the 9th of December, so we've still got time.

"I'm Dreaming of a White Christmas." Greatest pop song every written and by Irv Berlin. Greatest? At least according to record sales and number of recordings -- everyone from Bing Crosby to Miles David recorded it. Can you believe that blacks called this a white-prejudice song. Irv was a Jew and was a terrible miser but he certainly wasn't prejudiced. Incredibly, Berlin never learned to read music.

I've been in San Diego since 1961 and only saw snow hit the ground once. It lasted for about five minutes and then sort of blew away. When I left NYC in '61 I said that I never wanted to see snow again, at least not up close. Even when I see it in the movies I get a chill. I remember walking around NYC when it was 8 degrees, and the worst part of it was that the stores were all out of ear-muffs.

Memories, memories. Here in La Jolla it almost never gets below freezing. In fact, when the temp gets down to around 50 in La Jolla everyone complains, the convertible tops come down, and the dogs sleep at night curled up instead of stretched out.

I get up around 3:30 AM but wife Faye sleeps until 5AM. As soon as I split, Lauren, our female Poodle jumps into bed with Faye and that dog radiates more heat then a pot-bellied stove. No wonder Faye loves dogs.

Let's see, where was I? Oh yeah, the markets.

And I think I'm about finished. See you tomorrow.

The R man.


Pricing Power -- Did you check out the ad for thin Plasma TVs on page 2 of today's Wall Street Journal? Every make of thin screens was discounted with the Taiwanese Sampo 42" thin screen discounted from a price of $4,000 to $2,950. By the way, the Chinese-Taiwan struggle is being resolved via business. There is so much business interchange now between Taiwan and China that to all extents China and Taiwan are becoming one.


And now a few questions that I'll struggle to answer --

Question -- What happens to muni bonds if the government decides to eliminate the tax on dividends?

Answer -- First of all, even if the government cuts the tax on dividends, I think they will do what the government always does, and that is they'll do it part way. Say they cut the tax by 25%. I don't think that will have much impact on muni bonds, since in general the bonds are more stable than stocks. But remember, the average dividend on the Dow, where dividend tend to be higher than in the broad market, is only 2.1%. Against this you can get 4.5% on a long list of munis. Admittedly, long-maturity munis can decline in price if rates go up, but if you "hold for the long term" or to when your bonds mature you'll get your money back.

Of course, the danger there is that when you do get your money back it will probably be worth less. But we're in a primary bear market so if you hold your dividend-paying stocks you're probably going to lose money on the stock anyway. Conclusion -- it's a crap shoot even if the tax rate on dividends is lowered. In general, I don't think lowering the tax on dividends will directly hurt munis.

Question -- OK, so you bought a batch of gold coins. Where should you hold them?

Answer -- I prefer not holding them in a bank vault. I was audited many year ago by the state of California, and they went into my lock-box at the bank. Nuff said. The best thing to do is hide your gold coins someplace (don't tell me where). Some people even bury them in their back yard. Others keep them in a hidden home vault. If you live in an apartment, it's a problem. Maybe keep them in a private storage place. Best -- think of some very original place to store your coins.

Question -- How do I buy gold coins?

Answer -- Through a legitimate dealer. Look 'em up on the Internet. And always check the price with a few dealers. Gold coins can be sent to you through the mail. It's done all the time. Remember, messing with the mail is an FBI offense. From a safety standpoint, the mails are safe.

Question -- what do you think of gems as a store of value?

Answer -- Diamonds might be considered a store of value. I say this because most gem-grade diamonds now have a GIA (Gemological Institute of America) certificate (cert) stating exactly the quality the diamond. This means that the diamond has a sort of rough price that is generally accepted. The price will not be exact, but it will tell you approximately what the diamond is worth. The diamond market is reasonable liquid, and every gem-quality diamond can be sold at some price.

Diamonds have one huge advantage -- you can hold a few million dollars worth of gem-quality diamonds on a tablespoon, and this is not true of gold. I like diamonds and consider them a legitimate store of wealth. They obviously cannot be priced to the penny as is the case for gold. But diamonds are now a form of money. In fact, I understand that the Al Qaeda deals actively in both gold and diamonds.



Interesting e-mail received Sunday --


Dear Mr. Russell:

Below is a clearer follow-up to the email I sent to you earlier
today. Upon further reflection of the Chinese trade and monetary
stance, I want to refocus my query.

China has low inflation and a trade surplus (most strikingly with the
US). Chinese exports are responsible for approximately 25% of its
GDP. However, China's ability to improve exports may be limited by
their major trading partner's (Japan, US, Germany etc.) capacity to
to consume given their declining economies. Is China at a crossroads?

One of China's biggest economic concerns is the creation of a strong
domestic market. With average per capita earnings exceedingly low,
China could only benefit by improving its domestic market. According
to Mr. Raymond Foo, Regional Strategist for BNP Paribas Peregrine
Asia, "China's future lies in its ability to move up the value added
ladder." Can China improve its position?

If China were to exchange US dollars for gold, renminbi, euros etc,it
would surely hurt the US dollar and appreciate the renminbi. As China
has low inflation, the exchange may not only be worth the gamble but
may be necessary. It may hurt its lower value export growth, but on
the other hand it moves China further into an era of value-added
production. Most importantly, it leads to more domestic consumption
for its own populace. Yes, this approach may be inflationary, but is
it not to China's benefit?

I believe there is a twofold concern, which China will most probably
be able to overcome. Firstly, with the appreciating value of the
renminbi, China will have to export at least the same net renminbi
value of goods as before. Secondly, China will have to pay its labour
force higher wages. The second concern is academic- given the low
wage base to start, and the capital inflows that would accrue from
the appreciation of the renminbi. Do you see any concerns in this
regard?

In my opinion China is in a very dominant position. Depending on what
currency it decides to convert into, China can make other currencies
more or less competive. For example, if China wants to export more to
Japan it could convert the renminbi into Yen, driving up the Yen and
making Chinese exports cheaper for Japanese. The other affect, would
be do disuade the Japanese from producing lower cost goods, as their
appreciated currency would make Japanese products too expensive. Do
you concur with this scenario of the power of the renminbi?
Conversely, China can allow a lower-wage country such as Vietnam to
take over the production of cheaper products that it no longer wants
to manufacture.

As for gold, if China exchanges its currency for gold it can become
the lender of last resort, that is fill the shoes of the US (and UK
before it). Is China ready to become the world hegemon?

Your insights would be greatly appreciated.

Regards,
Brahm Eiley
The Convergence Consulting Group Ltd.
tel. 416-513-9444
http://www.convergenceonline.com

Russell Comment: I suspect that somewhere ahead China is going to make the renminbi convertible into gold. If it does, the renminbi will be a much-wanted currency, particularly is China continues on its current path of being increasingly trustworthy. Remember, the Olympics will be in China in 2010, and the Chinese are making much of that coup. And, of course, China is now a member of the World Trade Organization, a momentous change.

China is going capitalistic with a dictatorship at its head. Chinese leaders evidently are now in favor or individual capitalism and production of private wealth. The only thing that China's leaders are adamant about -- they, the party leaders, must remains in power. The average Chinese person has become singularly disinterested in politics. Their motto is -- let our leaders, whoever they are, do whatever nonsense they want -- just leave us alone and let us make money.