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May 21, 2005

Remember Free Markets?

Forget about market fundamentals: P/E ratios, debt ratios, earnings, blah blah blah. Forget about technicals: Double-tops, support, resistance, who cares? Those concepts were relevant in the good old days, but not in our super-duper never-a-bear-moment, new and improved 21st century government/central bank managed and manipulated market.

That's right folks. I'm talking about market manipulation and I'm here to tell you that the idea is no longer the exclusive domain of wackos and nutjobs like me. Market management has become so blatant, so undeniable that even Stephen Roach of uber-mainstream Wall Street firm Morgan Stanley recently wrote "I am not a believer in conspiracy theories. But the Fed's behavior since the late 1990s is starting to change my mind."

Why talk about manipulation? Why do we care? Because in my estimation, it has become the single, most-dominating force impacting your investments today. I won't delve too deeply into the mechanism or the means as this information is readily available all over the Internet. But a brief history is in order.

Prior to 1987, we had relatively free markets in this country. Government, albeit stupid overall, had sense enough to leave this one area relatively free of intervention, aware that while they can screw up just about everything else and get away with it, it's not a good idea to bite the hand that feeds you.

But after "the crash", Executive Order 12631 created the "Working Group on Financial Markets", consisting of the Secretary of the Treasury and the chairmen of the Federal Reserve, the SEC and the CFTC (or their designees.) Their goal: to enhance "the integrity, efficiency, orderliness and competitiveness" of our financial markets and to "maintain investor confidence." The means: "The Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions."

And what better way to maintain investor confidence than to make sure the stock market doesn't go down by tossing the Treasury's unlimited resources at it?

From the WGFM grew what today we nutters and wackjobs refer to as the "Plunge Protection Team." It is surmised that this group was built upon 1989 suggestions from Fed Governor Robert Heller who felt that the Fed should purchase stock index futures during market "emergencies" in order to halt major declines.

Do we know that the PPT exists? Official government denials of its existence are our first clue that it almost certainly does. But we needn't resort to cynicism for evidence. If such a creature exists, it must leave footprints in the market. Where there are footprints, there must be creatures. And oh yes, there are footprints.

Since the current cyclical bull began the S&P 500 has never suffered so much as a 10% correction. That is "unusual" like Mt. Everest is "a decent chunk of rock." In the two years during which the economy has struggled with the worst "recovery" on record, in the face of stagnant job growth and a host of other problems, the market has been so flooded with bullish investors that it couldn't pull back 10%? Nonsense.

In fact, whenever the market appeared ready to reverse its uptrend at key technical levels, (and it tried PLENTY of times), huge buying appeared in the futures pits. These were obvious levels that, if violated, would have triggered much more substantial selling. Some "market player" was willing to throw oodles and gobs of money at the market to prevent it from falling.

While there are funds that have that kind of capital, there aren't funds that are stupid enough to step in front of a speeding freight train to take a contrary position when they could make so much more money so much faster by positioning themselves WITH the decline.

Sure, every once in a while some of them get crazy and make a huge contrary bet. But not EVERY time and not at EVERY major turning point. None of them have enough capital, cojones nor dim-wittedness to attempt to halt a decline every time.

Who DOES have enough capital and dim-wittedness? Someone who has access to the United States Treasury. (And in this case, cojones has nothing to do with it. It doesn't take much cojones to spend other people's money.)

This behavior has recently become very obvious. On 20 April, the Dow came within a hair's breadth of the 10,000 level. The market had tanked a few day's prior and technically, it was clear that a major market top was in place. The psychologically critical support level was about to be violated, likely unleashing a torrent of selling.

In the wee hours of the following morning the stock index futures markets began to rally sharply. By the time the cash market opened the Dow was already up 100 points. If you watch the futures markets you know that the Dow NEVER climbs anywhere near 100 points overnight, unless in response to a big move overseas or major news. That wasn't the case this time.

Major players aren't doing much of anything during those hours. The markets are exceptionally thin. Foreigners and U.S. insomniac traders do not have the means to push the market up 100 points. So why did the market behave so unusually? Because some big, dumb buyer did something that no one else ever would, and did so gladly because "he" was playing with unlimited resources and stood to lose nothing.

Hmmm, let me think now: Big, dumb, unlimited resources. Who could it be?

It was a perfect opportunity for the PPT. Thin markets, no one around to take the opposite side. Push the market up to a sharply higher opening and the public will almost certainly grab the ball and run with it, wildly bullish and afraid to miss "the next big move."

And so they did. The Dow closed up 206 points on a day with mixed economic news, much of it bearish, none of it all that bullish.

The same thing happened last Friday following Thursday's downdraft that looked like another inevitable assault on Dow 10,000. Futures rose sharply overnight, the market opened sharply higher and by the end of the day was up 120 points. Another disaster averted at a key technical level.

This is not the way the markets used to trade. This is not the way that traders, the public and funds trade. There is no reasonable way to explain it without positing the existence of a major player with a vested interest in keeping the market from falling. And there is no private or public player big enough to do it and consistently get away with it. In light of the Executive Order and Heller's 1989 ideas, one has to conclude that the government is involved.

Gold's another fine example. We won't get too deeply into that either as plenty of information can be found at www.gata.org. Suffice it to say that the Gold Anti-Trust Action committee (GATA) was formed in an effort to expose this manipulation, resulting in a lawsuit against Alan Greenspan, several large Wall Street firms and the Secretary of the Treasury. The footprints are all too obvious in this market as well.

Commodities are in a huge bull market. The most recent upleg exhibited huge upward momentum. Crude oil surged to record highs. Steel, copper, platinum, aluminum: all at multi-decade highs. Commodities are on fire and inflation is rising even by officially manipulated "feel-good" data. Everything is rising. Except gold.

Gold's reputation is that of the ultimate inflation hedge. One of its primary roles in modern times has been to sound the inflation alarm, to let us know that the central bankers are screwing up. Yet in the midst of rising inflation and major Fed screwing-up gold is just sitting there. On days when bad inflation news comes out, gold gets hit with selling. Does this make sense? None.

Sure, we can buy the mainstream financial media spin that gold no longer has a monetary role, is no longer an inflation hedge. But tell me how it is that the one thing that has always been known to rise in response to inflation is not rising in price when everything else is? Funny how the one market that should expose the Fed's quackery is the only one that sinks in a "rising tide that lifts all boats."

Gold has repeatedly been "whacked" at key technical levels that if penetrated, would have brought in heavier buying. (Thereby alerting the world that the Fed is screwing up.) In most cases gold managed to eventually move higher, but only with great difficulty. And today, with inflation becoming undeniably obvious, the market has stopped rising. Not for legitimate reasons but simply because traders are tired of having their heads handed to them by an unethical, manipulative market opponent.

These are just a few of the more obvious examples. If you look at what's going on in the markets with an intelligent and perceptive eye, you can't help but conclude that they are being manipulated by a powerful group, a group that possesses more resources than any fund or individual trader.

Does it matter? Is it wrong? Shouldn't the government maintain order in the markets? We could go on for days debating the "morality" of it but it doesn't matter. What does matter is the fact that this IS going on and it's having an increasingly large impact on our investments and market opportunities. In fact, it's eroding the quality of both. Long-term interest rates, stocks, gold and other markets have displayed narrow bands of movement for years. Longs aren't making money. Shorts aren't making money.

Worse still, these efforts serve only to destroy the function and integrity of the markets. The longer the market is artificially held higher, the longer a real, sustained bull market is postponed. When the market is managed it ceases to fulfill its most important role: price discovery. Buyers and sellers can no longer come together to determine the real value of a stock or commodity. Prices become a sham that no one can trust.

In the end, manipulation will fail as no one is bigger than the market. A market that serves any legitimate, useful function will eventually find its appropriate level. Unfortunately, the failure of that manipulation is likely to cause investors much more headache than a simple secular bear market left to its own devices ever could. Arrogant feds and central bankers will never get it, always seduced by their delusions of grandeur, convinced that they're smarter than the marketplace. The little guy will reap the fallout of their inevitable failures, but you don't have to. Know that this is going on and position yourself accordingly...

Stocks vom 04.05.2005

Peter Meier

Stagflation: Zurück in die Siebzigerjahre

Die Anzeichen verdichten sich, dass die Weltwirtschaft in eine Phase der Stagflation schlittert. Wie Anleger darauf am besten reagieren.

Wie immer wird das Börsenwetter auf der anderen Seite des Atlantiks gemacht: Unternehmensergebnisse und vor allem volkswirtschaftliche Daten aus den USA bestimmen seit Wochen die täglichen Kursausschläge an Europas Börsen. Dabei schwappen nicht selten sehr widersprüchliche und verwirrende Meldungen über den grossen Teich. Sind die sich verdüsternden Konjunkturaussichten nun gut oder schlecht für die Aktienmärkte? Gut, weil dadurch die Zinsen tief bleiben oder schlecht, weil sich weniger Wirtschaftswachstum negativ auf die Unternehmensgewinne auswirkt? Ist der überraschend hohe Anstieg der US-Konsumentenpreise (+3,1 Prozent zum Vorjahr) Fluch oder Segen? Fluch, weil damit grössere Zinserhöhungen und schwächelnde Börsen drohen? Oder Segen, weil die Teuerung für eine weiterhin robuste US-Konjunktur spricht?

Wie so oft gilt an der Börse das Prinzip: «Die Kurse machen die Nachrichten»: Je nach Tagesverlauf wird das Plus oder Minus am Aktienmarkt auf gerade an diesem Tag erschienene Meldungen zurückgeführt. Wohin die Reise geht, weiss niemand so genau. Die Märkte geben hierzu auch ganz unterschiedliche und höchst widersprüchliche Signale ab. Der Obligationenmarkt mit den im langjährigen Vergleich sehr tiefen Zinssätzen spricht für eine anhaltend schwache Weltkonjunktur bis hin zu Deflationsgefahren. Die haussierenden Rohstoffpreise, die kürzlich ein 24-Jahres-Höchst erklommen, lassen dagegen mehr Inflation und damit auch höhere Zinsen erwarten. Der US-Aktienmarkt scheint mit seiner anhaltend hohen Bewertung weiter für einen optimistischen Mittelweg zu votieren, nach dem Motto: «Die Konjunktur wird weiter brummen, doch nicht so kräftig, dass die Zinsen ernsthaft steigen müssten.»

Getrieben von Teuerung, Rohstoffpreisen und schwächelnder Wirtschaft scheint sich ein Szenario aber immer stärker zu etablieren: die Rückkehr der Stagflation.

Der Begriff wurde in den Siebzigerjahren geprägt, als die westlichen Länder Jahre der wirtschaftlichen Stagnation kombiniert mit hohen Inflationsraten durchlitten. Die hauptsächlich durch die überaus lockere Geldpolitik der Zentralbanken verschuldete Misere widersprach dem damals wie heute verbreitetenden politisch-ökonomischen Dogma, das im Zweifelsfall etwas mehr Inflation gut für Wachstum und Beschäftigung sei.

Eine Rückkehr der Stagflation würde wenig Gutes für die Finanzmärkte verheissen. Ein Blick in die Siebzigerjahre zeigt, dass Aktien dannzumal sogar die am schlechtesten rentierende Anlageklasse überhaupt waren. Mit Dividendenpapieren erzielten Investoren in der Ära von Koteletten und weiten Hosen über Jahre weniger Rendite, als dass die Konsumentenpreise stiegen. Sie mussten deshalb reale Vermögensverluste einstecken. Sachwerte wie Öl, Gold oder Briefmarken legten dagegen überproportional stark zu.

Der Dow Jones Index kam über ein Jahrzehnt lang nicht vom Fleck und schwankte zwischen 600 und 1000 Punkten. Berechnet man die damals grassierende Teuerung mit ein, resultierte sogar ein Kaufkraftverlust für US-Aktienanlagen. Auch in der Schweiz gingen Aktionäre in den Siebzigern nach Abzug der Teuerung, die imJahr 1973 bis zu 12 Prozent erreichte, weitgehend leer aus.

Doch wie realistisch ist einStagflationsszenario? Nach zwei Jahrzehnten mit sinkenden Teuerungsraten wird die Inflation heute gerne totgesagt. Dass zumindest wirtschaftliche Stagnationsphasen trotz allem Gerede von der «New Economy» weiterhin möglich sind, zeigte die Erfahrung der letzten Jahre.

Die Parallelen zwischen der heutigen Situation und den Siebzigerjahren sind offensichtlich:

-- Die Ähnlichkeiten beginnen schon mit der Vorgeschichte: In den Sechzigerjahren verzeichnete die US-Wirtschaft genau wie in den Neunzigern eine Phase mit hohemWachstum und tiefer Teuerung, inklusive eines stattlichen Börsenbooms.

-- Zur Bekämpfung der nur als vorübergehend angesehenen Wachstumsschwäche am Anfang der Siebziger verfolgte die US-Zentralbank eine stark expansive Geldpolitik mit negativen Realzinsen, das heisst, nach Abzug der Teuerung lagen die Leitzinsen unter null - genau wie heute.

-- Der in den Sechzigerjahren begonnene Vietnam-Krieg belastete den ohnehin tiefroten amerikanischen Staatshaushalt zusätzlich - genauso wie heute der Irakkrieg, der Uncle Sam bereits über 300 Milliarden Dollar gekostet hat.

-- Der erste Ölschock liess den Preis des Schwarzen Goldes von 1971 bis 1974 von 2,20 auf 11,50 Dollar je Fass steigen. Ebenfalls um das Fünffache kletterte der Ölpreis von 1998 bis 2004 nach oben, von 10 auf über 50 Dollar je Fass.

Das oft angeführte Argument, die Teuerung der Siebziger sei primär durch den Ölschock ausgelöst worden, macht dagegen keinen Sinn. In einer Wirtschaft mit einer fixen oder praktisch fixen Geldmenge wie dem Goldstandardsystem muss der steigende Preis eines wichtigen Guts wie Öl automatisch zu sinkender Nachfrage und damit sinkenden Preisen in anderen, weniger ölabhängigen Sektoren führen. Anhaltende Preisanstiege auf breiter Front sind nur in reinen Papiergeldsystemen möglich, in denen die Geldmenge in Relation zu der Gütermenge beliebig ausgeweitet werden kann. Die Hochinflationsphase der Siebzigerjahre folgte denn auch direkt auf die Aussetzung des Währungssystems von Bretton Woods und damit der indirekten Golddeckung des Dollars durch Präsident Nixon im Jahr 1971. Damals wie heute argumentieren die arabischen Öl-Scheichs zu Recht, dass die Ölpreisanstiege zu einem wesentlichen Teil nur den Wertverlust des Dollars kompensieren, zum Beispiel gemessen am Wechselkurs zum Euro -- oder in den Siebzigern zur D-Mark, zu der damals der Dollar 53 Prozent seines Werts einbüsste.

Die momentan steigenden Rohstoffpreise sind damit also auch nicht die Ursache der anziehenden Teuerung, sondern nur eines ihrer Symptome -- und eine logische Folge der massiven Ausweitung der Geldmengen in den letzten Jahren. Angeführt von den USA haben die Zentralbanken schon vor dem Börsencrash im Jahr 2000, erst recht aber danach, die Geldpressen heiss laufen lassen. Inflation bezeichnet denn auch im eigentlichen Sinn des Wortes die Aufblähung der Geldmenge und nicht den blossen Anstieg der Konsumentenpreise.

Auch heute noch, nachdem die Rezession eigentlich als überwunden gilt, liegen die Leitzinsen in den USA wie auch in der Schweiz unter der Teuerungsrate. Die Geldpolitik ist folglich höchst expansiv. Kredite sind praktisch gratis zu haben - weshalb kaufwütige Konsumenten, Hypothekarschuldner und spendierfreudige Regierungen davon reichlich Gebrauch machen und die Verschuldungsquoten im Vergleich zum Bruttoinlandprodukt in den USA auf neue Höchststände getrieben haben.

Damit hat sich die amerikanische Zentralbank unter der Führung von Alan Greenspan jedoch in eine gefährliche Sackgasse manöveriert: Steigen die Zinsen in nächster Zeit zu stark, droht der gewaltige Schuldenberg die ohnehin schon schwächelnde Konjunktur zu erdrücken. Bleibt die Geldpolitik dagegen locker, beziehungsweise die nötigen Zinserhöhungen erfolgen weiterhin in kaum spürbaren Minischritten, so droht die Teuerung aus dem Ruder zu laufen - was früher oder später die Aktienmärkte auf Talfahrt schicken und den Wirtschaftsmotor ebenfalls abwürgen dürfte.

Der optimistische Mittelweg, den die Aktienbewertungen derzeit suggerieren, ist mit Blick auf die nächsten paar Jahre deshalb das unwahrscheinlichste Szenario. Viel eher dürfte der Obligationenmarkt mit seiner Rezessionsprognose oder aber der Rohstoffmarkt mit seinem impliziten Stagflationsszenario Recht behalten.

Erfahrene Anlageprofis wie Jim Rogers sind von einem Comeback der Stagflation überzeugt. Der ehemalige Hedge-Fund-Manager legte den Grundstein für sein Vermögen in den Siebzigerjahren, als er zusammen mit George Soros den legendären QuantumFund zu einer Performance von 4000 Prozent führte. «In den Siebzigern gab es viele Knappheiten, die Rohstoffpreise stiegen um 600 Prozent, einige sogar mehr. Dies wird sich wiederholen», betonte Jim Rogers kürzlich im Stocks-Interview (vgl. Stocks 7/2005).

Doch auch wenn die Stagflation tatsächlich kommt, brauchen Anleger nicht zu verzweifeln. Gute Anlagemöglichkeiten und interessante Aktien gab es auch in den Siebzigerjahren -- einzig blindes «buy and hold» dürfte nicht mehr funktionieren. Wichtig ist aber, die Auswirkungen anziehender Teuerungsraten auf das Depot stets im Auge zu behalten und Investmentmöglichkeiten auch ausserhalb des in den letzten Jahren üblichen Kreises zu suchen. Zum Beispiel im Bereich der Rohstoffe.

Investor's Guide: Geld investieren in einer Phase der Stagflation

Die historisch bekannten Auswirkungen der Stagflation auf einzelne Anlagekategorien:

Sparkonto/Festgeld

Eine vergleichsweise sichere, jedoch unprofitable Anlageform. Die Zinsen auf Sparkonti liegen nämlich in Stagflationsphasen zumeist unter der Teuerungsrate, sodass Sparer real Kaufkraft verlieren. Dies war in den Siebzigerjahren in der Schweiz schon einmal der Fall und ist bereits heute wieder so. Die Teuerung der Konsumentenpreise liegt aktuell mit 1,4 Prozent über der Rendite auf fast allen Arten von Sparkonti.

Obligationen

Auch Obligationen haben unter der hohen Teuerung in der Stagflation zu leiden, zumindest in der Anfangsphase, wenn die nominell tiefen Zinscoupons bei weitem nicht ausreichen, um den Kaufkraftverlust des Vermögens zu kompensieren. Höhere Inflation führt zudem über kurz oder lang zu steigenden Zinsen, was alte, tief verzinste Obligationen an Wert verlieren lässt. Sollte sich ein ähnliches Stagflationsszenario wie in den Siebzigern wiederholen, werden deshalb festverzinsliche Anleihen zu den schlechtesten Anlageklassen überhaupt gehören. Eine mögliche Alternative sind inflationsindexierte Anleihen, in den USA als TIPS bekannt. Allerdings muss man dabei als Anleger darauf vertrauen, dass der staatlich berechnete Konsumentenpreisindex die Teuerung realistisch wiedergibt.

Aktien

Als Anteile an realen Vermögenswerten sind Aktien bei anziehender Teuerung grundsätzlich keine schlechte Anlage. Den meisten Unternehmen gelingt es über kurz oder lang, den inflationären Preisdruck an die Konsumenten weiterzugeben. Problematischer für Dividendenpapiere ist die Stagnationskomponente einer Stagflation. Zu Beginn einer Rezession brechen die Aktienkurse in der Regel im zweistelligen Prozentbereich ein. Die in der Stagflation steigenden Zinsen sind zusätzliches Gift für die Aktienkurse. Höhere Zinsen und die durch die galoppierende Inflation verursachten Verzerrungen in der Wirtschaft führten in den Siebzigern zu grösserer Unsicherheit und einer massiven Reduktion der Aktienbewertungen. Die Kurs/Gewinn-Verhältnisse von US-Aktien gingen bis 1980 auf 6,8 zurück. Heute liegt diese Bewertungskennzahl in den USA immer noch bei 18,8. Aktien sind in der Stagflation durchaus geeignete, aber mit Vorsicht zu geniessende Anlagen. Es sollten tief bewertete Titel von Unternehmen mit hoher Preisdurchsetzungsmacht bevorzugt werden.

