Richard Russell: What Do You and I Do? Sit on Gold and Silver..

Snippets from Richard Russell's Dow Theory Letters (2/22/2011), at 321gold.com [emphasis is mine]:

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President Obama is obsessed with being re-elected. So far, he's done nothing to reduce the US deficit. Will Obama sell the nation "down the river" to get re-elected? Obama has turned the whole problem over to the GOP, which is cute. Will anything at all get done about the deficits? We'll know before 2012 election time.

.......The good old American way is as follows: We can make a fortune in the rising stock market or the precious metals market, fortunes that will tide us over during the coming difficult pay-back years. The other way is that we be invested so successfully that our investments will keep us "in good shape" during the coming deleveraging years.

But there's a problem. Stocks today are not priced to generate profits over the years ahead. Sure, under the auspices of the money-printing Fed, the stock market might continue to rise. But that's a risky bet on the Fed. For many investors it's the only course that makes sense.

There are roughly $2 trillion currently buried in the coffers of US corporations. Because of the many uncertainties that lie ahead, corporations are hoarding their cash. Corporate CEOs don't know what President Obama is planning next in his strategy of making the government "master of everything" while planing to distribute money from the "fat rich to the deserving poor" via taxation.

I've said before that the period of "making money" has essentially come to an end. The new era of "not losing money" or not losing purchasing power has arrived. Another way of putting it is that the era of protecting what we still have has arrived. Inflation, cost of living and rising