Immobilien

Anlagen in Häusern und Immobilienfonds sind grundsätzlich teuerungsresistent. Genau wie bei Aktien können jedoch eine wirtschaftliche Stagnation und steigende Zinsen die Rendite von Immobilieninvestments beeinträchtigen. Da die Immo-Preise zudem in den meisten Märkten in den letzten Jahren schon stark gestiegen sind, nicht zuletzt dank der tiefen Zinsen, droht sogar die Gefahr eines Immobiliencrashs, vor allem in den USA, England, Spanien und Australien. Es ist deshalb eine gewisse Vorsicht angebracht.

Rohstoffe

In der Stagflation der Siebziger waren Rohstoffe die Anlage erster Wahl, die während zehn Jahren Aktien, Obligationen und Immobilien outperformten. Die einfachste Direktanlage ist der Kauf von physischem Gold oder Silber -- ob für zuHause oder fürs Metallkonto. Weitere Möglichkeiten bieten die Aktien von Rohstoffproduzenten bzw. entsprechende Fonds sowie Rohstoff-Futures oder Zertifikate darauf.

January 7, 2004

ROBERT J. SAMUELSON NEWSWEEK

The U.S. economy in transformation

We are now undergoing a profound economic transformation that is barely recognized. This quiet upheaval does not originate in some breathtaking technology but rather in the fading power of forces that have shaped American prosperity for decades and, in some cases, since World War II. As their influence diminishes, the economy will depend increasingly on new patterns of spending and investment that are now only dimly apparent.

It is unclear whether these will deliver superior increases in living standards and personal security. What is clear is that the old economic order is passing.

By any historical standard, the record of these decades - despite flaws - is remarkable. Per capita incomes are now $40,000, triple their level 60 years ago. Only a few of the 10 recessions since 1945 have been deep. Prosperity has become the norm. Poverty and unemployment are the exceptions. But the old order is slowly crumbling. Here are four decisive changes:

First, the economy is bound to lose the stimulus of rising consumer debt. Household debt - from home mortgages to credit cards - now totals about $10 trillion, or roughly 115 percent of personal disposable income. In 1945, debt was about 20 percent of disposable income. For six decades, consumer debt and spending have risen faster than income. But debt can't permanently rise faster than income. As aging baby boomers repay mortgages and save for retirement, debt burdens may drop. The implication: weaker consumer spending.

Second, the benefits from defeating double-digit inflation are fading. Remember: in 1979, inflation peaked at 13 percent; now it ranges between 1 percent and 3 percent. The steep decline led to big drops in interest rates and big increases in stock prices (as interest rates fell, money shifted to stocks). Stocks are 12 times their 1982 level. Lower interest rates and higher stock prices encouraged borrowing and spending. But these are one-time stimulants. Mortgage rates can't again fall from 15 percent (1982) to today's 5.7 percent. Nor will stocks soon rise 12 times. The implication: again, weaker consumer spending.

Third, the welfare state is growing costlier. Since the 1930s, it has expanded rapidly - for the elderly, the poor and students. In 2003, federal welfare spending totaled $1.4 trillion. But all these benefits didn't raise taxes significantly, because lower defense spending covered most costs. In 1954, defense accounted for 70 percent of federal spending and "human resources" (a.k.a. welfare), 19 percent. By 2003, defense was 19 percent and human resources, 66 percent. Aging baby boomers and higher defense spending now doom this pleasant substitution. Paying for future benefits will require higher taxes, bigger budget deficits or deep cuts in other programs. All could hurt economic growth.

Fourth, the global trading system has become less cohesive and more threatening. Until 15 years ago, the major trading partners (the United States, Europe and Japan) were political and military allies. The end of the Cold War and the addition of China, India and the former Soviet Union to the trading system have changed that. India, China and the former Soviet bloc have effectively doubled the global labor force, from 1.5 billion to 3 billion workers, estimates Harvard economist Richard Freeman. Global markets are more competitive; the Internet means some service jobs can be "outsourced" abroad. Taken at face value, these are sobering developments. The great workhorse of the U.S. economy - consumer spending - will slow. Foreign competition will intensify. Trade agreements, with more countries and fewer alliances, will be harder to reach. And the costs of government will mount. There are also global implications. The slow-growing European and Japanese economies depend critically on exports. Until now, that demand has come heavily from the United States. But if American consumers become less spendthrift, there's an ominous collision. Diminished demand from Europe, Japan and the United States meets rising supply from China, India and other developing countries. This is a formula for downward pressure on prices, wages and profits - and upward pressure on unemployment and protectionism.

It need not be. China and India are not just export platforms. Billions of people remain to be lifted out of poverty in these countries and in Latin America and Africa. Ideally, their demands - for raw materials, for technology - could strengthen world trade and reduce reliance on America's outsized deficits. If so, exports (and manufacturing) could become the U.S.economy's next great growth sector. What's at issue is the next decade, not the next year. We know that the U.S. economy is resilient and innovative - and that optimistic Americans generally adapt to change. People seek out new opportunities; they adapt to change.

These qualities are enduring engines for growth. But they also will increasingly have to contend with new and powerful forces that may hold us back.

Richard Russell's Dow Theory Letters, July 17, 2004

Will unfunded liabilities ultimately bring on American's worst depression? It certainly wouldn't surprise me. Business Week this week runs a cover story in which it talks about US Corporations having built up almost a trillion dollars in unfunded pension liabilities. This is "killing" many of the older companies, who have built huge pension and medical liabilities. The low interest rates of the last few years have also hurt the pension and medical funds (for instance, think Ford, GM and the big airlines). These corporations are now facing stiff competition from new companies who do not have to deal with these liabilities.

But corporate unfunded liabilities are a drop in the bucket compared with US government's unfunded liabilities, which add up to around $45 trillion. Two books discuss this momentous issue. "The Coming Generational Storm, what you need to know about America's economic future," by Laurence Kotlikoff and Scott Burns.

Peter Peterson addresses the government's horrendous unfunded liabilities in his book, "Running On Empty." The sub-title of the book is "How the Democratic and Republican Parties Are Bankrupting Our Future, and What Americans Can Do About it."

Of course, we won't do much of anything about it -- until the problem hits us square in the face. There are only two solutions. One is to cut way back on Social Security and Medicare or somehow privatize them. The second solution is to print the money needed to cover these liabilities, and of course this would be wildly, and I mean WILDLY, inflationary. If this is the path we go on, the dollar would collapse, sending US interest rates through the roof -- while at the same time the economy would unravel.

As I see it, the unfunded liabilities present the basis for the next depression. I think the whole monetary system could ultimately break down in the face of this ocean of unfunded liabilities. Wait, there's such a thing as "starting all over again," and I believe there's a good chance that that's exactly what we'd have to do. Fantastic as it sounds, we might have to dump the entire current system, get rid of the Federal Reserve, and go back to what the US Constitution originally mandated. The US government would issue the money that it needs, the dollar would be backed with a specified percentage of gold, and the idea of a private central bank (the Fed) that can issue any quantity of money it wants -- would be relegated to history.

OK, honestly, I don't know how it will all work out. I do know that the US has built up massive unfunded liabilities. I do know that when you set up systems that are not funded, ultimately you either have to print the money to fund the system, change the system, or jettison the system entirely. But there's one thing that's certain -- any one of the three will entail pain -- a lot of pain.

The last two generations of Americans (people up to their mid-40s) are the only generations in US history that have never had to deal with true hard times. This length of painless era has never happened before. And I don't think most Americans say 45 or younger, can even envision what hard times are like.

What I'm afraid of is that this primary bear market, the bear market that I've been writing about since it started in late-1999, is going to end up as the mother all bear markets. It could easily be the worst bear market since the Great Depression of the '30s. Of course, what's been holding the pain at arm's length, what has kept the bear at bay -- has been debt -- the greatest build-up of debt in world history. How has this been allowed to exist?

One reason is that the dollar is the world's reserve currency. Another reason is that other nations want to continue selling to the US. Our overseas friends sell us their services and merchandise, and they pretend they're getting paid -- paid with fiat paper dollars. Our suppliers then turn around and buy up US assets with the paper dollars they receive.

It's a vast, incredible card game, with nobody yet ready to make the "call." Politicians and central bankers the world over simply hope that somehow the game can keep going. There, however, are those who believe the game will terminate somewhere ahead. These people keep their mouths shut and accumulate gold.

I've given a lot of thought about how to operate in the current environment in view of the trouble that I see coming up. Trouble that will materialize in, I don't know -- three years, five years, ten years. I really don't know -- if I had to guess, I'd guess the trouble will come within four years.

My thought is that there's no fool-proof way we can protect ourselves against what I see coming up. What will be, will be. The debt is there, the liabilities are there -- they're a fact of life. They exist, and, in fact, they're getting worse. My own thought process is to at least "act" as though the dollar will survive -- but just in case it doesn't, I'll continue to accumulate gold.

Stocks are overvalued today. Moreover, there's no yield, no income, from stocks. As I see it, there's no sense at all during a primary bear market holding dividend-less stocks that are overpriced. In the end, it's the guaranteed path to losing money. It's Wall Street's game, but it's a game that makes no sense when stocks are flagrantly overpriced, as they are today. You see, that's the awful secret that no analyst, no brokerage house, no broker will tell you. The secret is that stocks today are not priced to bring you profits; stocks today are priced to give you losses over time.

I liken buying and holding stocks today to gambling in Las Vegas. The longer you play, the surer the odds that the casino will take your money. The casino will do anything to keep you playing, simply because the casino has the odds. The longer you hold stocks today, the surer you will be building losses. Of course, Wall Street wants you to continue buying stocks, simply because that's what Wall Street survives on. Wall Street is a selling organization. That's what Wall Street does -- it sells.

My way, at this time in the cycle, is different. My way is to place a large portion of money in T-bills. A second portion of money goes toward compounding. And a third portion of money goes into gold and gold shares.

Compounding only makes sense if you do it correctly and consistently. That entails placing a certain portion of money in safe securities that pay interest or dividends. The process entails reinvesting all the interest and dividends back into other safe securities that pay interest or dividends. Top-grade municipal bonds will do.

What happens, you ask, if rates go up and the bonds go down? Answer -- the bonds still pay off at maturity, and after 20 years the compounding factor is so powerful that you can "burn" your original purchases.

Again you ask, "But what happens if we're sitting with bonds or T-notes or whatever, and the system collapses?"

My answer -- Then you rely on your gold.

But what happens if the government bans trading or even holding or selling gold?

My answer -- Why would they do that? It wouldn't make sense. But let's say the government acts stupidly (which they usually do); then we're back to what my father told me during the Great Depression. "Richard," he said, "There are only two things you can depend on. Your education, and what you have between your ears. If you have an education, and you're able to think -- you'll always be ahead of the game.." My father was right in 1935, and he'd be just as right today.

As an aside, today's Wall Street Journal, front page carries an article entitled, "Why Today's Soaring Deficits don't Inspire Fear."

Russell Comment -- The answer is that the "soaring deficits" don't inspire fear because we're not feeling the pain yet. Yeah, we'll worry about it when is happens. Besides, if the deficits were really a problem, Alan Greenspan wouldn't let it happen. Sleep on -- Zzzzzzzz.

Richard Russell's Dow Theory Letters, July 9, 2004

Hedge funds -- This is where the "smart money" has supposedly gone as they sought superior total returns in a volatile, erratic and overpriced market. And many hedge funds have been winners, at least up to recently. "But too many cooks spoil the broth," and today I believe there are too many hedge funds. Last year $72.2 billion rushed into hedge funds, and the count is that there are now a ridiculous 7,700 hedge funds with new funds coming into the market every week.

The CSFB/Tremont Hedge Fund index is up 2.58% (as of a month ago), compared with the S&P increase of 1.47%.

So everybody's trying to beat the bear, but in my humble opinion it's not going to be that easy, and I don't care whether you're in hedge funds, mutual funds or any other kind of fund.

I hate to repeat my old adage again, but here goes -- "In a bear market everybody loses, and the winner is the one who loses the least." I'm convinced that my adage will prove to be correct, but sadly I must admit that I don't know where the ultimate island of safety is. The US dollar is vulnerable, but ultimately I suspect that ALL paper money will prove to be vulnerable before this bear market has breathed its last.

My instinct all along has been to buy into the ultimate island of safety, real money commonly known as gold. And lately, (although I own both) my instinct has gravitated more to the actual metal than the stocks. Yes, the stocks have the leverage, but we have to remember that gold stocks are in the business of producing gold, but it's safer to own the actual product than the company that produces the product.

Richard Russell's Dow Theory Letters, July 2, 2004

With the US economy top-heavy with debt, with the US families loaded with adjustable-rate mortgages and other debts, with billions of dollars still "invested" in the carry trade, it wouldn't take much in the way of higher rates to send the US economy into a Japanese-style deflation -- or maybe even worse. Better to let prices continue to inflate, right Alan?

If there's any group that's ultra-sensitive to inflation, it's the bond crowd. For this reason, I was particularly interested in yesterday's bond action, and I included a chart showing the 30 year T-bond closing above its May 27 preceding peak -- thereby establishing a new high for the move. What's so interesting is that the bonds have been advancing ever since their May 14 low -- this in the face of the almost universal prediction that "bonds have nowhere to go but down." As for today, bonds are up again.

And what the surprisingly strong bonds are telling us? I think they're telling us that bond buyers are not worried about the predicted long string of boosts in interest rates. They're telling us that this economy is too fragile to deal with a long series of rising interest rates. They're saying that they know it and that Greenspan knows it and that Pimco Bill Gross knows it.

Here's the salient fact -- Alan Greenspan is more worried about the US economy than he is about inflation. Here's something else that the Greenman know -- it's easy to stop inflation, but it's almost an impossible job to reverse a deflation-prone sinking economy.

So c'mon, Russell, what are the possible "problems" that lie ahead.

First there is the dollar, which I consider the Achilles Heel of the current picture. With the huge trade and current and budget deficits, the dollar is vulnerable. If the dollar swoons, rates will go out-of-control on the upside. And we don't want that, do we (that is, unless we're waiting to buy bonds).

Second, it's the economy itself. It's going to take continuing huge stimulation in the form of deficits and government spending and "friendly" interest rates to keep the US economy going.

Third, it's the consumer. If consumers cut back on the spending and start to pay off debt or even save, the US economy is going to develop a nasty case of pneumonia.

Richard Russell's Dow Theory Letters, June 23, 2004

OK &emdash;I'm going to give it to you straight in big black letters &emdash; and I doubt that you're going to read this anywhere else. The global situation is very deflationary. There's too much debt &emdash; and far too much global production at viciously competitive prices.

Any time the Fed eases up on its inflationary operations, deflation begins to take over. We can see it most clearly in the action of gold. The fact is that the Fed is actually not inflating enough &emdash; and that's exactly what the action of gold is telling us.

Next, why the strength in the dollar, when everyone is saying that the dollar should be heading down (including, I might add, Warren Buffett)? I've said this before, and I'll repeat it &emdash; the HUGE debt position in all areas of the US economy amounts to a "synthetic" short position against the dollar. The dollar's strength is telling us that. Contrary to what everybody seems to believe, there is not enough liquidity in the system. Any time the Fed eases up on the money supply or any time the Fed does not create enough liquidity, the dollar surges (as it's doing today) and gold drops.

Greenspan has a huge problem &emdash; the price of goods is rising (price inflation) and Greenspan is being pressured to raise rates. But the larger global background is deflationary, and I have to believe that Greenspan knows that. What's Greenspan to do? He'll talk about the Fed raising rates in the hopes that talk will forestall inflation, but he'll ACT as if the real problem is potential deflation, and he'll be very reluctant to actually raise rates.

So this is the great irony which nobody understands &emdash; THE FED IS NOT INFLATING ENOUGH. GOLD IS TELLING US THAT! EVEN COMMODITIES SUCH AS COPPER ARE TELLING US THAT!

Richard Russell's Dow Theory Letters, June 17, 2004

The BS goes on and on. In today's Wall Street Journal, Michael Moskow (he's CEO of the Chicago Fed) writes about how superior the Fed is in tracking the rate of inflation. Moskow ends his article (which is entitled "The Inflation Game") with this sentence -- "Over the past 25 years, inflation has come down from double-digit rates to a pace consistent with effective price stability."

Can you believe this garbage? This guy is claiming that we've now reached price stability. Really, then how about this? In today's San Diego Transcript, I read that the median price of a resale home in San Diego is up 35.5% over the same period last year. You see, the great inflation today is taking place is in the price of homes -- which is just where the Fed wants it. Of course, home prices don't enter in the Dept. of Labor's inflation calculations.

So what's it all about? Simple -- the Fed wants to keep inflating the money supply while simultaneously playing down the rate of inflation. However, and this is important and nobody seem to be talking about it -- there are very definite global deflationary forces pressing down on the economies of the world. I've listed these deflationary forces many time over, and they include fierce Chinese, Indian and Asian competition, the price-leveling power of the Internet, world over-production and the price-cutting activities of the world's largest retailer, Wal-Mart.

I have to believe that Greenspan is well aware of these deflationary forces, and I have to believe that Greenspan's huge expansion of liquidity is calculated to battle or at least hold off the forces of deflation.

At this point, the stock market appears chronically overvalued, and the recent low volume on the exchanges may be telling us that people are becoming a bit sceptical regarding stocks that go nowhere on balance while at the same time providing little or no yield.

So where's is all of Greenspan inflation-creation going? It's going into real estate and housing. The word today is -- "Buy a house, buy two houses -- you can't lose. Buying real estate today is a total a no-brainer proposition."

In fact, I read where you can now put land or housing into your retirement program, and people are doing it. Seems that homes and real estate are beginning to replace stocks as the ideal place for your retirement money.

The question -- are houses overvalued today?

Answer -- Home values are now in "sky-high ville." The acid test -- there's no way today that you can buy a house, rent it out, and cover your costs. That situation has always meant that the price of a house has reached the over-valuation level. In other words, it's far cheaper to rent today than it is to buy a home.

To my mind, the great Achilles Heel of the US economy lies in real estate. When the real estate bubble finally bursts, home prices will turn down and we'll find out that real estate can be very illiquid as the volume of turnover dries up. I'm certain that Greenspan is well aware of this, and it's a major reason why he wants to keep "asset inflation" in force.

Basically, asset inflation today is synonymous with rising housing prices. The pin that can burst the giant housing bubble will be rising interest rates, and for this reason I expect at most a .25% increase in the Fed Funds rates, and if Greenspan could somehow get away with it, I know he'd prefer to keep rates at their current low.

Thus, you can expect the Fed to do everything in its power to play down the rate of price inflation while at the same time continuing to inflate the money supply. The Greenspan hope is to keep the punch bowl in place while doing everything possible to ward off the global forces of deflation.

Today the Labor Dept. announced that the Consumer Price Index rose 0.60 in May, the biggest increase since January 2001. But the "core rate" of inflation (minus food and energy) rose "only 0.2%, which is what analysts wanted to hear. On this "great news" the market headed higher, the 30 year Treasury bond rocketed higher, and the dollar sank.

One thing interested me about today's action, and it was this -- why did the very interest-sensitive 30 year T-bond surge up over two points as seen on the chart below? If the news was inflationary, the bonds should have "fallen out of bed." Instead they surged. Obviously the bond market liked today's news.

The daily chart below tracks the long bond. Is this a "double bottom" we're seeing in the bond? Is the long bond starting to reflect deflation, and I mean global deflation?

On the chart it looked as though the bond was ready to break down below its preceding mid-May low. Instead, today the bond registered it largest one-day advance since last March. But I'll be neutral, and just say that I'm going to be watching the action of the 30 year T-bond with intense interest. With the CPI rising at a 7 percent annualized rate, why did this bond surge? Is the bond market beginning to march to the beat of a different drummer?

Richard Russell's Dow Theory Letters, June 10, 2004

Let me explain. As I see it, we're in a primary bear market that was signaled under Dow Theory in September 1999 -- and we've been in that bear market ever since. At the time I stated that I thought this bear market would very likely resemble the extended and very deceptive bear market of 1966 to 1974. I said that because I thought that the Federal Reserve would fight the bear "tooth and nail." I also stated that we were dealing with a case of "INFLATE OR DIE." That was, I believed, the stance that the Fed would take. The Fed must inflate. Otherwise, the heavy debt would plunge the US into a severe bear market recession.

Since 1999-2000 the debt of the US has expanded tremendously. The case for "inflate or die" is now more compelling than ever.

I thought that the stock market "blow off" of the late 1990s should never have been allowed to happen. Stock margins should have been raised, rates should have been raised much sooner and higher. But that's water under the dam.

After the first leg of the bear (2000 to 2002) took place, the Fed panicked (deflation fears) and exploded the money supply while at the same time driving interest rates down to two-generational lows. With it all, the best that the S&P 500 could do was recover half of its initial bear market losses.

During the last few years the corporate sector has helped itself considerably. It has cut its debt and greatly improved its profitability

The consumer sector is another story. Consumer spending now comprises over 70% of the Gross Domestic Product of the US. Thus, the Fed believes that consumers MUST CONTINUE TO SPEND. During the past few years consumers took trillions of dollars out of their home value via refinanced mortgages. With interest rates now climbing, the refinancing party is about over. What's next for consumers.

I've said that I believe consumers are strapped for cash -- that they are "tapped out."' I've said that US consumers have been keeping up their standard of living by borrowing -- and that now consumers are near the point where they are "borrowed up."

Along these lines, there was a little article in today's New York Times, an article so small that it could easily have been overlooked. Here's the headline -- "Consumer Borrowing Slows, Defying Analysts' Predictions." The Article starts, "Borrowing by America consumers rose $3.9 billion in April, less than half the rate of the month before, to a total of $2.03 trillion, The Fed reported yesterday." It was just a little article, but maybe with larger meaning. We'll see.

Richard Russell's Dow Theory Letters, May 20, 2004

Do you get angry when you hear the latest phony government statistics. For instance, today we heard that consumer prices rose 0.2 percent in April, while the so-called core rate (excluding food and energy) increased by 0.3 percent. Anyone living in the real world knows these statistics are manipulated and utterly absurd, but what the hell -- these days we take what we get from our government, and nobody ever guaranteed that government statistics would be honest.

So let's face it -- today we have rip-roaring inflation in prices. That house you own -- the darn thing is worth 1 percent more every month. But wait -- doesn't inflation really mean an accelerating expansion in the money supply? Oh, you want the monetary definition of inflation? Well, we have that too. The latest figures on M-3, the broad money supply, shows that M-3 was up a huge $58.3 billion for the week ended May 3. For the 18 weeks in 2004, so far, M-3 has increased by a whopping $349 billion or at an annualized rate of over 10.2 percent. So at the present rate, the Fed will be adding a trillion dollars to the money supply in 2004. Now I'd call that monetary inflation, wouldn't you?

Question -- Why is the Fed opening the monetary throttle this wide?

Answer -- Because in the background lies the world forces for deflation -- think China and India. And Greenspan knows very well that the giant "debt-bubble" that he has built represents an extreme danger if even disinflation takes over. There are two phenomena that scare the hell out of Greenspan -- rising rates and even the remote possibility of deflation. Either one (they go together) could burst the "debt bubble." If the debt bubble bursts, the whole situation could quickly get out of the control of the Fed.

Therefore, the Fed cannot allow rates to surge, and I'd be surprised if the Fed was not buying bonds now in order to hold interest rates down. Of course, the Fed buying bonds in itself is inflationary. There's simply no easy way out of this situation, but Mr. Greenspan is playing for TIME. He wants to be reappointed and then retire before the whole manipulated economic mess falls apart.

Please keep in mind that such predictions are not serious.

U. Winiger

NYSE WEEKLY COMPOSITE INDEX PREDICTED THRU 2005

by: Dr Stephen A Rinehart

May 2004

Background: Together with another scientist, I developed a computer code over 20+ years ago which could find the major cycles in the long term stock market and I have successfully used the software to trade the NYSE. In particular, the software was useful to define the possible overall broad market moves in the NYSE over several years (using weekly closing data since 1950) for timing your 401(K) moves.

Summary of Results: Since there maybe a network problem with incorporating the graph with this text , I will describe the overall predicted NYSE market moves from the remainder of 2004 thru 2005 (graph attached). The current sell-off in the NYSE is sharp and may continue thru early July 2004. The results still show a possible rally for two to three months in July/August/Sept 2004 followed by a down market starting sometime in Fall (October is usually a bad month in the NYSE) with a final top in late Dec 2004 or early Jan 2005. The NYSE will form a broad top from Jan 2005 thru early to mid- March 2005 (but volatile) followed by a sharply descending market thru the remainder of 2005 (third wave down of a secular Bear Market) with a final bottom possibly not occurring until May 2006!  The fourth and fifth waves down in the coming secular Bear Market may happen from Jan 2008 thru June 2009. The first real bottom in this secular Bear Market is not predicted to occur until June 2009 and the second will occur in Dec 2012!! At this time PEs may have dropped from current 30s to single digits (8 or 9) and stocks could be selling at face value. This will be followed by the largest rally of all time as a huge influx of retirement funds hit the marketplace to buy Chinese/Asian stocks. Remember that Bear Rallies (like we are now seeing) can result in upward moves of 40%+ before the next big drop occurs. It is going to be absolutely wild from March 2005 thru 2015.

Possible Strategy: Get out of 401(K), mutual funds, and stocks by early August 2004 unless you just like playing with fire and taking risks. The top is still predicted to happen in early Jan 2005 for those who like to fish in trouble waters but don't bet on it. This is going to become a very dangerous global financial market in 2005/2006. The bond market may collapse in price if interest rates go sharply up and REITS (Real Estate Investment Trusts) are already taking a beating. Cash will be King but there are immediate buying opportunities in getting a few 1 oz gold coins called American Eagles or Canadian Maple Leafs (buy slowly over time (months) &endash; not all at once because gold prices are very volatile) and save them in safety deposit box for the time being.

Richard Russell's Dow Theory Letters, 10.03.04

Levels to watch, 10 470.74 for the Industrials and 2 822.11 for the Transports. If both Averages violate those levels, the bear market will be reconfirmed under Dow Theory.

At some point the rising edifice of debt cannot be inflated any further. From that point on, the inflationary forces of the debt build up become deflationary.

In the past, when a big copper rise tops out, it's sign that the economy is at or near a turn.

Are too many people on the short side of the dollar? When that happens, I don't care what the fundamentals are, you can get a surprising reversal.

Bonds are in a positive mode.

I believe gold is at or near a bottom.

US consumers continue to buy "like there's no tomorrow." According to last Friday's Fed report, consumer credit outstanding rose by a larger than expected $14.2 billion in January to a seasonally adjusted $2.016 trillion. Wall Street expected a $5.9 billion gain. At the same time, "investors" in January bought just over $40 billion in mutual funds, one of the biggest buying months in recent history.

Mark Faber notes that according to a Yale School of Management poll, 95% of individuals and close to 92% of financial institutions believe US stocks will be higher 12 months from now. People are bullish about the stock market.

The percentage of cash held by mutual funds has dropped to an historic low of 4.3%. Funds are extremely bullish regarding the stock market, at least with other people's money.

Advisors have remained bullish for 44 consecutive weeks. Bullishness is now rampant with Investor's Business Daily's poll of investment advisors showing the bullish percentage now at 59.6% while the bearish percentage is at 18.8%. The bullish percentage of advisors has prevailed for months on end.

In the face of all this bullishness, stocks continue to be drastically overvalued. And despite 45-year lows in short interest rates and the greatest spate of liquidity ever seen, none of the major stock averages, the Dow, the S&P, the Nasdaq or the Wilshire, has been able to rise to new highs. Eighteen months have passed since the bear market lows of September 2002, which is a long time for a bear market rally to remain in force.

Meanwhile, the "conventional wisdom" holds that if there's to be any trouble ahead, that trouble will be held off until "after the elections." Why? How? "Easy, the Fed won't let it happen."

But now we see important divergence in the stock averages. On January 22, the D-J Transportation recorded a closing high of 3080.32. Two trading days later on January 26, the Dow rose to a high of 10702.51. Following that high, both Averages turned down. On the rally that followed, the Industrial Average advanced to a new high of 10737.70 on February 11. The Transports failed by a wide margin to confirm.

In fact, in the face of continuing strength in the Industrials, the Transports have now formed a series of declining peaks.

January 22 -- Transports closed at 3080.32.

February 11 -- Transports closed at 2951.92.

March 1 -- Transports closed at 2916.61.

This is continuing divergence, and a very negative sign for the market. So while investors appear highly bullish and the retail public continues to buy heavily into the market -- the Averages are waving a "warning flag,"

In the face of all the above, I've advised a move to cash and gold with close stops under all common stocks that subscribers still hold.

I'm not alone in this. The cheer-leading Wall Street Journal buried it in its B-section (for shame), but it made headlines on the front page of the Financial Times. The world's greatest investor, Warren Buffett of Berkshire-Hathaway fame, states that he can find few if any stocks to buy which fit his valuation criteria. So Buffett's been building a record cash hoard of $36 billion. Writes Buffett in his annual report just released, "Our capital is under-utilized now . . . It's a painful condition to be in -- but not as painful as doing something stupid."

On top of that, Buffett has invested $13 billion in foreign currencies in a huge play against the dollar.

Writes the Financial Times today, "The last time Warren Buffett chose to sit on the sidelines with anywhere near this much cash, it was a precursor to the largest stock market bubble in history."

Richard Russell's Dow Theory Letters, 28.02.04

The big Picture:

The US has been living over its head for years with the help of two phenomena

1. The US possesses the world's reserve currency, the dollar

2. Debt, total debt in the US is now three times GDP, a ratio that has never been seen before.

In fighting the forces of deflation and in fighting the problems of the burst stock market bubble, the Fed has elected to flood the economy with liquidity while driving short rates down to 45-year lows. This brand of manipulation will only work for a while, and while it's working, it is building new excesses into the economy.

Anytime an item is more than 10 % above its 200 day MA, it is overdue to correct.

Richard Russell's Dow Theory Letters, January 01, 2004

Today we live in a fast-moving, fast-changing world, and I want to address some of the dangers that we may be, or could be, facing.

First, we're living in a world where for the first time since World War II we're facing real economic competition from outside the US. Of course, I'm talking about China, India, Asia, and even Eastern Europe.

Nobody knows how this is going to work out. But look at the facts. China has a bigger population than the US. China's average wages are a fraction of US wages. China is an exporting machine. China has a military capability, and that capability is rising. China is one of two nations on the planet that can say "No" to the US. The other nation is Russia.

China is holding about $125 billion in US Treasuries, and that number is growing by the week. China has a fierce unemployment problem, and it's moving in every way to solve that problem. China is rapidly turning capitalist. Today we hear that China's leaders, in another step toward embracing capitalism, are proposing a constitutional amendment to guarantee the rights of entrepreneurs -- this for the first time since the 1949 revolution. In other words, China is saying that it's granting China's small-business owners the same protection as those enjoyed by foreign-owned enterprises, which have fueled an economic boom in China. So in fact -- China is opening the doors to free-enterprise! China is saying "Your money and your business are safe here."

Paper money is now being created wholesale throughout the world. Stated simply, all paper currency is now valued against each other. But more important, ultimately ALL paper is ultimately valued against the only true, intrinsic money -- gold. In world history, no irredeemable paper currency has ever survived. Since all the world's currency is now irredeemable (in gold), this means that in the end, the only form of money that will survive is real intrinsic money -- gold.

It's not a question of whether gold will survive, it's a question of when the world's current paper money will deteriorate and finally die. I can tell you that irredeemable paper will not survive -- but obviously I can't tell you when it will die. The timing is the only uncertainty.

Gold stocks and gold metal are not the same. Gold mining companies are run by men, and these stocks can be evaluated differently -- they can find new reserves, and they can lose reserves. Gold companies can be run well or badly, There can be mine accidents, and the companies can be regulated by governments. But gold in your hand is the end product. Only two things can happen to gold in your hand. It can be confiscated by government, and it can take more or less paper money to buy an ounce of it.

I do NOT see gold being confiscated by the US government. Confiscation would serve no purpose. Secondly, gold is now too established via ETFs, other nation's populations holding gold, gold in vaults, etc. Gold will not be confiscated. In fact, we may see the time when the US government encourages it's citizens to accumulate gold (as China is doing now doing with its own people).

Silver is not gold. In good times silver becomes a precious metal, but in bad times silver can become an industrial metal. Unlike gold, silver can be "used up" in manufacturing and commerce. Silver is now historically "cheap" compared with gold, There are trends, but there is no law saying that silver must gain relative strength against gold.

I consider that the primary trend of the stock market is down. Yes common stocks have been in a spectacular corrective advance against the primary bear trend. The rise has been generated by the greatest infusion of liquidity in US history along with short rates that have been artificially pegged to extreme low levels by the federal Reserve.

Instead of allowing the normal forces of correction to work following the bull market top of 1999-2000, the Fed has fought the bear "tooth and nail" as I predicted that it would back in 1999 and 2000. In fact, I coined the phrase, "Inflate or Die" as the choices confronting the Fed. Obviously, the Fed chose to inflate -- inflate with a vengeance.

Due to the Fed's manipulations, the US economy was not allowed to correct. Had the bear market been allowed to run its course following the year 2000, I believe we would have born the pain and come out a healthier and far more competitive nation. Instead, we are now a nation loaded with debt and running outlandish budget and trade deficits. At the same time, the dollar has been thrust into a vicious and continuing declining trend.

As I see it, the bear has not been banished. No, the bear has simply been forced back into hibernation. Because the Fed has introduced so many additional excesses into the US economy in order to thwart the bear, I predict that the ultimate end of this bear market will be far worse than would otherwise have been the case.

Extracted from the Belkin Report…. November 2003

Bubble Speak

A time machine seems to have transported investors back to March 2000. The momentum crowd has re-discovered tech (especially Internet and Semiconductors). Bubble Speak is back in fashion - who needs earnings or cares about p/e ratios?

Closing out our 11 month old long position and shorting this market has not been a good call so far (to put it mildly). Mutual fund inflows continue, the tape acts great, charts look OK and reckless investors continue to buy over valued equities with abandon. Stocks were a great buy 12 months ago and have rallied ever since. Why the big appetite to get in now? Mob psychology is autoregressive. Investors expect more of the same trend -- and when that trend has been happening for 12 straight months, investors will confidently pile into a March 2000 Nasdaq top or a November 2003 top. While we wouldn't rule out a slightly higher high for this move, the risk/reward equation is shifting to the downside. This bear market rally is old. Investors should be thinking about how far it has come (a long way), how much further up it could go (probably not very much) and how far stocks could fall when they finally roll over (a lot).

Expectations of a further economic recovery abound. But it probably isn't going to happen. The economic indicators that made us positive over the past year now make us negative (money supply growth, bank lending to businesses and consumers, bank treasury holdings, bank real estate lending, ECRI weekly leading index). All those indicators have already slumped and/or have a downward model forecast.

Weakness in these monetary and economic measures should soon feed through into corporate revenue and earnings misses. October auto sales just came in at a 15.6 million annual rate, below the 16.1 million expectation and way down from September's 16.6 million and August's 18.9 million. The auto sales slump is probably a harbinger of a broader economic slowdown -- one that the stock market is not at all prepared for.

A second area of economic concern is job growth. The US is in a seasonal pattern of layoffs. Initial Unemployment Claims (IUCs) not seasonally adjusted (NSA) have more than doubled from mid September to early January every year since 1982 (all available data). That is 22 for 22 or 100%. We anticipate weekly IUCs (NSA) will increase an average 160,000 over the next 11 weeks for a cumulative loss of almost 2 million jobs. While that real-world job loss is happening, the government will probably report job gains in the seasonally adjusted data. Because an election is approaching and investors are obsessed with job growth, the government must use all its powers to satisfy the bullish mob's appetite. So while 2 million real world jobs are being lost, the government will say the opposite and investors will lap it up appreciatively. Bubble Speak. We cannot affect mob psychology, but we can present numerical analysis of employment conditions for institutions who prefer fact to fiction.

Finally, industry group rotation is gradually shifting toward defensives and against tech. Tech has gradually moved from our outperform prospect list to our under perform prospect list over the past month. Meanwhile, defensive groups like consumer staples have moved in the opposite direction (from under perform to outperform candidates). The model is forward looking. If tech is supposed to under perform and consumer staples to outperform, the market is likely to drop.

In the big picture, defensive groups remain in a bull market relative to the index -- the consumer staples/S&P500 ratio is above a rising 200 week moving average (our definition of a bull market), has had a correction and is probably turning up relative to the index again. Tech is the opposite story. The InfoTech/S&P500 ratio is below a declining 200 week moving average (our definition of a bear market), has had a big rally in that downtrend and is probably turning down again. Those two themes (defensives in relative bull market, tech in relative bear market) support the view that the long term stock index bear market that began in 2000 is still in force and the current position of equities is an inflection point where stocks are looking for an excuse to head lower again. But try telling that to the vast hoard of investors who crave Bubble Speak and who are determined to repeat the mistake of buying the March 2000 top again.

November 20, 2003 / Richard Russell's Dow Theory Letters

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.

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.

October 27.10.03

The Point of a Bear Market Rally / Belkin Report

The point of a bear market rally is to make everyone bullish again before the market does its next swan dive. That process has largely been accomplished. The fear and loathing of equities that the 2000-2002 bear market drilled into investors has been massaged into complacency by the subsequent 12 month rally. Individual investors are buying mutual funds again (even as the 'market timing' fund scandal unfolds). Hedge funds have been squeezed out of short positions. Option volatilities are near record lows (put protection is cheap but unwanted). Downside risk is far from most investor's minds. Emerging market stocks are charging higher -- as capital flows into roach motel markets (you can check in but you can't check out). Forecasts of continued economic expansion spring forth daily from the scribes of Wall Street and Silicon Valley. Analysts and strategists extrapolate current robust earnings into the 4th quarter and beyond. Tech stocks have climbed back out of the gutter into investor's hearts again. Cyclical stocks are also highly esteemed by the rosy consensus crowd -- you've got to own them to participate in that economic recovery that always lies just around the corner.

The 12-month rally has erased pessimism and enhanced the feel-good factor -- what, me worry? That psychology is the perfect starting point for the next bear market decline (it resembles the complacency in bond market psychology that preceded the July bond market rout). The good news is baked into the cake. Stocks are priced for perfection and vulnerable to disappointment.

Although no one seems to care, risks abound. The timing of geo-political shocks is beyond our forecasting prowess, so we'll stick to monetary and economic risks. Measures of credit hit a brick wall over the past several months. It's not the Fed-controlled stuff that is ailing -- it is private sector credit growth that has plummeted (see October 12 Belkin Report). If the economy is doing so great -- why is bank lending growth plunging (commercial and consumer) and money supply growth negative (3 month annualized rate)? Probably because the post-July bond market rout sent a shock and margin call through the financial system, jolting cozy leveraged long Treasury and derivative positions established on the assumption that the Fed would keep short-term interest rates low forever and therefore bond prices couldn't decline. Bad assumption. The bond market sell-off started when bond market psychology was as rosy as equity market psychology is now.

We expect a similar jolt out of the blue to strike equity markets, as struck bonds last July. An involuntary convulsion. The contrast between bullish equity market psychology and deteriorating private sector credit conditions is bizarre. The consensus has come around to believe that a liquidity bubble is pumping up world markets -- just as liquidity conditions deteriorate. De-leveraging in the credit markets should soon feed through to economic decay. Of course, bubble people would say 'that will lead to lower interest rates so who cares? Lets keep partying.' A more cynical observer might suggest that short-sighted monetary and fiscal policies have borrowed growth from the future -- and the cupboard is now bare with regard to auto sales, housing and consumption growth. With nothing left to borrow from the future -- and a single minded obsession with debasing the Dollar, policy makers better pull a rabbit out of their hat quickly, or the complacent equity market might have a rude shock. The bear market rally has done its job well. Almost everyone is back on board -- now that it is time to turn down again. De-leveraging the System he Federal Reserve deliberately leverages the system -- every cycle seems to get more brazen and dangerous. Fed pump-and-dump operations resemble those of a boiler room penny stock operation -- cram a bunch of leverage (excess credit in the Fed's case) into financial markets, entice investors into excessive long positions in the targeted market (penny stocks for boiler rooms, bonds and equities for those who follow the Fed), push the bubble as far as it can go -- then watch from a distance (and deny responsibility) when it all goes up in smoke. The Fed seems to do one of these pump-and-dump operations about every four years. The last was the 1999 Y2K credit expansion, which inflated the early 2000 Nasdaq bubble and led to the subsequent crash. The major one before that was the 1992-93 credit expansion, which culminated in the 1994 global bond market crash. The process of leveraging up the system sends out a signal -- go forth and speculate. Buy stocks, bonds and houses, build buildings, leverage up your holdings. Take no thought for tomorrow. Swing for the fences. At some point, the leveraged Ponzi scheme collapses -- either as a result of a Fed tightening -- or it simply topples from its own dead weight.

Markets and the economy are approaching that point. Since Fed honchos are promising never to raise interest rates again -- it probably won't be a Fed tightening that upsets the apple cart this time. But there is increasing evidence of an involuntary deleveraging (see charts). 1) Money supply growth has plummeted from 14% to just 1% since July (3 month annualized growth rate of M2). 2) Banks are liquidating Treasuries. Treasury holdings at commercial banks have dropped $100 billion since July.

The Fed has pumped banks full of Treasuries with its low interest rate policy -- and now it is dump time. The model forecast sees an ongoing liquidation of Treasuries by banks. 3) Commercial lending has gone nowhere since July. The model sees no recovery in bank commercial lending. 4) A slowdown in real estate lending. So far it is just a slowdown in the growth rate, but the model sees a bigger real estate lending slowdown ahead.

This involuntary deleveraging process should feed through into weaker corporate results and economic statistics. This is a seasonally weak period for unemployment. The average increase in Initial Unemployment Claims (IUCs) not seasonally adjusted over the past four years was 421,000 from late September to early January. The Labor Department tries to disguise this with seasonal adjustments. Just be aware that every commentator babbling on about stronger job statistics is ignorant of the most obvious seasonal trend in existence. They are not talking about real-world unemployment claims -- they are blabbering about how fudged Labor Department numbers differ from other Labor Department fudged numbers. Why financial markets take any notice of this nonsense is beyond us. In any event, many more people will be losing jobs over the next three months in the real world -- no matter what Labor Department or CNBC morons say.

So the process of leveraging up the system has run its course and an involuntary deleveraging is underway. Deleveragings are not low-volatility events -- a financial market dislocation in the fourth quarter is likely. Earnings reporting season is keeping a bid under stocks for now, but the news should be mostly downhill from here. S&P500 earnings growth is at a 50 year high -- the profit cycle is probably topping. Overvaluation is still a huge issue -- the S&P500 P/E ratio is still 1.2 standard deviations above its long term average. That may seem cheap (down from 4 standard deviations), but the bubble era warped the concept of value. Templeton says to buy at a point of maximum pessimism and sell at a point of maximum optimism. For the current cycle -- this is a case of the latter.

October 22, 2003

Richard Russell's Dow Theory Letter

China and Asia can, and are, producing merchandise far below the cost of what that merchandise can be produced for here in the US. Now the service industry too (think India) is moving towards Asia. This is creating huge imbalances in the transfer of funds. It's producing half a trillion dollars a year in a US negative trade balance.

On top of this, the US Federal budget is out of control to the tune of another half trillion dollars. These enormous imbalances must be addressed sooner or later. They are unsustainable.

My belief is that ultimately the dollar must fall, maybe 30 %, 40 % or even more against a basket of all currencies including the Asian currencies. This is a fundamental market solution. Even if this happens it may not solve the trade imbalance problem. But it would be a fundamental move in a situation that is unsustainable.

The real bear market still lies ahead.

Written by JAY TAYLOR

The reality of the U.S. dollar now appears to be really sinking in. And so we are hearing that various nations like Russia, India and China adopt policies that increase the use of gold as a monetary asset. This past week a report from a German government source said Russia may soon demand payment in Euros for its oil. That is significant because Russia is now the second largest exporter of oil, behind Saudi Arabia. Some people thought Saddam's downfall was not weapons of mass destruction but rather his belligerence against the U.S. in demanding payment for oil in Euros rather than in dollars. And another issue that is downplayed in our press, but which I think could be very significant, is the move among the Islamic world, led by Malaysia to use the gold dinar as a medium of exchange for trade among themselves. All these signs of the dollar's demise are, I believe, very bearish for the dollar, the bond markets, the real estate markets, and the U.S. economy in general.

The Dollar/Treasury Markets

Steve Forbes made a point the other day on CNBC, saying he thought interest rates would rise for "good" reasons rather than bad reasons. The good reason for interest rates to rise, he said, was because of a stronger economy. What is a bad reason for interest rates to rise? We talk about that almost every week because we think that is the key to why the U.S. economy is destined to falter. When interest rates begin to rise because foreigners are selling their U.S. investments, it will be "game over" for the U.S. economy.

Remember, the Clinton Strong Dollar Policy was important to make the economy look good on Bill Clinton's watch. That was true because in order to maintain an illusion of prosperity during the Clinton years, foreigners had to lend us an ever-increasing amount of their surplus trade dollars. Without those recycled dollars being sent our way, interest rates would have risen dramatically, thus choking off economic growth and a booming stock market. So we have become addicted to this monetary narcotic and like any addiction, over time, it becomes life threatening. What I have been watching for each week is an indication that interest rates are rising because foreign money is leaving the U.S. A sustained decline in the dollar index shown below, coupled with rising interest rates also shown below, would provide evidence that this dangerous trend is underway.

Indeed, the charts above illustrate that over the past two weeks, interest rates have been rising as the U.S. dollar has been weakening. We are told that the economy is getting stronger. I'm willing to concede that we have seen some modest gains in the economy although as we pointed out last week, the failure for job growth to respond to the so-called economic turnaround and also for companies failing to see "top line growth" is very disturbing. We think that given the greatest monetary stimulus in history and an incredibly strong fiscal policy, the response of the U.S. economy is pitifully anemic. Unfortunately, we remain confident that Ian Gordon's Kondratieff winter forecast is right on track.

Moreover, I remain convinced that much of what we are seeing in so-called improved economic conditions is nothing more than the slight expansion of the economic bubble that has little or nothing to do with real and sustainable economic growth. Indeed the rise in the equity market, which, like a sedative, makes so many Americans feel good about things, is quite a bubble in itself. Not only are PE ratios still in nosebleed territory, but also we are seeing huge increases in margin debt, which is adding fuel to the equity fire. In fact it is my understanding, based on a CNN report the other day, that margin debt has now surpassed levels at the top of the equity bubble in 2000.

Meanwhile, if things are so good in the economy, we wonder why those with the best seats in the house to view this improvement are selling their stocks en masse? According to the latest numbers I have seen, insiders sold $8.7 billion worth of their stock representing a sale of $36 for every $1 purchased.

Who do you believe: Wall Street sales guys who have to keep promising you things are getting better so they can sell you their products in order to feed their families? Or do you believe corporate CEOs who have a vision of the future of their companies from the inside?

As for the stock market, what we have seen so far (from the lows of this past March), certainly has not reversed the bear market that began in March 2000. It certainly has led the majority of people to think the worst is over. But we hardly think that is possible given an enormously overvalued stock market, which, with a PE ratio, means that you have to wait about 33 years to get your investment returned to you. And that assumes retained earnings are in fact as real as the accounts claim they are.

September 24, 2003

Richard Russell's Dow Theory Letters

We print phony money to buy foreign real merchandise and services. Our foreign friends accept the phony money and with that money they buy our bonds. Why do they buy the bonds? They buy our bonds because if they didn't buy them, rates in the US would go sky high, the US would sink into recession, and our foreign friends couldn't sell us their goods and services. In other words, we buy their goods with the money they now lend us.

Foreigners now own 46 % of US Treasuries. At some point they will have had enough. They'll be loaded with too much US paper, and when it's perceived that there's too much US paper, then the dollar will start a serious slide.

So the phenomenon that's holding the global economy together at this point is the continued acceptance of US dollars. As long as the world continues to accept dollars the game can go on, and the US can continue to operate while producing massive deficits in both its trade and in its currency account.

The high for gold set in 1980 was 850. Let's take the low for gold as roughly 250 recorded in 2002. That's a spread of about 600 points, so half of that is 300, and we'll add the 300 to 250. Thus the halfway level of the entire bear market comes in at 550. And I truly believe that 550 is a very important number for gold. In my opinion gold will, in due time, move above the 550 level.

Well, so far the markets have acted as though there are no problems, and I wonder whether this can continue. The markets are seldom taken by surprise, so am I missing something? Maybe, but then I remember the old adage, "The market always does what it's supposed to do, BUT NEVER WHEN". It's a recovery based on liquidity, upward momentum and a total ignoring of values.

It takes a lot of time and force before the 20 month MA can cross above or below the 40 month MA, and this statement applies to everything tradeable from coffee to gold to stocks. In November 2001 the 20 month MA crossed below the 40 month MA, and I took this to signal a change in the direction of the primary trend. A bear market has started. I am assuming that before this bear market is ended, we will experience some of the worst and most vicious bear market action in US history.

Richard Russell's Dow Theorie Letter, August 21,2003

First, a housing bubble has been built. Due to low mortgage rates, Americans have rushed into housing, driving home prices up to absurd prices. And with the housing boom, more debt has been built into the system.

Second, the stock market bubble has been brought back. Is the stock market a bubble? With the S&P selling at 32 times trailing earnings and providing a yield of 1.7 %, I say the stock market is now most definitely in a bubble.

Third, in driving short rates down, the Fed has created a bond market bubble. At the recent low, 10 year T-notes were yielding 3.1 %, rates not seen in almost five decades. The bond bubble has now suddenly and totally burst, sending bond rates and mortgage rates higher. This morning the rate on 30 year fixed rate mortgages rose to 5.71 %.

So what lies ahead? A continued battle on the part of the Fed to thwart the forces of deflation. The more persistant the forces of deflation, the greater will be the Fed's inflationary efforts. The Fed will use every resource, every trick in the books to thwart deflation, I call it a "death struggle". It's a battle the Fed has vowed not to lose.

In the end, the Fed's all out inflationary war will impact on the dollar. Too many dollars will be created (of course that's happened already), but as the dollar is systematically destroyed, bonds will become suspect, and the whole world of financials will come under suspicion.

When in doubt, stay out.

Richard Russell's Dow Theorie Letters, July 27, 2003

The great bull market started with the Dow at 759 in 1980. The bull market continued to a high of 11 722 in the year 2000. That amounted to a rise of 10 963 points. Half of that is 5 481. Adding 5 481 to 759 gives us the halfway level of 6 240. So 6 240 becomes the 50 % of halfway level of the entire bull market advance from the years 1974 to 2000.

The 50 % Principle is saying that on a big picture basis, as long as the Dow can hold above 6 240, the situation is constructive. Many months have now gone by, and the Dow has never broken the 6 240 or 50 % level. This is constructive and a plus for the market, at least so far. The fact, that the Dow has never violated 6 240 allows the Dow to advance and possibly test the highs again at 11 722.

Now here's the other side of the 50 % Principle. On the decline from the January 2000 high of 11 722, the Dow sank to an October 2002 bear market low of 7 286. This was a decline of 4 436 points. Half of that is 2 218. Adding 2 218 to 7 286 we get 9 504. So 9 504 is the halfway or 50 % level from the bull market high to the bear market low. Applying the 50 % Principle, we can now say that if the Dow can rally above 9 504, this would be a very bullish technical achievement. In fact, if the Dow can advance above 9 504, the way would be open for a retest of the 11 722 high.

However, if, on any and all advancing action, the Dow fails to better 9 504, then the odds are that the Dow will, in due time, decline to test its October low of 7 286. If 7 286 is violated, then the odds increase that the Dow will decline further to test the critical 6 240 level.

Somewhere ahead, and I obviously can't predict the timing, the Dow will either break out above 9 504 or the Dow will turn down and violate its bear market low of 7 286. So the 9 504 or 7 286. What the Dow does in relation to those two levels will tell us a lot about the future course of both the stock market and the US economy.

In June NEM (Newmont Mining) broke out above a massive accumulation pattern, and I thought this was very significant action. NEM is the leader, the largest gold producer in the world, showing pattern of long term accumulation and then breaking out topside of this pattern.

Richard Russell's Dow Theorie Letters, June 18, 2003

America, clearly, has completely unfettered credit and capital markets, and in the last two years, the economy also got the most prodigious monetary and fiscal stimulus. Comparing the resulting, virtual credit and debt deluge with its miserable economic effects, there is manifestly a radical disconnect between financial system and economy.

For sure, American producers are facing insufficient demand. Yet we hasten to add that all this talk of deflation and lack of demand in America is ludicrous in the case of a country that is running a current-account deficit of now more than $500 billion, or over 5% of GDP.

Such a deficit reflects, by definition, an equal excess of domestic spending over domestic current output and income. However big America's recorded capital overhang may be, the record-high and still-rising trade deficit indicates that the true lack in the U.S. economy is not credit and effective demand, but competitive capacities.

What the reported capacity overhang probably reflects is overwhelmingly past malinvestments. Considering the huge amounts spent by American firms and consumers on foreign goods, America's growth problem is definitely not on the economy's demand side, but on its supply side. And as to credit creation, there is obviously far too much of it, not too little, resulting in a tremendous imbalance between the huge amounts of credit going into consumption and the tiny amount going into capital formation.

America has always been a high-consumption, low-investment and low-savings economy. But this time, this pattern went into unprecedented imbalance. This bias towards consumption is not by accident. It is a traditional, widespread view in America that consumption is a far more important element in the economy than investment.

Typically, the policies of all presidents were aimed primarily at stimulating consumption. Even the logic behind the Bush government's tax cut for dividends is that it will stimulate consumption through wealth effects in the stock market. Another result of this bias has been a credit system that is overwhelmingly geared toward consumer credit.

This notion that consumption governs business investment and economic growth has always been confined to the world of English-speaking economists, primarily American economists. And by the way, it was not Keynes but some obscure American economists, Foster and Catching, who caused a sensation with this idea in the 1920s. At the time American producers invented and developed consumer installment credit. Construction and business fixed investment stopped growing in 1926. During the following three years, consumption alone accounted for total GDP growth. To us, the parallels in this respect between then and today are ominous.

In essence, it is a growth model that builds completely on consumer credit because consumer incomes &emdash; normally the main source of consumer spending &emdash; essentially derive from what the consumer earns in the production process.

It is our long-held view that this obsession of American policymakers and economists with consumer spending misleads them to pay far too little attention to business investment and the influences that spur or suppress it. The apparent, conclusive cause of the U.S. economy's protracted sluggishness is the slump in profits and capital spending, and we see nothing that suggests any improvement.

What induces businesses to invest and produce is ultimately one single thing, and that is the prospect of profit. Profits and profit expectations are paramount for investment spending and economic growth. "We live in a society organised in such a way that the activity of production depends on the individual business man hoping for a reasonable profit… The margin which he requires as his necessary incentive to produce may be a very small proportion of the total value of the product. But take this away from him and the whole process stops. This, unluckily, is just what has happened," wrote economist John Maynard Keynes in 1931.

And, unluckily, this is just what has happened this time all around the world. In the capitalistic economy, profits lie at the heart of economic growth. In the United States and many other countries, profits as a percentage of GDP have collapsed to their lowest level in the whole postwar period. Yet it strikes us how little attention this disastrous fact has been finding in the public discussion.

* * * * * * *

For the U.S. post-bubble economy it is inflate or die, postpone the day of reckoning at all costs and hope for a miracle. Fighting the painful consequences of the bursting stock market bubble with looser and looser money, the Greenspan Fed has created three new bubbles &emdash; a housing bubble, a mortgage refinancing bubble and a bond market bubble with unprecedented leverage.

Endless liquidity is available for speculation of unprecedented recklessness. Debt spreads have virtually collapsed as speculators are turning to junk for higher interest rates. The riskier the bond, the sharper it has recovered. With its well-founded fear of economic vulnerability, the Fed has set the stage for one final period of parabolic credit excess.

The American public is closing its eyes to the fact that this greatest credit bubble of all times has hardly had any visible effects on the economy. Yet there remains an unbelievable optimism that the loose monetary and fiscal policies will in due time stimulate a strong recovery. Hard evidence that the U.S. economy is heading back into recession will, instead, prick all these bubbles.

Richard Russell's Dow Theory Letters, June 11, 2003

On May 2 the Transports did close above their January 6 high.

The upside target for the Dow was 8931.68.

On June 4 it was "mission accomplished"

So far, the direction of the market is up, even though the stock market is heavily overbought.

This is a rally in a bear market.

Richard Russell's Dow Theory Letters May 29, 2003

Let's talk about the current upward correction in this primary bear market in stocks. The broadest measure of what's happening in the market can be gauged using the 50 % Principle. The 50 % Principle should only be used with an average, and only following extended moves in both duration and extent.

The decline from the year 2000's high of 11722 in the Dow has gone long enough and far enough so that using the 50 % Principle is now valid. The bear market took the Dow from its January 2000 high of 11722 to an October 2002 low of 7286. Since October 2002, the market has been in a corrective or rising phase. The question is how far will this correction carry, and can the correction recoup better than 50 % of the bear market losses?

The halfway level of the entire bear market decline, so far, is 9504. The 50 % Principle tells us that as long as the Dow remains below 9504, the situation remains long term bearish. The Dow can trade below 9504 as long as it wants but if it can not close decisively above 9504 it can be taken as long-term bearish action. The 50 % Principle tells us that if the Dow remains below 9504, then in due time the Dow will decline to test or break below its bear market low of 7286.

However, if the Dow can close decisively above 9504, then the momentum will switch to the upside, and in due time the Dow may rally to test its preceding bull market high of 11722 or even surpass that high. In the meantime, we can either trade the market, hoping to stay on the right side of the secondery trend. Or we can sit on the sidelines and watch the show.

Richard Russell's Dow Theory Letters, May 21, 2003

Our uncomfortable Treasury Secretary Snow is providing the world with a new definition of a "strong dollar." Snow said that his understanding of a strong dollar is the people should have confidence in it. "You want them to see the currency as a good medium of exchange, you want the currency to be a good store of value, something that people are willing to hold, you want it hard to counterfeit."

Hey, what about the dollar compared with gold or other currencies? Mmmm, well, the Treasury secretary didn't get into that.

Along those line, it should be noted that the Treasury has dreamed up an exciting addition to our currency. Yes subscribers, the Treasury will be adding color to the twenty-dollar bill. On Snow's encouraging words, the dollar slumped another 20 points today, while the euro rose to within a penny of its all-time high of just over 1.17.

It should be noted that not all it well on the part of President Bush's economic team. Receiving their walking papers, so far, have been the Secretary and the Deputy-Secretary of the Treasury, the head of the National Economic Council, the Chairman of the Council of Economic Advisers, the Director of the Budget, and the head of the Securities and Exchange Commission.

In the meantime, the IMF warns that Germany is at high risk of deflation and that Japan might suffer further price declines. The IMF added that Hong Kong and Taiwan are also experiencing deflationary pressures. The IMF appointed a special task force to study deflationary risks in the world's 35 largest economies in December amid rising concern about global price declines.

So what's really happening? The world is suffering from too much in the way of goods -- and consumers are exhausted from too much debt and too much spending. A major problem aside from over-supply and under-consumption is the vast differential in wages between the developed nations and China, India and the Asian nations. The fact is that China alone could easily supply the entire world with all the manufactured goods that it needs -- but even that would not solve chronic Chinese unemployment.

All this puts a frightened US Federal Reserve in a difficult spot. The US is confronting a half-trillion dollar (or more) budget deficit, a half-trillion dollar (or more) current account deficit, a dragging economy, and in the face of this the Bush Administration is pushing for major tax cuts and stepped up spending.

No currency can hold up in this kind of climate. Something had to "give," and that something is the dollar.

The Fed has little choice but to open the spigots of the money supply and warn of even lower rates to come. At the same time, the Fed, almost daily, predicts that some of the surging liquidity will somehow be spent by consumers who are already "spent up," and by manufacturers who don't need to build new sources of supply.

The more the forces of deflation press on the US economy, the more panicky the Fed, and the more the Fed will work the liquidity spigots while warning of lower interest rates to come.

The beneficiary of this gathering economic nightmare is real money -- better known to you and I as gold.

*******

Richard Russell's Dow Theory Letters, May 19, 2003

Ah, there's nothing like a market that opens on news. Today's news -- The euro surged to a four-year high against the dollar.

Gold, of course, has been "watching" the weak dollar intently. In recent sites, I've been drawing attention to the "head-and-shoulders" bottom that has been forming in gold. Over the last few days I've stated that gold is "working" on the right shoulder of this pattern. The upside breakout from the head-and-shoulders pattern, I said, would come if June gold could rally above 337.50.

This morning, as the June Dollar Index broke to a new low, June gold rallied over four dollars to a high of 339.00, then backed of a bit but tended to hold in the 337-338 area.

Subscribers must note how tentative, how reluctant, the gold shares are to react to any better action in gold, the metal. This is typical action during the early phase of a bull market. It's obvious that the public is not in the gold shares (do any of your friends own gold or gold stocks?), and thus gold shares are being bought by only the most enthusiastic element of the "gold-bug" fraternity. This has meant that buying of gold shares has been tentative, sporadic and erratic.

With years of denigration and bad-mouthing by the central banks of the world, the public is hardly going to turn bullish on gold in a matter of a few weeks or months. It's going to take a long period of "good action" by gold before the public and most funds become "friendly" to gold and gold shares.

But there's a "good" side to this suspicion and antipathy toward gold. The good side is that gold stocks remain on the bargain counter. Remember, gold mining companies enjoy huge leverage as the price of gold rises. Their expenses remain roughly the same while the price of their product, gold, rises. This is the single reason for holding gold shares as well as the basic product, gold

But again I want to warn subscribers that holding any item early in a bull market entails a test of nerves. A bull market wants to advance while taking the few possible number of investors with it. How does it do that? It does it by making it very damn difficult on your nerves to hold the right items.

*******

Richard Russell's Dow Theory Letters, May 1, 2003

Interest rates have been pulled down and down, the money supply has been blown up and up. But what if the banks can't find borrowers, and what if manufacturers are already producing too much in the way of goods, and what if manufacturers don't want to borrow and what if commercial and industrial loans keep sinking (which they are)?

Well if all the above materializes (and it is), then money turnover or velocity sinks and it becomes almost impossible to "stimulate" the economy.

The danger of deflation is that because actual interest rates can't drop below zero, deflation makes negative real interest rates unattainable. And how the devil can Alan Greenspan and crew drop rates if they're already at zero?

No one yet knows whether the US is heading for actual deflation. But believe me, the Fed is thinking about it, even though they deny the possibility of deflation almost daily.

The danger of deflation is that consumers put off buying because they think goods will be cheaper tomorrow and the next day.

Deflation is a problem because in deflation debts become much more difficult to service.

In deflation, banks loan less and this is a pressure on the money supply. It can shrink during deflation.

In deflation, corporations cut back on their activities, because they are preparing for slowing business and lower prices.

Perhaps worst of all, during deflation the mind-set turns to saving, since money becomes worth more, and because pressure is on all prices. As far as manufacturers and stores are concerned, pricing power is nonexistent.

The world has survived deflation before. But today something new has been added. It's the massive differential between US wages and Asian (Chinese) and Indian wages. This has forced US manufacturers to transfer billions of dollars worth of manufacturing facilities overseas while at the same time firing thousands of US workers. These are not just jobs temporarily shut down, they are jobs that are permanently lost.

OK, enough. How about the stock market? The stock market is overbought, we know that. And the stock market will correct, we know that. How big a correction? We don't know that. I expect the correction to start any time -- very likely next week.

*******

Richard Russell's Dow Theory Letters, April 22, 2003

The plot is easy to read. The Fed has read it all along. The plot is as follows -- American consumers MUST AT ALL COSTS CONTINUE TO CONSUME. What keeps America's consumers spending? The phenomenon that keeps them spending is the rise in home prices, along with the money they pull out of their home equity through refinancing.

It all boils down to this. The Fed must keep interest rates low and lower so that consumers continue to buy homes and so that home prices continue to rise and so that consumers can continue to pull equity out of their rising home prices.

Thus, the US economy now depends on the trillion dollar housing industry. If housing tops out, if home prices head down, the US economy will be in major trouble. The Fed is well aware of this, and the Fed will do anything it has to -- to keep people buying homes and to keep home prices rising.

But here comes trouble. In March housing starts surged 8.3% to a record annual rate of 1.78 home starts. Home starts are terrific. But home sales are starting to decline. God help us, the US may be running out of buyers!

For this reason, it would not surprise me at all if the Fed dropped rates another half percent. The Fed is desperate to keep the housing boom going, After all, it's the only "boom" we've got (except, of course, for the boom in debts and deficits).

So the eyes of the Fed are on housing.

Greenspan is back telling the world that there is no "housing bubble." But as we all know, Greenspan couldn't spot a bubble if he was sitting on one. Furthermore, it's been said that you can't identify a bubble is you're inside one. But believe me, housing is in a bubble.

One proof of the bubble is the ratio of home prices to rent costs. Currently, the ratio is near its highest level in history, meaning that it's much cheaper to rent than to buy a house.

I've been talking about that in different terms for decades. The example I use takes us back to the early 1940s. Those were dark days during the Depression. In the early 1940s brownstone homes (two to five story houses) in New York City were so cheap that you could buy a brownstone for $30,000 with $10,000 down. The brownstone would be half occupied and you could still make 25% on your money.

My father, who was a real estate man all his life, used to call that "out in four years." In other words, you could buy the brownstone for $10,000 and get your money back in four years. And that was with the building half rented!

Those were the days when housing was a great bargain. The only trouble was that people were afraid to buy. Today those same brownstones sell in the millions of dollars.

What I've just described, the situation in 1940, is the direct opposite of the situation today. In those days people were frightened, money was scarce, and if you did have money you kept it in the safest place possible, most likely in the bank or in government paper.

So as I see it, the current housing situation is highly dangerous. Home prices are too high, they're financed with too little equity, and the nation, I believe, is beginning to run out of buyers.

*******

Richard Russell's Dow Theory Letters, April 14, 2003

What's inevitable and eternal? Death, taxes and the bullshit that's always coming out of Wall Street. People forget that Wall Street is essentially a selling organization. Consequently Wall Street possesses many of the world's best salesmen.

But what Wall Street hates and despises and won't deal with is the thesis that we are in a great primary bear market that is far from ended. This bear market will end the same way all other great bear markets have ended -- in exhaustion, with stocks selling at great values or to put it more realistically, with stocks selling "below known values."

I just read Fred Hickey's latest very fine High-Tech Report, and he chastises investors for buying some of the leading tech companies which he shows are selling at absurdly inflated prices.

Then this morning I picked up the latest issue of Barron's, and I read "Bubble, part II" and inside I read the story, "Bubble Redux, Look out below! Internet stars Yahoo, eBay and Amazon again look very inflated." Barron's shows price/earnings estimate for Amazon at 80.2, for eBay at 65.7 and Yahoo at 69.3. I'd say these leading stocks were overvalued, wouldn't you?

The fact is that most stocks are still very overvalued. The Standard & Poor's 500 is now the standard that almost all of Wall Street now accepts. The S&P 500 is now selling at 31.01 times reported earnings, while sporting a dividend yield of 1.87%. Standard & Poor's new "core earnings" would show the P/E on the 500 at an even higher and more ridiculous level.

By now readers of my reports know that at major bear market bottoms, the S&P will sell at 5 to 8 times earnings while providing a yield of at least 5%. But since this bear market is following the greatest and most speculative bull market in history, I expect the eventual bear market bottom to give us values that may not have been seen since the great bear market bottom of 1932.

I've been mulling over another phenomenon that we may see in this bear market. And that is a long period when most of the time-honored technical systems fail to work. The reason I say this is because the stock market has a disconcerting habit of double-crossing whatever system is popular and whatever guru of the moment is popular (remember Abbey Cohen, remember -- who can forget -- Alan Greenspan).

For that reason, I'm more than ever concentrating on just the actual movements of the stock averages. After all, if the Dow and the S&P and the Wilshire are all rising, there's no argument. Face it, the market is rising.

So I hate to say it, but I'm becoming increasingly skeptical of all systems except the one based on the action of the Averages, and that's Dow Theory. Dow Theory entails values and the cycle of overvaluation to undervaluation and back to overvaluation again. This is not a timing cycle -- a bull market can last for three years or 20 years. In fact, a basic thesis of Dow Theory is that "neither the duration nor the extent of a primary movement can be predicted in advance."

And that's why the Dow Theory is not understood or followed by many analysts today. Most analysts like to make definite predictions. "This bull market will end in three years." "The bear market will terminate in 2007." "Stocks will never sell at 10 times earnings in our lifetime."

Investors are like other people, they hate uncertainty and they love certainty. Investors will always follow an analyst who makes definite, unhedged predictions. An analyst who makes unhedged predictions "sounds" like he knows what he's talking about.

But Robert Rhea, the great Dow Theorist of the '30s, warned, "The more cocksure the analysts, the bigger the quack."

The market can do anything, and if you accept that, then you'd damn sure better tone down your predictions, because if you don't, you're heading for that great Wall Street graveyard, the graveyard of analysts who've gathered a huge following and then turned out to be very, very wrong.

Which is why the late, great Bob Bleiberg, former editor of Barron's, always warned, "If you forecast a level for the market, never use a date. Or if you forecast a date for the market, never pick a level."

*******

12.04.03

Mit rund 330 Dollar je Unze notiert das Edelmetall nun wieder auf dem Niveau vom letzten Dezember.

Die Hausse des Goldes begann weit gehend unbemerkt bereits im April 2001 bei einem Preis von 255 Dollar je Unze - deutlich vor dem 11. September und lange vor der Irak-Krise. Der Preisanstieg hat gewichtige fundamentale Gründe. Die wahren Ursachen, und darin sind sich die Experten der Minenindustrie und die Konzernchefs der Goldförderer einig , haben vielmehr mit der aktuellen Lage im Finanzsystem und den alten Stärken des Goldes zu tun. Folgende Gründe sprechen dafür, dass sich die Hausse des Edelmetalls in den nächsten Jahren weiter fortsetzten wird:

Die fundamentale Marktsituation

Seit Jahren reicht die Goldproduktion der Minen nicht aus, um die Nachfrage nach Gold zu decken. Im Jahr 2001 zum Beispiel wurden rund 400 Tonnen weniger Gold gefördert, als die Schmuckindustrie und Goldinvestoren konsumierten. Die Differenz wurde einmal mehr aus den Beständen der Zentralbanken gedeckt. Zu den grössten Goldverkäufern gehörte dabei wie auch 2002 die Schweizer Nationalbank. Der Preis des Edelmetalls war Ende der Neunzigerjahre während Jahren so tief, dass Goldminen gleich reihenweise stillgelegt wurden. In Südafrika, dem grössten Goldproduzenten der Welt, sank die Zahl der Arbeiter in der Goldförderung von 1990 bis Ende 2002 von 400000 auf 200000. AlleinAngloGold, der grösste Goldförderer des Landes, schloss 24 Minenschächte. Ohne die umfangreichen Verkäufe der Zentralbanken hätte der Goldpreis auf Grund vonAngebot und Nachfrage schon wesentlich früher steigen müssen. Da nun ein Ende der Zentralbanken-Ausverkäufe immer absehbarer wird, legt der Goldpreis seit 2001 wieder zu. Doch auch noch auf dem jetzigen Niveau lohnt sich der Goldabbau für viele Minengesellschaften nicht. Die weltweiten Fördermengen sinken nach wie vor. Gleichzeitig wurde in den vergangenen fünf Jahren wegen der tiefen Preise nur wenig in die Exploration von neuen Vorkommen investiert. Erst ab einem Goldpreis von über 350Dollar lohnt sich nach der Schätzung von Experten die Ausweitung der Förderung für die marginalen Produzenten wieder. Doch von der Exploration bis zum Abbau von neuen Vorkommen dauert es in der Regel vier bis sieben Jahre.

Die Reduktion der Terminverkäufe

In den Zeiten sinkender Goldpreise haben sich die Minengesellschaften vor allem mit Terminverkäufen von Gold (Hedging) über Wasser gehalten. Damit waren sie gegen sinkende Preise abgesichert und konnten gleichzeitig von höheren Preisen profitieren. Denn die Future-Preise für Gold lagen während Jahren deutlich über den je-weiligen Marktpreisen. Dieses Phänomen, «Contango» genannt, kam dadurch zu Stande, dass die auf Gold spezialisiertenBanken bei den Zentralbanken zu tiefen Zinsen von 1 bis 2 Prozent Gold ausleihen konnten. Das geliehene Gold wurde sofort auf dem Markt verkauft und der Erlös in der Regel in mit rund 6 bis 7 Prozent rentierende US-Staatsanleihen investiert. Auf Grund der satten Zinsdifferenz konnten deshalb den Minengesellschaften für zukünftige Goldverkäufe deutlich höhere Preise garantiert werden. Mit dem starken Rückgang der Zinssätze weltweit ist das Contango nun zusammengeschmolzen, was das Hedging weniger attraktiv macht. Der Anstieg des Goldpreises seit 2001 lässt zudem alle Minen alt aussehen, die einen grossen Teil ihrer Produktion schon auf Termin verkauft hatten. Aus diesen zwei Gründen haben in den letzten drei Jahren die Goldförderer netto ihre Hedging-Aktivitäten reduziert. Weniger Hedging bedeutet aber auch automatisch weniger Leerverkäufe von geliehenem Gold durch die Banken, die die Termingeschäfte garantieren. Eine Abnahme der Terminverkäufe wirkt sich also direkt positiv auf den Goldpreis aus. Ein steigender Goldpreis wiederum bewegt Minengesellschaften zum weiteren Abbau ihrer Hedging-Aktivitäten.Es ist deshalb eine selbstverstärkende positive Spirale in Gang gekommen, ganz analog zur Abwärtsspirale, die den Goldpreis in der zweiten Hälfte der Neunzigerjahre belastete.

Das Ende der Zentralbankenverkäufe

Die Zentralbanken waren während Jahren die grössten Verkäufer von Gold. Ende 2001 befanden sich noch 29600 Tonnen des Edelmetalls in ihren Kellern. Da die US-Zentralbank Fed ihre Goldbestände von 8100 Tonnen nicht zu verkaufen gedenkt und die meisten asiatischen Notenbanken, allen voran China, eher zu einem Aufbau denn Abbau der Goldreserven neigen, dürfte das Ende des Ausverkaufs absehbar sein. Selbst wenn im Jahr 2004 nach Ende des Washingtoner Abkommens, das die jährlichen Verkäufe der wichtigsten Zentralbanken limitiert, neue Goldverkäufe angekündigt werden. Ein grosser Teil der Zentralbankenschätze wurde nämlich bereits inForm von ausgeliehenem Gold verkauft und kann den Marktpreis nicht mehr unter Druck setzen. Konservative Schätzungen gehen von rund 5000Tonnen Leihgold aus. Andere, die zum Beispiel auf Goldderivatstatistiken beruhen, rechnen mit 10000 bis 16000 Tonnen Gold, die ausgeliehen und grösstenteils leer verkauft wurden und somit bereits als Schmuck vonFrauen und Männern in der ganzen Welt getragen werden. Wie viel Gold sich nach Abzug der nicht publik gemachten Ausleihungen effektiv noch in den Kellern der Zentralbanken befindet, ist unbekannt. Die hohen Leihbestände in Höhe der zwei- bis siebenfachen jährlichen Goldproduktion aller Minen stellen jedenfalls ein beträchtliches Risiko dar. Bei einem weiteren deutlichen Anstieg des Goldpreises ist sogar ein phänomenaler «Short Squeeze» möglich. Banken und Spekulanten, die Gold von den Zentralbanken ausgeliehen hatten, wären plötzlich zur Deckung ihrer Ausstände gezwungen, Gold zu einem höherenPreis vom Markt zurückzukaufen. Was den Goldpreis weiter treiben würde und noch mehr Panikkäufe von Gold einleiten könnte.

Die Schuldenberge und Systemrisiken

In der zweiten Hälfte der Neunzigerjahre wurde nicht nur eine Börsenblase, sondern auch eine gewaltige Kreditblase aufgebläht. Vor allem in den USA erreichte die Verschuldung von Firmen, Privathaushalten und Staat in Relation zum Bruttoinlandprodukt rekordhohe Ausmasse (vgl.Grafik Seite 23). Der Schuldenberg, der irgendwann unter seinem eigenen Gewicht zusammenzubrechen droht, stellt ein beträchtliches Risiko für die Wirtschaft und das Finanzsystem dar. Schon im vergangenen Jahr kam es in den USA zu neuen Rekorden bei Firmenpleiten und Privatkonkursen. Das letzte Mal erreichte die Schuldenlast ähnlich hohe Ausmasse 1932. In der Weltwirtschaftskrise der Dreissigerjahre wurden die Schulden dann über Massenpleiten und Bankenkrisen aus dem System getilgt. Deflation war die Folge. Gold und Goldminenaktien waren in der damaligen Zeit, in der die Sparguthaben auf der Bank nicht mehr sicher waren und der Dow Jones Index innert drei Jahren 89 Prozent seines Wertes einbüsste, eine der wenigen profitablen Anlagen. Gold kann nicht nur bei Kriegen, sondern auch bei Finanzkrisen als sicherer Hafen dienen. Da die heutige Lage mit rekordhohen Schuldenständen und einer geplatzten Börsenblase derjenigen von 1929 bis 1932 ähnlich sieht, ist ein gewisser Anteil Gold im Depot als reiner Risikoschutz sicherlich angebracht.

Die Reinflationierungspolitik der Zentralbanken

Die Zentralbanken, allen voran das amerikanische Fed, haben klar gemacht, dass sie eine Deflation wie in den Dreissigerjahren um jeden Preis vermeiden wollen. In einer geschichtsträchtigen Rede hob der neue US-Fed-Gouverneur Ben Bernanke kürzlich die verschiedenen Möglichkeiten der Zentralbank zur Deflationsbekämpfung hervor, falls die bereits angewendeten Massnahmen zur Reinflationierung nicht greifen sollten. Da eine Liquidationswelle und Deflation für die Notenbänker keinen politisch gangbaren Weg darstellen, erscheint ihnen Inflation die einzige Lösung zur Beseitigung der Überschuldung. Durch Inflation werden nämlich die realen Schuldenlasten vorzu kleiner. Die Wahrscheinlichkeit, dass das Fed weiterhin durch den Gebrauch der virtuellen Notenpresse die Krise zu überwinden versucht, darf als hoch angesehen werden. Anders als in den Dreissigerjahren gibt es zudem heute keinen Goldstandard mehr, der einer exzessiven Geldmengenausweitung Einhalt gebieten würde. Nicht zuletzt auch in Anbetracht der massiv steigenden Budgetdefizite der USA und ihrer Bundesstaaten ist deshalb mittelfristig mit einer Rückkehr der Inflation in Amerika zu rechnen. Dies wiederum dürfte in Kombination mit der schlechten Wirtschafts- und Börsenlage den Druck auf den US-Dollar weiter verstärken. Eine massive Abwertung des «Greenbacks» gegenüber dem Euro und dem Franken ist allerdings keinesfalls gesetzt. Schon heute jammern europäische und Schweizer Exporteure über die ungünstiger gewordenen Wechselkurse. Der Druck auf die Europäische Zentralbank (EZB) und die Schweizer Nationalbank dürfte deshalb grösser werden, die eigenen Währungen ebenfalls abzuschwächen beziehungsweise die Wirtschaftskrise mit Reinflationierung zu bekämpfen. Das Szenario eines kompetitiven Währungszerfalls, bei dem Dollar, Euro und Franken trotz allen Bemühungen der Notenbanken zueinander in etwa gleich notieren, gegenüber Rohwaren wie Erdöl oder Gold aber deutlich an Wert verlieren, würde damit immer wahrscheinlicher. Eine Anlage in Gold und Goldminenaktien erwies sich schon in der Hochinflation der Siebzigerjahre als eines der renditeträchtigsten Investments. Bei einer allfälligen Rückkehr der Inflation in den nächsten Jahren dürfte dies nicht anders sein.

Gold ist nach wie vor wenig populär

Trotz all der Kursanstiege der letzten Monate und der vermehrten Diskussion in den Medien bleibt Gold als Anlage unbeliebt. In den Neunzigerjahren wurden reihenweise Gold-Fonds geschlossen. Die Marktkapitalisierung aller Goldminen-Aktien der Welt beläuft sich auf nicht einmal 100 Milliarden Dollar. Die Goldförderer und ihre Reserven sind damit an der Börse weniger wert als eine einzige Tech-Firma wie Intel oder IBM. Entsprechend sind Gold-Aktien in den Depots institutioneller Investoren - wenn überhaupt - höchstens mit Gewichtungen von 1 bis 2 Prozent vertreten. Die heutige Situation steht damit im scharfen Gegensatz zur Lage im Jahr 1980, als nach Jahren der Hochinflation Gold-Gewichtungen von 10 bis 30 Prozent in den Portefeuilles der institutionellen Investoren die Regel waren. Der Rekordpreis von 850 Dollar je Unze aus dem Jahre 1980 entspricht heute inflationsbereinigt rund 1900 Dollar. Bis Gold wieder die alten Höhen der Beliebtheit erklimmt, bleibt noch viel Luft nach oben. Auch nach den jüngsten Avancen des Edelmetalls bleiben die meisten Anlageberater jedoch skeptisch. Zu tief sind die Neunzigerjahre mit ihren Verlusten für Gold und Gewinnen für Aktien in den Gedächtnissen eingegraben. Bis Gold als Anlage wieder populär wird, muss zuerst die sprichwörtliche «wall of worry», eine Mauer der Skepsis, überwunden werden. Gold eignet sich damit unabhängig vom kurzfristigen Wirbel des Irak-Krieges auch als Investment für Contrarians.

Die alten Stärken des Goldes als Risiko- und Krisenschutz erleben eine neue Blüte. Hinzu kommen neue Stärken, die mit der fundamentalenMarktlage zu tun haben. Angesichts der aktuellen Risiken an den Finanzmärkten, die wohl seit 70 Jahren nicht mehr so gross waren, ist es deshalb für konservative Investoren angebracht, rund 5 bis 10 Prozent ihres Depots mit Gold und Goldminen-Aktien abzusichern. Spekulativ orientierte Anleger, die zum Beispiel die guten Fundamentaldaten der Minenindustrie ausnutzen wollen, können Gold durchaus wesentlich höher gewichten.

Quellenangabe: Stocks 14/03 04.04.03 Artikel von Peter Meier

 *******

Richard Russell's Dow Theory Letters, April 2, 2003

If you're me, you read and you listen and you think and you ponder and you talk it over with a few smart people, and inevitably you come to the big question -- What's happening in the world? What's it all about?

Here's my take. I believe we're slowly moving into a world recession or worse, possibly a world depression. Here are some items that I gathered just from today's newspapers. I don't usually pay too much attention to news because all news is history -- it's already happened. But when news goes along with my studies of the markets, I'm inclined to factor the news into my scenario of the "big picture."

Here we go -- An index based on a survey of purchasing managers in 2,500 euro-region companies (poll by Reuters) dropped from 50.1 in February to 48.4 in March. "We see no recovery this year," said Ralph Wiechers, chief economist of Germany's VDMA engineering industries federation which represents 3,000 companies. "This bad news reinforces global manufacturing's helplessness."

Japan's Nikkei tumbled yesterday, dropping a huge 3.7% to 7972, near a twenty-year low, as war fears, weak industrial output and fear of the mysterious SARS virus all hurt stocks. Production in Japan fell 1.7% in February, worse than expected.

The president of the United Auto Workers said that China's low wages and lax labor policies threaten union efforts around the world. The search for ever-cheaper labor costs creates a "race to the bottom," he said. He also suggested that the UAW would be unwilling to make concessions in its contracts with talks with automakers later this year.

"Everyone is looking at an economic situation that is substantially worse that it was one, two or three years ago," said Martin Leach, President of Ford Europe last week.

With sluggish sales and rising inventories, GM announces what it calls the most sweeping offer in its history -- 0% financing for up to five years on nearly every vehicle it's selling.

In the US consumer debt, things like credit cards loans but NOT including mortgages, has risen to more the $1.7 trillion. The American Bankers Association states that the number of accounts passed due on credit card bills rose to a record of 4.07% in the fourth quarter of 2002. Said James Chessen, chief economist for the bankers, "The rise in delinquencies is not surprising given the cumulative weight of layoffs and the poor prospects for re-employment in the face of anemic job growth.

Despite the late payments problem, companies are issuing credit cards at a record pace.

Yesterday marked the end of the first quarter of 2003. How'd we do? The Nasdaq started the second quarter of 2003 up 0.4%. The Dow was down 4.2% and the S&P was down 3.6%. According to Wilshire Associates, stocks are down another $400 billion, so far, in 2003.

According to USA Today, in the last quarter 26% of corporations polled said that business was "better than expected," and 43% said business is "worst than expected." For this quarter 20% of corporations said that business was "better than expected," and 58% said that business was "worse than expected."

But analysts blamed the current quarter's pessimism on the war. As soon as the war is over, they opined, business should get better.

OK, enough already. The above is just a skimpy, quick look at the world and this bear market as the recession-depression is slowly, very slowly developing.

At the very least, you can see how any deflation would brutalize this economy. With corporations loaded with debt and unfunded liabilities, with consumer loaded with debt and many defaulting on their debt, the US is not in a position to withstand any degree of deflation.

This is the reason why Fed Governor Ben Bernanke came out with his now-famous speech which drew attention to the Fed's ability to fight deflation with its ever-busy "printing presses."

On top of everything else, the US is now engaged in an expensive war with open-ended expenses. And at the same time, this administration is engaged in the unprecedented act of lowering taxes during a time of war. All this is part of the government's struggle to ward off deflation and recession at a time when both are threatening. Of course, it also has to do with re-electing Mr. Bush.

The "miracle," so far, is that the dollar is holding up at all. Of course, the Dollar Index is still in its corrective mode following its January-to-March swoon. As I see it, the Dollar Index is now in the act of "hanging on," although the June Dollar Index has fallen back below its 50-day moving average.

As for the Dow, which as subscribers know, I use for my major indicator of market action, as for the Dow its 200-day moving average stands at a new bear market low of 8390 today. The faster-moving 50-day MA stands today at 7988, The spread between the two has widened to 402, its widest since the decline began. Thus, on a smoothed trend basis, the Dow's decline continues to accelerate.

The Dow is now struggling to remains above its 50-day MA. A decisive break below the 50-day MA (below 7988) would turn the secondary trend of the market down. As matters stand, I classify the secondary trend of the market as "neutral-bullish"

I haven't mentioned the 50% Principle in quite some time. What it's saying now is clear enough.

From the bull market high of 11722 to the bear market low of 7286 the Dow lost 4436 points. The midway level of the entire bear market decline so far, is 9504. If the Dow can climb above the halfway or 50% level then according the 50% Principle, the Dow can advance to test its high of 11722.

But as long as the Dow remains below the 50% level (where it is now), then according to the 50% Principle the Dow, in due time, will decline to test its bear market low at 7286.

Thus, if we look at the market in the context of the very big picture, all the rallies and declines, all the spurts and swoons, all the daily and weekly back-and-forth action, is meaningless and relatively unimportant. The big picture is that following the October 9 low, the Dow has been unable to recover even half of its bear market losses.

As long as this is the case, the stock market will remain in the grip of the bear.

*******

Richard Russels Dow Theory Letters, March 27, 2003

We're experiencing some of what I call "surface inflation," and I'm referring to consumer items like gasoline, some food items, housing in selected spots, insurance, and medical.

But I'm wondering if we haven't got an even broader trend of deflation. Oil price have plunged, copper looks toppy, gold is down substantially as are all the precious metals, commercial real estate is down, the commodity indices looks as though they've topped out, the used car market is in bad shape, home sales have slowed, and new home starts look like they have topped out.

Deflation now would be extremely dangerous. And I wonder, could we be close to -- or on the edge of a deflationary debt collapse? Nothing could be more bearish at this point than real deflation.

The reason I say that is based on the precarious position of the debt structure in this country. The corporations are in poor shape from a debt and pension standpoint, but American consumers are in much worse shape. Many consumers have little or no equity in their homes, in their cars or in anything else. A goodly number of Americans are living off their credit cards or off money pulled out of their homes via refinancing.

Deflation could set of a deflationary debt collapse that could easily run out of control. For this reason it will pay us to watch the debt situation very carefully. We should also watch the bonds. This economy could not stand a concerted rise in interest rates.

An article by Jim Grant in today's New York Times (op-ed page) caught my attention. James writes:

The United States at the millennium is an historical oddity, not only a great power but a great debtor. It consumes much more than it produces. It imports much more than it exports. And it owns much less of foreign assets than foreigners do of American assets ($2.3 trillion less as of the end of 2001). In 2002 Americans imported about $500 billion more than they exported -- that being the size of the current account deficit -- a comprehensive measure of the net flow of goods and services between the US and the rest of the world. It is useful to think about this deficit in terms of the current defense budget: it is 35% bigger.

Most countries would jump at the chance to get into this kind of fix. But they can't. And if they did get into the habit of consuming more than they produce, they would quickly have to earn their way out -- by consuming less and producing more. No such imperative is yet felt in the country, however, We conveniently finance our deficit with dollars.

So I had a little argument with my corporate lawyer wife this morning.

Me -- Is it logical that a nation can pay off its debts by printing it's way out?

Faye -- Logical is the wrong word. You mean, is it sustainable?

Me -- No I mean logical. Is it logical that a foreign nation will sell us its products and services for a currency that cost us nothing to manufacture. In effect, we're getting something for nothing. Isn't the US actually living off the proverbial "free lunch"?

Faye -- I still say you're not talking about logic. This situation will probably end at some point, so the real question is -- is it sustainable? And we don't know the answer to that.

Me -- Well, to me, if I can get something for nothing I'm defying logic.

Faye -- You say "for nothing," but a dollar is something.

Me -- It is? Then what's your definition of a dollar? You can't give me a definition, because there is none. As far as today's fiat dollar, you can only talk about it in terms of another currency. It takes so many dollars to buy a euro. There are so many yen to a dollar.

Sure, at one time a dollar was defined in terms of a specific amount silver or gold. But without being able to define a dollar in terms of something tangible, you're just dealing with "printing press" or "monopoly money." We're buying foreign products with "monopoly money." I maintain that it defies logic, and if it defies logic it can't last.

With that we halted our debate.

But I maintain that the Achilles Heel of the US economy at this time is the dollar. I believe that the value of the dollar in terms of other currencies can't be maintained. And that's the reason why we have to hold insurance. The best insurance against "fantasy money" is real money, and real money is gold.

There are endless arguments regarding whether gold is being manipulated by various interests. Obviously, if gold begins to rise relentless, then questions about the dollar will arise. The Fed and the central banks of the world (who hold huge reserves of dollars) cannot allow the dollar's "value" to be questioned. Thus, we can expect pressure on gold to continues. It's a battle of the "inflation masters" against the reality of real money. I can tell you that real money will ultimately win the battle. But unfortunately, I can't tell you when.

This brings up the question -- Should we time our buying or selling of gold? You can try, and many do, and some reap profits from their timing. But for the vast majority, I say, "Take your position in gold and gold shares and forget it." You don't buy and sell your life insurance, and I feel the same way about gold. Furthermore, the odds are that when the dollar starts to unravel and gold starts to climb against the dollar you'll have traded yourself out of the metal and out of the gold stocks. Take a position you can "sleep with" and forget it. That's my advice.

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Richard Russell's Dow Theory Letters, March 19, 2003

The stock market is bouncing higher. The market has two things going for it. The first is that last week we had a 90 % down day, and after a 90 % down day we almost always experience an automatic snap back rally.

The second thing the market has going for it is an important non confirmation. The Transportation Average broke to a new bear market low, but the Dow held stubbornly above its own October 9 bear market low of 7286.27. This non confirmation on top of the 90 % down day may allow the market to rally further than would otherwise be the case.

These bear market rallies can look better than the real thing, but they can also end as suddenly as they started. Remember, the bear isn't a gentleman. Hardly, the bear is out to take your money, and he has no conscience. He would just as soon leave you broke as not, and he's done a good job of that so far, a very good job.

Posted on Sun, Mar. 02, 2003 Herald.com

Top manager predicts a depression

Three years ago, when Michael O'Higgins was entirely out of stocks and into zero-coupon Treasury bonds, when he was predicting that stocks would lose half their worth, I didn't believe him.

If you listen to O'Higgins now, you won't want to believe him either: he's predicting another depression.

However, I think you should pay close attention, because it's possible he's on target. Again.

O'Higgins, for whom the term contrarian is much too mild, has a record of being right when most of us are headed in the wrong direction. And a record of making money while we're losing it.

Since our last conversation in March of 2000, zero-coupon treasuries are up 43.5 percent. The S&P 500 Index is down 41 percent. He said long-term Treasury bond yields would drop from 6.15 percent then to 4.6 percent. They are now paying about 4.7 percent.

O'Higgins manages $200 million at his boutique investment firm in Miami Beach that caters to clients with assets of at least $1 million. He's been a top money manager for more than 20 years and has written best-selling investment books, Beating the Dow and Beating the Dow with Bonds. He's best known for his Dogs of the Dow theory, which worked well for quite a while when the market was still going up.

Today, O'Higgins won't touch a Dow stock or almost any other stock at current prices.

Because he is looking for a depression to begin soon or to be already in progress. ''Perhaps the greatest deflation and depression of all time,'' he says, ``Following the greatest speculative boom [in stocks] of all time.''

It'll begin as the Baby Boomers wake up and realize that the stock market's downturn over the last three years has wiped out almost half of their nest eggs.

''When you say it can't be like 1929 through 1931 [when stocks lost 89 percent of their value], ``you're right. It could be worse,'' he says.

Boomers and consumers will begin to save more money when they realize that the bull market is firmly over. Stock gains in the future will not bail out an investor if he has put too little money away.

People today have higher levels of debt -- for consumers, government and corporations as a percent of Gross Domestic Product -- now than at any time since 1929, he notes.

The depression will not end until that debt is liquidated, he says.

ECONOMIC COLLAPSE

When consumers decide to save more, they'll stop spending. And the economy's main support will collapse.

After that, you can wait and watch for the Dow Jones Industrial Average, currently just under 7,900, to sink by another 24 percent to 6,000. And that's his best-case scenario.

It could go as low as 3,100, if the stock market goes back to its normal range throughout the last century for the dividend yield, which is the figure you get if you divide a stock's dividend by its price.

Right now, O'Higgins is only interested in gold, which he sees as undervalued and heading up because of deflation. ''Because it's real money, because it has held its value for thousands of years, because it's not subject to the manipulations of government or central banks or dishonest corporate executives,'' he says.

What's more, gold goes up when stocks go down. In 1929-1932, he notes that gold rose 69 percent. And indeed, in the last 12 months, it is up 20 percent. Yet its price is still far below what it traded for in 1980: $850, or roughly 2 1Ú2 times higher than today's roughly $350 an ounce. Global supplies of gold, too, are dwindling.

A gold stock, Newmont Mining, is the only stock he owns today and he's betting against the rest of the market. His strategy is risky, not diversified and, well, daring.

''He's made some great calls over the years,'' says Joseph McGraw, a hedge-fund manager who is president of Yankee Advisors in Waltham, Mass. ``Mike likes to be emphatic, but I'm pretty negative, too. I'm concerned about deflation coming out of China. I'm concerned about the U.S. consumer totally retrenching and freezing.''

''Fundamentally I think he's correct,'' says money manager John N. McVeigh of Upland Capital management in Ridgefield, Conn. ``I think we're in a secular bear market. Those typically run 10 years or more. That takes us out, from the spring of 2000, to 2010.''

For the record, this isn't the mainstream view. According to Bloomberg News, the average Wall Street market strategist thinks you should put 68 percent of your portfolio in stocks.

The Wall Street crowd has largely been wrong, throughout this bear market that began in March of 2000. Mostly because of O'Higgins' correct bet on the direction of interest rates and bonds, the O'Higgins Fund of Funds in 2000 soared 71.32 percent, when the Dow dropped more than 6 percent, and rose 4.76 percent in 2001, when the Dow was down more than 7 percent. Last year, as he moved out of bonds and into gold, his fund rose 19 percent, when the Dow dropped 17 percent.

Certainly, O'Higgins has not always been on target. He moved out of stocks too early and missed the great 86 percent gain on the Nasdaq in 1999, when his fund rose only 48 percent.

As he admits, ''I'm only dealing with probabilities. I don't have any illusions that I have a crystal ball,''' he says. ``I just know financial history.''

STILL BUBBLY

He makes a convincing case, in charts and newspaper clippings, for his thought that there's little that will stop this downturn until the speculative bubble in stocks and spending is completely deflated.

It is not so, yet. For example, he notes that consumer spending has dropped in every recession since the 1950s, but not in this one. Stock valuations remain high, despite the long downturn.

He notes that the Federal Reserve has engineered 12 interest rate cuts and still the market has not responded. In practically every other instance when the Fed cut rates since 1921, stocks rebounded.

''I would have brought you more information,'' he said Friday. ``But I didn't want to ruin your lunch.''

When will O'Higgins' depression end? ''I suspect it'll be a long time,'' he said.

Richard Russell's Dow Theory Letters, February 5, 2003

At its high recorded on March 24, 2000, the value of the Wilshire 5000 was 14754. At its recent bear market low of 7396 struck on July 24, 2002, the Wilshire was down 49.8 %. I put the final target area at around 2200. If this occurs, it would mean that the stock market had wiped out around 80 % of all stock values since the year 2000 highs.

How the Wilshire works its way down to the 2200 area is another story. I believe it could take another two or three years to get there. And I believe the path down will be convoluted with one major upside correction before the final bottom.

January was a down month. A down January shows an 80 % chance that the market will be down for the year. But it's that other 20 % that can double cross the bears at this point. My guess we'll see a major decline to an important bottom this year, and then maybe, just maybe a mini bull market. But the 2003 low (if it materializes) will NOT be the final bear market low.

THREE GREAT ECONOMISTS AMERICANS DON'T WANT TO HEAR ABOUT!

The Austrian School of Economics flourished in Europe in the early part of the century. Professor Ludwig von Mises (Meeses) emigrated to the U.S. from Austria and became a powerful American spokesperson for sound money, free markets, and limited government. His business cycle theory showed that easy money and credit brings about an economic boom. Then he warned, "The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. - The credit expansion boom is built on the sands of banknotes and deposits. It must collapse. - There is no means of avoiding the final collapse of a boom brought about by credit expansion." Mises believed the damage in the ensuing recession or depression depended on the scale of prior credit excesses.

A contemporary Austrian thinker, Dr. Kurt Richebacher, argues that the boom has become a huge bubble centered in the financial markets. He warns, "Asset price bubbles arise when money and credit expand well in excess of economic activity. The excess money winds up in the financial markets, propelling asset prices to unjustified and unsustainable levels completely out of proportion to the general price level. In this way, U.S. stock valuations over the last year went from ridiculous to insane."

Consumers and corporations borrowed almost a trillion dollars last year, of which half went into financial markets. This year mind-boggling increases in margin debt and record financial leveraging were piled on top of last years massive home refinancing and huge corporate borrowing.

What happens when money and credit growth ends and the boom collapses? We paraphrase Mises. Business must restrict its activities. Prices drop suddenly. Factories close, construction projects are cancelled, workers are discharged, and consumption drops. The final outcome of the credit expansion is general impoverishment. The immense majority of people must foot the bill for the bad investments and overconsumption of the boom episode.

This describes the onset of an ordinary recession. Dr. Kurt Richebacher suggests we could get much worse. "An impending U.S. downturn is poised to hit a deceptively frail financial and economic foundation. The consumer sector is tapped out with a monstrous debt load and negative savings. The business sector is running a huge cash flow deficit while in the midst of an unsustainable borrowing binge and aggressive expansion of dubious enterprises. In the financial sector, overieveraging and reckless speculation exist as never before. The combined excesses of all three sectors underlie the unprecedented U.S. stock market and economic bubble. In short, the entire system is an accident waiting to happen."

Says Mises, "Accidental, institutional, and psychological circumstances generally turn the outbreak of the crisis into a panic. The description of these awful events can be left to the historians. It is not ... (the task of economists)... to depict in detail the calamities of panicky days and weeks and to dwell upon their sometimes grotesque aspects."

In the 1930's credit extremes caused an economic collapse that retarded progress for a decade. The present credit expansion appears worse than that of the 1920's and more excessive than Japan. Furthermore, at the inception of any slowdown or economic crisis, the monetary authorities are quick to inject new money and credit (Long-Terin Capital). According to Professor Mises, this postpones the problem, but makes it worse in the long run.

What must be understood is that the "New Paradigm", the "New Era", the future without setbacks, is no more than a belief that continuous inflating and credit expansion can rescue us from any economic problem. That policy carried to its conclusion will insure a great depression and ultimately the onset of a financial dark ages.

One of Mises' students, the Nobel Prize Winner, Freidrich Hayek said, "The disquieting but unalterable truth is that a false monetary and credit policy, pursued through almost the whole period since the last war, has placed the economic systems of all the Western industrial countries in a highly unstable position .......

Ludwig von Mises had numerous other accomplishments in his lifetime. Way back in 1920 he showed that collectevism must fail because of a lack of market pricing. He was an effective enemy of socialism and big government. If you would like to read more about Ludwig von Mises and other freedom philosophers, send for our free book, "The Great Gold Comeback."

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Richard Russell's Dow Theory Letters, January 2, 2003

What about next year, the year 2003?

1. There is still FAR too much bullishness, considering that this bear market is not even close to being completed.

2. This bear market is three years old, and the Dow has not lost as much as half of its bull market gains and I'm talking about the bull market of 1974 (Dow 577) to 2000 (Dow 11722). Half of the bull market's gains would take the Dow back to 6149. We're not there yet, but I think there will get there probably next year.

3. The Market will be down three years in a row. This is a very rare and bearish series. I believe that this series is the market's way of discounting important deterioration in the economic, social and political fabric of the nation. This deterioration, I believe, will begin to show in 2003.

4. The Greenspan Fed has been a mainstay for bullish hope among investors. I believe that in 2003 Greenspan will be discredited and doubts will arise regarding the usefulness of the Federal Reserve (criticism of the Fed will increase, and many will begin to see the Fed as "part of the problem").

5. With the bear market deepening, Bush's popularity will plunge and many of his policies will be disparaged.

6. Unemployment will increase substantially in 2003, and consumers will become increasingly disillusioned. Debt will become a crushing problem and the operative phrase will be "With these low rates, where can I get some income?"

7. The dollar will continue its decline and the rising price of gold will tell Americans that "something is terribly wrong."

8. I think the housing bubble is living on borrowed time.

Richard Russell's Dow Theory Letters, November 14, 2002

The October 9 lows appeard to be a viable bottom. Note also that DJ Industrials and DJ Transports Averages have formed what appear to be "head and shoulder bottom" patterns. Normally, this should call for extended rallies, rallies that should take the Averages at least above their August highs.

Following the November 7 decline, if both DJ Averages recover to new highs we'll have the "all clear" signal, a signal which will tell us that the market is going higher. However, if one or both Averages fall to recover to new highs, that will be a warning flag that tells us that this market is running into trouble.

Richard Russell still believes that the bear market we're in will, in time, generate the greatest losses of any bear market in US history. This market is still flagrantly overvalued and not near a bear market bottom.

US is much more flexible than Japan ever was. And that's a plus for the US. But a minus for the US is that the US is a spending nation whereas Japan is a saving nation. Thus when deflation and hard times hit Japan, the Japanese population weathered the storm rather well. The US however, is smothering with debt.

On November 5, for the first time since early April, the PTI crossed above its 89 day moving average. Thus, the PTI turned bullish for the first time in seven months.

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Richard Russell's Dow Theory Letters, October 23, 2002

If or when Gold breaks out above 330 = bullish.

Stocks are still expensive. Therefore, on the value test this bear market is not completed yet (longterm view)

If you had bought stocks in 1999 or 2000 you may have to wait a decade or a quarter of a century to get even.

All of the major stock averages head and shoulders formations have broken down, and they have all declined to the point where they are oversold. Meaning they have gone down too far without a correction. So we're in the corrective phase. Bear market rallies give stockholders hope. That's where we are now.

The neckline or support for the S&P formation comes in at about 940. October 9 was a temporary but possibly important low for the stock market. This allows for a lot of room for the S&P to rally before the S&P even comes into heavy "supply". Long term the S&P has a "target" on the downside of around 400. How the S&P gets from here to there will be the story of how this bear market unwinds. It's going to be an extended, very convoluted story, taking years.

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Richard Russell's Dow Theory Letters, October 2, 2002

The target of the Wilshire 5000 Index will be at around 3000 to 4000 (Low 7396 on July 24, 2002, High 14754 on March 24, 2000, 7598 on October 4, 2002). If this occurs, it would mean that the stock market had wiped out around 80 % of all stock values since the year 2000 highs.

How the Wilshire works its way down to the 3000-4000 area is another story. It could take another two or three years to get there. The path down will be convoluted with one major upside correction before the final bottom.

Everyone seems to be waiting for the bottom. People don't want to sell their stocks because they've been told that they're holding for the long haul. Over the years, they've been told, stocks go up. Sure stocks go up, but it all depends where you bought those stocks and what time frame you're talking about. If you bought your stocks at the 1929 highs sure stocks go up, but it took a quarter of a century before your stocks went to new highs. That's twenty-five years of waiting before you started making money. Of course, if you bought your stocks three years later in 1932 then your stocks really went up, but they started up in 1932, and there's the difference.

The market and the economy are going into the tank. This bear market, so far, has been the worst since World War II, but before this bear market is over it's going to be the worst since 1929-32. We're going into a deflationary mess. Base: partly on the recent and current absurd valuations and on the many bubbles, some having burst and some (houses, mortgages, debt) are still in place.

The real panic declines lie ahead. What we've seen so far may be the preamble, a taste of what may lie ahead.

Six months in a row on the downside suggests an oversold stock market. But, this is a bear market that should not be fooled around with.

If the US goes into net deflation, a veritable blizzard of bankruptcies and foreclosures will happen. In fact, the dollar itself then becomes suspect.

Gold is the only financial asset that cannot default.

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Richard Russell's Dow Theory Letters, September 10, 2002

History tells us that once a bull market tops out, once a bull market breathes its last, the market and the economy invariably move to the other end of the spectrum. The journey, the corrective journey to the opposite end of the spectrum, is what we term a bear market.

But why do bear markets occur? Why can't economies stay healthy and why can't stocks stay overvalued?

The answer is human nature. And human nature doesn't change.

People become overly optimistic -- and then people become overly pessimistic. All history suggests that human emotions and markets are always traveling between these two extremes.

There is also the "law" of regression to the mean. That means that there is a "central line" of growth or decline, and the action of markets is always to travel above or below the central (mean) line. If a market sinks too far below the mean, it will only be a matter of time before the market returns to the mean line -- and the market will usually run past the mean. By the same token, if a market that rises too far above the mean, it will eventually reverse, and decline to touch the mean. In fact, the market will usually go past the mean on the downside.

Going back to post WW II, the mean price/earnings for the S&P runs around 14 and the mean dividend yield is around 4.5%. All history tells us that somewhere ahead the S&P will decline to around 14 times earnings, and in a bear market the S&P will probably overdue it on the downside so that its price/earnings ratio will drop to, or more probably, well below 14 times earnings. And at the same time the S&P will yield 4.5% or most probably more.

Despite all the above, you can almost sense that investors, probably the majority of investors, are thinking (hoping) that today's news of the drop in unemployment means that the bear market could be over -- that the worst has been seen. There is no doubt in my mind that the great majority of American consumers and investors believe that this bear market, if not over, is "close to its bear market lows."

Of course, that's the reason that Americans continue to hold most of their stocks. If they really believed that this bear market was going to take blue chip stocks down to where they were selling at say 8 times earnings while yielding 6%, they would be selling their stocks. But they don't believe that for a second -- so they continue to hold their stocks while reading the newspapers or watching Kudlow and Cramer or Lou Ruykeyser for signs and indications that the worst is over.

So the situation really boils down to two schools. The one school believes that this bear market can be limited, held to a minimum, probably with the help of the Fed. The other (much smaller) group believes that this bear market will run to its relentless conclusion, no matter what. I belong to the second group. And I have history on my side.

On the money front the broad money supply, M-3, rose $10.9 billion in the latest week. The Fed continues it frantic efforts to reflate, to stimulate, to encourage consumers to buy cars, to buy homes, to buy, buy, buy.

I honestly believe that Greenspan and the Fed members don't understand how bear markets work. I think that the Fed believes that it can control and even reverse the primary trend of the market. Why do I say that?

I say it because if the Fed did believe that the primary trend is all-powerful, they would not be placing US consumers in such a vulnerable position. They would not be encouraging consumers to take on more debt. They would be warning corporations about building inventories. They would be telling people to prepare for difficult times, which means building savings, cutting back on debt, becoming as conservative as possible.

No, it's obvious that the Fed believes that if they can keep consumers buying and thereby holding up the economy. Then in due time corporations will begin to expand again, corporations will resume capital spending, and lo and behold -- the Fed in its wisdom, will have staved off a severe recession or even a depression.

Sadly, I must inform Alan Greenspan and his Fed members that it's not going to work that way. The Fed will not beat the primary trend. The Fed will not slaughter the bear. No, what the Fed is doing now will simply make the situation worse. By their actions, the Fed is placing American consumers and American business in the worst positions possible to weather the coming onslaughts of this bear market.

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Richard Russell's Dow Theory Letters, August 21, 2002

We'll now see a period of backing and filling, popping and flopping, all of which will give way to a renewed decline which will take the S&P for new lows below the July lows in final decline which could produce an historic oversold bottom. That bottom could be lower than most people are thinking about. It will be low enough to finally turn the public bearish on the market.

When this down leg finally hits bottom, which will occur before the end of this year, we will then see a major upside correction that will take the market to a high next year in 2003. That corrective leg should serve to turn the crowd bullish, at least near the the highs. From the highs of next year, the final or C down leg will begin. This will be the Killer leg, the most costly and most frightening leg of the bear market. This final leg will not end before 2005 or even 2006. This final leg will end with stocks selling at great values.

What could occur to drive the final leg down? It could be a dollar collapse, a debt melt down, a war, a collapse in the bond market along with severe credit troubles, a general social and political turmoil or most likely it could be a severe recession (depression) in the US or even throughout the world.

The world is facing a phenomenon that has never occurred before. It's the phenomenon of world over production.

Consumer have over $ 30 trillion of debt outstanding. The US government has over $ 6 trillion of debt outstanding, the states, counties and cities have countless trillions of debt outstanding.

The housing bubble has replaced the stock market bubble.

At the year 2000 high the S&P was selling at 94 times its dividends. Right now the S&P is selling at 55 times dividends. When this bear market hits bottom, the S&P is expected to sell at 14 or less times dividends. That's when we know that the bear market is close to, or about over.

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Richard Russell's Dow Theory Letters, July 23, 2002

The number one fear of the Fed is that we may have sunk into a US version of the "Japanese disease." What is the Japanese disease? In a word, in a dreaded word -- it's deflation.

Believe me, nothing worries the Greenspan Fed more than that single word -- deflation. But why is deflation such a worry? Deflation undermines the ability of consumers, states, counties, cities and corporations to service their debt.

Deflation impacts on incomes and asset prices. But regardless of rising or falling income, regardless of rising or falling asset prices --THE DEBT REMAINS.

Deflation can result in the forced selling of a person's or a corporation's assets in order to service their debt. This can result in a continuous spiral of lower incomes and collapsing asset prices.

Japan or I should say the Japanese people, were able to function in the face of deflation because the Japanese people are great savers. If you have enough assets you can weather any storm, which is what the Japanese people have been doing. Not so in the US where most Americans are gifted spenders and miserable savers. Thus, a debt spiral or melt-down would have massive repercussions in the US.

Significantly, I just received the latest copy of New York magazine (July 19). The cover story runs, "Addicted to Spending, Why You Can't Live Within Your Means ... And What You Can Do About It."

Right now the Fed is doing everything in its book to avert deflation. Among the Fed's efforts include flooding the system with liquidity, dropping rates to their lowest level in 40 years. And finally, coming out with inspirational and hopeful words about the US economy.

Yesterday, in emphasizing accounting scandals and "infectious greed" by corporate executives, Greenspan was implying that once all this corruption is cleaned up, the economy will be ready to expand again.

Said Greenie, "The effects of the recent difficulties will linger for a bit longer, but as they wear off, and absent significant shocks, the US economy is poised to resume a pattern of sustainable growth."

That, of course, is what Greenspan wishes. Furthermore, I believe he's hoping that any trouble (like deflation) can be held off until he is safely out of office. In fact, one good and extended bear market rally in the stock market, and it would not surprise me to see Greenspan resigning because of age or health or some other serviceable excuse.

Listen, the Green man knows what's happening, and what's happening is that the Fed is in a deadly battle against the forces of deflation. The Green man knows that the US is up to its ears in debt, and any sustained period of deflation could lead to an unprecedented disaster. So we're back to what for years I warned against. It can be expressed in three words --

INFLATE OR DIE

The fed is on an all-out path to stave off deflation via re-inflation and happy talk. Which is a major reason why the Fed does not want gold to rise. Rising gold would reveal what the Fed is doing, and it would also reveal the basic problem of having to re-inflate.

So what the Fed is trying to do it hide the problem of deflation, hide their cure, which is deliberate inflation, and hide the whole process by holding down the price of gold.

What the Fed analysts are studying usually tells us what they are worried about. The Fed recently published a treatise entitled, "Preventing Deflation: Lessons From Japan's Experience in the 1990s." The Fed is deeply concerned with methods of preventing a Japanese style deflation. On this basis, we can expect a continuation of the Fed's all-out effort to re-inflate the US economy.

Is the Fed being successful in bringing back inflation? Two places to watch are the commodity indices and home prices. Many home-owners have increased the mortgages on their homes and spent the additional money. Thus, it would be disastrous if home prices start to decline. For this reason, the Fed cannot allow a decline in home prices. This will be difficult from my standpoint, since I believe housing is in a bubble. This week, by the way, the home-building stocks got hit hard -- the six home-building stocks that I watch have all topped out.

As far as commodity prices, I watch the CRB Commodity Index and the Goldman Sachs Commodity Index. The CRB Index has been rising strongly ever since last October and shows no signs (so far) of topping out. The Goldman Sachs spot index has been much more questionable, rising from October to April, but since April the Goldman Index has struggled, moving generally sideways since April.

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Richard Russell's Dow Theory Letters, July 20, 2002

THE PARTY IS OVER. It was a picnic of lying and cheating. Nobody paid dividends. Of course, you need real earnings to pay out a dividend, but that didn't bother the new buyers. Dividends are for old ladies, real men want capital gains. The conventional wisdom, which says equities get most of their value from capital appreciation is wrong. The fact is that over an extended period of time the real appreciation comes from the power of compounding incoming dividends.

Stock over time never grows faster than the growth of the economy.

The second psychological phase of the bear market is here. And skepticism, frustration, disappointment and anger are the order of the day.

Because the dollar is at risk and because all paper currencies are at risk, it makes sense to have part of your assets in gold or gold shares.

If there is a crisis coming up, and I believe there is, it is liable to be a crisis of debt and income, too much debt and too little income. One reason Japan has been able to withstand a dozen years of no growth and recession or semi recessionary conditions is because the Japanese people are huge, almost obsessive savers. Americans, on the other hand, are spenders and certainly not savers.

The great Japanese bubble started to burst in late 1989. Today the Japanese Nikkei stock average is down roughly 75 % from its peak. Over the last year the Nikkei has moved basically sideways in the 11 000 area. The fact is that after a dozen years of bear market there's still no real recovery out of Japan.

In the US, whatever wealth US consumers have seems to lie in the rising value of their homes. Therefore, one of the greatest dangers would be a top out of home prices. Today, real estate is a speculation. The real estate bubble is here. In a severe and protracted bear market, real estate is an illiquid "dog".

The US trade deficit is out of control, there has to be a real weakening of the dollar.

In the short term the market can do anything. There's only one expert, and that expert is THE MARKET.

So the best advice, based on what the market is telling us, is to get into cash, T-bills, top grade bonds, some gold or gold shares for insurance, and exercise patience, a lot of patience. The bear is in no hurry. He knows that investors become impatient and do stupid things. In a bear market, the smartest thing you can do is to STAY OUT.

Remember, the markt always wants what nobody else possesses. Right now, everybody has debt and nobody has cash. Cash, liquidity, no debt, this is the ideal position to be in. Who do you know that is in that position?

*******

Richard Russell's Dow Theory Letters, July 02, 2002

Economists take notice -- all facts are history. So to start, let's go over a bit of history.

The US dollar has sustained it biggest quarterly drop in 14 years. Why? A decline in foreign demand for US assets.

Financier George Soros says the US dollar could drop by one third over the next few years. Is George shorting the dollar?

The House votes (by one vote) to raise the US debt ceiling another $450 billion to a total of $6.4 trillion. The US is swimming in an ocean of debt.

US consumer spending "unexpectedly" declined in May for the first time in six months.

The broad M-3 money supply increased by $38 billion in the latest week.

Stocks fell worldwide in the first half of 2002 -- investors lost trillions of dollars as US stocks suffered their biggest first-half loss since the 1970s, based on growing distrust of US executives and a concern that a rebound in earnings may be slower than originally expected.

So much for history.

I thought the most significant headline in any of the 12 newspapers I read daily was this one from the front page of today's New York Times.

"China Races to Replace US As Economic Power in Asia. China is rapidly strengthening its economic presence across Asia, gobbling up foreign investment and chipping away at the United States' position as the region's economic engine.

"As it buys up goods, parts and raw materials from its neighbors as never before, China has accompanied its new heft with diplomatic efforts to assure them that it wants to offer cooperation, not competition. Many have rushed to China's embrace and are nimbly shifting their economic alliances, particularly as the United States makes its way through only a tentative economic recovery."

"So far, the Bush administration has been loathe to talk publicly about China as an economic challenger in Asia.. . . . As part of what China is calling its 'go global' economic strategy, the Bank of China has already opened branches in Thailand, Malaysia and Singapore and will soon reopen one in Jakarta."

By the way, the Bank of China was an early subscriber to Dow Theory Letters.

I've been warning about all the above for months if not years. China, I believe, has given up on war as the way to win in the battle for world power. The path that China has chosen is economic supremacy, and certainly economic supremacy in Asia.

Gold moves and accumulates in the direction of economic power. And gold is now flowing into Asia as it leaves the US and Europe. Meanwhile, the US via the Greenspan Fed continues to enlarge its liquidity base. Yankee paper dollars spew forth throughout the world in return for the world's services and merchandise.

As the ocean of dollars grows larger, it also grows larger in relation to a limited supply of real money -- gold. I continue to believe that at its current price in relation to dollars, gold, better known as real money, is the cheapest thing around. Or to put it the correct way, the ever-expanding supply of paper dollars and other assorted fiat currencies are extremely expensive in terms of gold.

In the last few months we've seen the fiat currency of Argentina go down the drain, Brazil is following and now the Mexican peso is turning weak. If you were an Argentinian, think of what you would have saved in assets and tears if you had your money in gold rather than in the junk currency of Argentina.

And how much longer will it be until all paper currency comes under suspicion? Just a thought, just a thought.

Is there inflation in the US? If the definition of inflation is an expansion of the money supply, then yes, the US is most definitely inflating. As far as inflation in the price of goods, prices in many areas have been stable mostly due to cheap imports. But in services, movie tickets, sports tickets, medical costs, insurance, taxes and dozens of other cost-of-living items, prices have been rising.

*******

Richard Russell's Dow Theory Letters, June 19, 2002

The S&P has formed a huge head and shoulders top, and the S&P is now "working" on its right shoulder. Over recent months the right shoulder has looked increasingly weak. The support for the S&P comes in at around 940 in the vicinity of the September low. If or when the S&P breaks below 940, the second phase of this bear market will be on in full.

The bear market under Dow Theory started on September 23, 1999. The public relates to the Dow. The resistant Dow is one of the reasons why the stock buying public has remained so remarkably, stubbornly, everlastingly bullish. Despite the fact that a great many stockholders have "lost their shirts" in this market so far, the public remains amazingly bullish. What this tells us is that this market is in the second psychological phase of the bear market, and probably rather early in the second psychological phase. The second phase of a bear market is the phase where stocks go down as they discount deteriorating corporate earnings. In the second phase (it's almost always the longest phase of a bear market), public sentiment turns from optimism and hope to frustration, from frustration to fear, then from fear to anger and finally to full agreement that "yes, this is indeed a bear market."

It will be a world recession, we'll experience a battle of competitive currency devaluations. As currencies devalue, gold will rise. Before this bear market is over, the Dow will only buy around a single ounce of gold.

In a bear market everyone loses, but it's the person who loses the LEAST who is the winner. So brace yourself, before this bear market is over, you are going to see some amazing changes.

This generation of analysts, strategists and economists have never experienced or lived through a primary bear market. Lacking experience, somehow they don't seem to believe a bear market can "happen". The bear market lows were recorded last September. So far, the main stock averages have held above the September lows. This has given rise to the thesis that despite disappointments and problems, the September lows marked the worst of the bear market decline. This thesis has also allowed for hope and bullish interpretations.

We face one of two possibilities. The first, stagflation. This is a situation where the economy is stagnant, going nowwhere, but Fed-created inflation continues full steam ahead. In this situation stocks continue down, and well, losses just continue to build up. The second possibility is that the market and the economy both tank, and at the same time the Fed continues to create more and more liquidity.

The gold price has surged far above both moving averages, and this could mean a period of consolidation. But the bullish crossing of the moving averages (20 month MA and 40 month MA) indicate that a new bull market is in place. The long term trend of gold is now bullish, this despite the fact that gold is overbought and in the process of correcting.

Hope, hope, hope, it's what keeps people sitting and losing in a bear market.

*******

Richard Russell's Dow Theory Letters, May 30, 2002

In July of 1999 the market did something that has been done only twice before in the last hundred years. The Dow relative to gold turned down on a trend basis. Let's trace the history of this ratio. Back in 1895 gold was cheap. The Dow at that time would buy an ounce of gold. During the 1920s a great bull market took the Dow to a high of 381 (1929) at which time the Dow would buy 18 ounces of gold.

From the '29 high, the market collapsed with the Dow sinking to a low of 42. A short bull market followed, but that bull market topped out in 1937, only to be followed by another bear market that took the Dow down to 92 in 1942. At the '42 low the Dow would buy only 2 ounces of gold. From the World War II low set in 1942, a great bull market was born. The bull marked carried prices steadily higher into the 1960s. In May of 1969 the Dow could buy 28 ounces of gold.

From the high ratio of the late-1960s, the ratio declined and by 1980 with the Dow at 1000 and gold over 800 the Dow would buy a little over 1 ounce of gold. That was the lowest Dow/Gold ratio in history. From the early-1980s Wall Street gave birth to the greatest bull market in stock market annals. By July of 1999 the Dow could buy more gold than ever before in history, the Dow could buy over 44 ounces of gold! Next came the turn, and the ratio turned down. As this was written, the Dow will still buy over 33 ounces, but the ratio continues to decline.

The ratio started in 1980 from its lowest point in history and by 1999 the ratio rose to its highest point in history. Therefore the correction or reversal of this huge rise in the ratio will be a major decline, a decline to the point where the Dow again might buy only 1 ounce of gold or even less. This will require either a huge rise in gold or a massive decline in the Dow, or probably both.

The Fed has a huge problem today. The problem is that it has embarked on the greatest inflationary expansion in its history, but so far the economy has responded very sluggish. The Fed may have (at least so far) prevented the economy from totally collapsing under the weight of a mountain of debt. Greenspan's great fear is that the US will turn into a version of Japan, the same Japan that has been in recession during most of the last decade.

The great fear of the Fed is that the debt mountain built into the US will become out of control, that the economy will sink into a severe recession and that consumers en masse will just "go under," suffocating in the black hole of their own debt. The bear market in stocks is beginning to damage consumer sentiment as far as Wall Street is concerned. In the May 8 issue of the Wall Street Journal there's an article with the headline,"Main Street Loses Faith in Stocks."

So what's the hope for consumers? Why it's real estate. This is where the money is now. And in order for real estate to prosper, you've got to have financing, cheap financing. Which is one big reason why the Fed is keeping rates low. The event that has "saved" the consumer and the US economy so far has been the inflationary rise in housing. Had it not been for the rise in housing, the economy would almost surely now be in a deep, grinding recession.

So the big picture can be expressed in a phrase: Inflate or Die.

The 20 month MA of Gold turned up in October 2001 while the 40 month MA turned up in January 2002. Right now the 20 month MA is just about to cross above the 40 month MA. If or when that happens, we will receive a long-term bull signal for gold. How long will that bull signal be good for? Obviously no one knows, but to guess three to five years. That's how long the bull market in gold could last.

Hope springs a lot in the stock market, but hope is not eternal. Before a bear market ends, hope is abandoned. In fact, that's one characteristic of the bottom of a great bear market. It's called "the abandonment of hope"

We are now in the early part of the second phase of this bear market. Investors are still optimistic, even though stocks, in general, have done poorly over the last three years.

*******

Richard Russell's Dow Theory Letters, May 8, 2002

The monthly S&P has assumed the pattern of a giant "head-and-shoulders" top. Note that the 20 month MA turned down in January 2001. It has continued down since then, but at an accelerating rate. In November for the first time since the early '80s the 20 month MA broke below the 40 month MA. Then, two months ago, the long-term or 40 month MA turned down.

The two critical levels on the S&P Composite to watch are the September 2001 closing low of 1041, and even more critically important, the extreme September 2001 low of 944. If 944 is violated on the S&P, Richard Russell would expect the bear market losses to accelerate and the bear market to move into a much uglier phase.

For an important upside reversal, I'd want to see the S&P move above its 200 day MA, which now stands at 1129.

Gold is a pure asset in that it has no debt against it and thus gold cannot go bankrupt. Gold is not managed by any group or any central bank. Gold doesn't have to be managed.

To Richard Russell's mind, the entire Federal Reserve System is a fraud perpetrated on the American people. As such it will ultimately collapse. It's simply a matter of time. The ultimate object of the central banks, taken together, is to institute a world central bank with a single currency. Then there would be no problem of competing currencies. Then a single central bank would control the entire world's money. Then the central bankers would realize their dream. Total control and power to manipulate the world economies.

Richard Russell considers gold and gold shares at this time unlike any other items. We should look at gold and gold shares as insurance against a system that almost guarantees inflation over time. The only real protection we have against the Federal Reserve System is real money, and real money (gold and silver) is outside the system.

The dollar has topped out and the question is "How far down is the dollar fated to go?" The answer is that anyone know. What's significant, however, is how little publicity has accompanied the dollar's decline.

*******

Richard Russell's Dow Theory Letters, April 17, 2002

Gold is still in a basing pattern, and basing patterns move slowly and take a long time to complete. In the fragile markets of today, investors, or at least many of them, want ultimate security; they want real money, money that is not a product of some central bank. In other words, they want gold.

Investors who buy stocks here have to deal with two major problems. The first problem is current valuations, which are extremely high. The second problem is dividends, which are extremely low. Two years of losses is hard to take. Three successive years of losses is "too much" to take. Richard Russell believes that the US consumer is now starting to cut back on his spending. If this happens, all forecasts of "the end of the recession" will be called into question. Unfortunately, we are now in the "no profit" part of the year. This is the six months starting in May and ending in October when, historically, you would have been better off being out of the market.

The system of debts and credits that the Federal reserve has established is starting to tremble. There's just too much debt in the system. Over the last year the Fed has flooded the system with over a trillion dollars in credit. The Fed has also dropped interest rates to the greatest extent in a short period of time, in history. If the Fed had done that 15 years ago you'd experiencing the damnedest explosion in inflation that you can imagine. Then how is it that we're not being battered by inflation now?

The reason is that the forces of debt, the contractionary forces, are so powerful that even a trillion dollars injected into the system can't generate galloping inflation. On top of that, we're experiencing the toughest global competition in our history. The fact is that the world is now producing too much. It's producing more than consumers can consume.

Consciously or unconsciously, investors have started to distrust the debt and credit system that the Fed has thrust upon us. People see the surging money supply, the debt, the bankruptcies, the declining corporate earnings, the lay-offs, and the factories moving overseas. And they see the US negative balance-of-payments, they decide that they want to be outside the system that the Fed has created. That means being in tangibles, homes, land, real estate, gold, silver, base metals, something of intrinsic value, in short, something that is not going to go bankrupt when the "big unravelling" arrives.

Slowly but surely it is becoming accepted that at current valuations, stocks will be hard-pressed over the next ten years to provide average total returns of more than 5% to 7% a year. Actually, Richard Russell believes that's an optimistic reading of the situation.

The certainty of inflation is now fixed in the minds of almost all Americans. After all, since World War II that's all we've known. But it is conceivable that a period of deflation lies ahead, at least a deflation in prices as opposed to inflation in the money supply (the latter seems to never end).

Making real money in stock market entails getting in on a primary trend and riding it to conclusion. When the big stocks, the "backbone of the economy" such as GE, IBM and AOL are struggling, Richard Russell doesn't think you're going to make big money in secondary groups. Sure, you may pick up 10% or 15% before taxes, but is it worth the risk?

*******

Richard Russell's Dow Theory Letters, March 27, 2002

In December 2001, a second technical milestone was reached. In December of 2001 the 20-month MA crossed decisively below the 40-month MA - this for the first time in 22 years. The 20-month MA has remained below the 40 month MA since that time. The crossing of the 20-month MA below the 40-month after 22 years, in his opinion signals that a major top is in place.

The best way to lose money in a bear market is just to keep "playing around" with the stock market - buy something here, sell something there, take a tip, buy a highly-touted mutual fund, just keep fooling around. And in due time, sure as shootin', you'll lose your money.

Everyone loses in the bear market, and the winner is the one who loses the leaest.

There is a lot of risk in investing at this time. The variables are many and they are extreme. On top of that there is the Achilles Heel of the entire picture and that's the dollar. We have to wonder how long, or how much longer, our foreign creditors will continue to accept American paper for their merchandise and hard labor. They've been accepting dollars for a long time, but the negative trade balance figures are unsustainable. With the new euro and perhaps bottoming Japanese yen as competition, common sense tells us that somewhere ahead the dollar will hit the trail to lower levels.

When the percentage of stock allocations is over 50%, the outlook for stocks is not particularly good. When the percentage is over 60%, the year ahead for stocks should be a loser. But the latest reading is just off its highest level in the 21-year history of the data. The latest reading is just over 69.9%. This calls for a 20 % drop in stock prices over the year ahead.

*******

Richard Russell's Dow Theory Letters, January 24, 2002

The stock markets of the US and the world are currently caught in what Richard Russell believes will be an historic bear market. We are still near the beginning of this primary bear market.

Despite the massive manipulations of the Fed, the economy continues to be in trouble, and stocks have failed to recoup their huge losses. The problem is inflation. Too much money chasing too few goods means rising prices, and rising prices means declining bonds and declining bonds means rising rates.

Right now debt as a percentage of disposable income is at record levels. Debt is now over 100 % of disposable income (in 1982 it was only 60 % of disposable income)

If we have to work for our money and the government can create money (actually legal tender) without someone working, that's an immoral situation. In a weird way, it makes all of us "slaves" of the government. And that's one of the cruxes of the current situation. We're all working to make money, money that has no instrinsic value, money that the government prodcues at will, money that government creates "out of the air". Immorality is just another word for evil. And in the end, the only power evil has is the power to destroy itself. This may sound far-fetched, but I believe the paper-money system will ultimately collapse, and with it will go the whole federal reserve concept.

Every market advance whether primary, secondary or minor, will ultimately be corrected. The bigger the speculative edifice, the bigger and more severe the correction. This is a law of nature, and it can be drawn out, it can be extended, but it can't be eliminated. The Federal Reserve seeks to change this natural law. They might just as well issue the following edict - "From now on there will be no night. The Federal Reserve announces that from this time on, there will only be day."

Right now the US public is acting as if the bull market is still with us. He believes we still have the "bubble" with us. After a while, you can get used to almost anything - anything if it lasts long enough feels as though "this is the norm." He thinks Wall Street and the stockholding public believe that price/earnings in the high 20s or even 30s are normal. They accept stocks that pay no dividends as normal. But 150 years of stock history tells us that stocks with P/E in the high 20s and stocks with no dividends are NOT normal. These are bubble stocks, and in his opinion the bubble is still with us. True, the bubble has been deflated somewhat, but basically the bubble is still here. You can see it in the abnormal valuations.

His overall view is that the market is still in its second psychological phase, and the second phase is the longest phase in the bear market. He believes that in this second phase we will experience the slow but relentless decline of bullishness. As this bear market drags on, people will realize that they are no longer making money in the market. Bullishness will turn to disappointment. Disappointment will give way to frustration and anguish. Finally, frustration and anguish will give way to resentment and anger. At the final bear market lows as stocks cave in and as great values finally appear, the public will have exited the market and the general sentiment will be - "I never want to hear about the stock market again."

*******

Richard Russell's Dow Theory Letters, December 12, 2001:

There is the latest utter nonsense. The Dow is up 20% therefore "we're in a new bull market". Richard Russell doesn't know who started this dopey latest rumor, but suddenly all the newspapers pick this new definition. On this "up 20 % is a new bull market" definition, during 1929 to 1932 we saw six "new bull markets" How's that? During 1929 to 1932, during the greatest bear market in US history, there were six upside corrections. Of those six, five were over 20 % in extent.

This is the way those six corrective rallies ran within the great 1929-32 bear market. The first corrective rally following the crash took the Dow up 49 %. The second rally took the Dow up 16 % - this was the mildest rally. The third rally advanced the Dow 23 %. The fourth took the Dow up 29 %. The fifth rally took the Dow up 35 %. and the sixth rally just prior to the final low advanced the Dow 25 %.

You think that was unusual? It wasn't at all. In fact, we have a modern comparison at our fingertips. It's the bear market in the Nasdaq, which may or may not be over. So far, we've seen six rallies in the Nasdaq. The first took the Nasdaq up 19 %, the second took the Nasdaq up 35 %, the third was up 16 %, the fourth advanced the Nasdaq 24 %, the fifth up 41 %, and the sixth and latest up 36 %. And as Richard Russell said, the bear market in the Nasdaq is not over.

A bear market ends when the market produces GREAT VALUES in stocks as it did in 1932, 1942, 1949, 1974 and 1982. Historically, when those great values finally appear they are confirmed by the pattern of the D-J Averages.

Take earnings per share for the S&P 500 Stocks Index for the second quarter: Under Thomson Financial/First Call standards, it is $ 11.82. But it's $ 9.02 according to S&P, and $4.83 under GAAP. How can investors make intelligent decisions?

Looking ahead, Richard Russell said that FED action might result in the kind of mini-bull, mini-bear action that we saw during 1966 to 1974. Following are a list of the mini-bear markets which occurred during 1966 to 1974. During February 1966 to October 1966 the Dow lost 25 %. During December 1968 to May 1970 the Dow lost 36 %. During January 1973 to December 1974 the Dow lost 45 %.

As for the mini-bull markets that occurred during the 1966 to '74 period, we have October 1966 to December 1968 when the Dow rose 32 %. During May 1970 to January 1973 the Dow rose 66 %. That gives you some idea of the difficulty and complexity of the entire 1966 to 1974 bear market. By the time that bear market was over, most investors had been "beaten to death". They were through with the stock market.

The Dow hit a high of 995.15 in 1966. At the lows of 1982 the Dow had fallen to 776.92. That was 16 years of frustation for investors with most having lost money during that period. At the lows of 1982 the S&P was selling 7.9 times earnings (in 1980 it was selling at 6.8 times earnings), in 1982 the yield on the S&P was 6.3 %, the price to book was 0.97, and price to sales was 0.33, and I might add that the bond yield was 12.2%.

No two bull markets and no two bear markets are the same. None start exactly the same and none end exactly the same. However, going over history the best gauge of bull market tops and bear market bottoms are VALUES. The pattern of the stock averages merely confirm the values.

Obviously, Richard Russell doen't know what will produce great values in this bear market. It could be just declining earnings, it could be a severe recession or even a depression, it could be a war, it could be a dollar collapse - your guess is as good as mine (maybe better than mine) But Richard Russell does think that this bear market will only end with a decline to the point where stocks provide great values. One characteristic of a bear market bottom is depressed investor sentiment. Aside from poor earnings, it is this depressed psychology that gives us the great values.

*******

Richard Russell's Dow Theory Letters, November 21, 2001:

You can make a good case for world deflation, and if so, high-grade bonds will be the place to be. As for stocks, Dow Theory says it's still a bear market with a long way to go. Holding stocks in a bear market is never a healthy endeavor. Stocks are expensive and buying them is really a bet that the September 21 low was the bear market low.

One of the disciplines Richard Russell had to learn in this business is to ignore all the advice, predictions, warnings, optimism and pessimism of the so-called "experts". There is only one expert in the investment business and that's the stock market itself. Everything known by anyone anywhere at any time is "built" into the structure of the D-J Averages.

The return in the decade of the 1990s was a sky-high 18.2 % annually. Investors such as Warren Buffett and Sir John Templeton are warning that over the next ten years you might not make anything in stocks. This has enormous implications for baby boomers who are counting on retiring at the age of 55 or 60. They are basing their retirements on the same kind of returns that they received on stocks during the 1990s. Stocks today are not priced for anything like the 18 % annual returns of the 1990s.

As Richard Russell is writing this the Dow is flirting with its 50 % or halfway level, that level being 9978. He has drawn a lot of attention to this "halfway" level. If the Dow can close above 9978 there is a reasonable chance that it can continue further, even attacking the bull market high of 11722. Only time will tell. If you want to trade, and have the stomach for buying stocks just for trading purposes, go ahead.

*******

Mark M. Rostenko / The Sovereign Strategist, October 2001

Bottom? What Bottom?

With the stock market up substantially from September's three year low, Wall Street pundits and analysts and the popular media are once again beating the drum for "the bottom". It seems this bear market has seen more bottoms than a box of Pampers. Unfortunately for the handful of naive investors who haven't yet realized that the so-called experts don't know bottoms from holes in the ground, every one of these "market bottoms" has proven to be false.

"But this is THE bottom," the experts tell us. "And this time, we really mean it."

But let's bear in mind that the experts are the same folks who last year told us that the U.S. economy would grow by better than 3% this year. And then told us that growth might slow, but that we'd surely avert a recession. And then told us that we should expect a soft landing. Then following the events of 11 September, they slithered out the back door with a perfect excuse for their failed forecasts ("no one could predict such an event") and officially proclaimed that a recession was inevitable.

Now they're telling us that the market has bottomed and that the recession will be a wee tiny one. The consensus estimate calls for a growth rate of 3-4% in the second half of 2002. That would make the current recession one of the shortest ever.

After all their blundering prattle, now they're telling us that this recession will be one of the tiniest in 50 years. Is anybody still listening? If so, why?!

It would be quite a feat for a record-breaking expansion to be followed by one of the mildest recessions on record. It would be much like throwing a basketball fifty feet into the air and then watching it fall ten feet toward earth, stop, and then head higher once again, defying all laws of physics.

Perhaps when viewed from the ivory towers of economic academia or the skyscraper-clad canyon of Wall Street, basketballs can hover magically at forty feet in the air and then project themselves again to higher elevations. But in the world most investors live in, that doesn't generally happen. Neither are record expansions followed by tiny little dents in the economic fabric. In this world, most of us know that "the bigger they are, the harder they fall."

If we're to believe the experts, apparently the bursting of the biggest asset bubble in U.S. history and a massive decrease in household net worth (for the first time in more than fifty years) will result in a two-quarter blip and a quick trip back to the land of peaches and cream in no time flat.

Never mind that household net worth plunged $532 billion in the first half of this year. Never mind that households shed $875 billion in net worth last year. Never mind that the U.S. has fallen victim to the biggest terrorist attack ever. Never mind that the U.S. will be spending billions of dollars chasing after an elusive enemy that might never be caught.

Never mind all of that. The experts have proclaimed that the good old days are just around the corner. Perhaps someone need remind them that we passed that corner a long time ago.

Some point to the stock market's recent rebound as proof that the recovery is imminent. After all, it's "common knowledge" that stocks bottom an average of 5-6 months before the economy begins to recover. That's the way things have always been.

May I remind the reader that there was a time when the Roman Empire ruled much of the world and was expected to do so indefinitely? After all, that's how things had always been.

Things may very well be different this time. Most of our historical recessions have been consumption-led. That is, the consumer pulled back on spending and the economy slowed. The Fed cut rates, restored confidence and voila! The U.S. economy was back on track.

But anyone that has eyes with which to see knows that this slowdown has had little to do with consumption, or a lack thereof. No. This beast has been of a much more threatening and longer-term variety, that of a decline in capital spending.

Businesses aren't spending. They aren't building new plants. They are no longer funneling capital into dot-com upstarts and telecoms. After having tossed capital around on any and every "high-tech" idea that came down the pike in the 90s, businesses are now sitting on their hands waiting for a reason to expand capacity. They aren't interested in Uncle Al's easy money. Why build more products that aren't selling?

This is a slowdown of a different flavor and it would be foolish to apply simplistic notions in an attempt to forecast the recovery. Wasn't it just yesterday that the financial pages were plastered with prattlings about how "three rate cuts ALWAYS lead to bull markets"? That was seven rate cuts ago. We can learn from the past, but history never repeats itself identically and indefinitely.

Now the pages are plastered with news that the economy generally rebounds 5-6 months after the stock market bottoms and that therefore, we can look forward to a recovery in the second half of 2002. (Remember when it was supposed to be the second half of 2001?) There's a mighty big assumption built into that forecast: that the stock market has indeed bottomed.

Every time the market rallies a bit, everybody is calling the bottom. And yet very few ever offer any compelling logic or reasoning for why it is indeed a bottom.

We're in a major bear market. Rallies tend to be bull traps. And there is nothing about the current rally which might differentiate it from a typical bull trap, much like the one observed in March of this year. You'd think that the experts would have learned by now that stocks rebounding from major lows does not necessarily constitute a bottom nor does it signify an impending bull market.

Stocks are still overpriced. The p/e ratio of the S&P 500 currently stands higher than it has at most previous market peaks. Does that look like a bottom? Bull markets have never, not once, not ever, begun while the stock market was overpriced. Bull markets have always begun when stocks were underpriced.

Investor sentiment also argues against a bottom. Small investors are disgruntled and frustrated, but everywhere you look, everyone is keeping their heads up for the next bull market.

Bear market bottoms are not characterized by confidence, optimism, nor hope. They are laden with gloom, despair, and frustration. Most people, including the experts, are dead wrong about major market turning points. But you can't turn more than two pages in the financial pages today without hearing some Wall Street cheerleader "rah! rahing!" about the bottom.

Forecasting the market and trading it profitably is a very tricky game. Even the best traders in the world will tell you that rarely, if ever, are they successful in picking major market turning points. Are we to believe that this time the bubble-heads at CNBC and the typical naive investor have succeeded where the world's best rarely do?

Are we to believe that the experts who once recommended now-defunct Internet stocks at hundreds of dollars per share and the small investor who foolishly held on while their dot-bombs plunged 90% have suddenly been shined upon by some golden light of prophetic ability? That they are now able to accurately forecast market bottoms?

The so-called experts were wrong about our economic growth. Repeatedly. They were wrong in forecasting that a few rate cuts will create a new bull market. The analysts have downgraded profit estimates all year. ("Downgraded" is Wallstreetspeak for "We're wrong. Let's make up another number.") Perennial bull Abby Jo Cohen, poster child for the excess and absurdity of the 90s market, has had her flock buying losing stocks all year, multiplying their losses with every downwave of the bear. And now the experts are telling us that the bottom is in place. Who you gonna believe?

Believe the market, and only the market. The market's opinion is the only opinion that matters. Only the market will tell us when it has bottomed and until it does, anyone forecasting a bottom is merely playing a guessing game.

We've had quite the bull run and we've seen the bear inflict some massive damage. After all that, when the bottom comes, rest assured that it won't come in a day. Major market turning points don't work that way.

The market will lull the remaining bulls into hopelessness and despair. It will takes its time in building its bottom. And it won't show its face until most of us aren't looking. It will take the "experts" and the investing masses by surprise, as it always does. Just as they believe that every rally marks the bottom, so too, when the bottom finally comes, they will not believe it.

When the "experts" tell you that there is no longer any hope, put on your smiley face. Buy with confidence because the bottom will finally be in place.

Mark M. Rostenko

Editor

The Sovereign Strategist

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Richard Russell's Dow Theory Letters, September 19, 2001

From the valuation standpoint we have much further to go on the downside in this bear market. Bear markets, major or primary bear markets, tend to take stocks down to the point where they become "great values". Actually, at great bear market bottoms such as 1938 or 1942 or 1974 or 1982, stocks declined to "below known values". On any measurement, stocks are not there today.

This could be maybe the longest bear market in history. The base for this element is the fact that the bull market rolled on for 17 years. The longer the bull market, usually the longer the time required for the total bear market correction. We have two depressing examples of bear market timing. We have the gold bear market which has already lasted from 1980 to the present, or 20 years. And we have the Japanese example which has lasted from 1989 to the present.

As far as valuations are conerned, stocks are still extremely expensive. The S&P 500 minus all the baloney is selling at around 36 times earnings, at least, this is the way the WSJ analyzes it.

During a bear market the Dow will tend to hold below its 200-day MA except during instances of powerful upward corrections. But if the bear market is still intact, it will be only a matter of time before the Dow sinks below its 200-day MA again.

The consumer buying is coming to an end. The NYC disaster will somehow cause consumers to become more conservative. Of course, the huge number of layoffs will also serve to turn consumers conservative. The age of "fun and shopping" may be coming to an end. Consumer spending equals two-thirds of the US GDP.

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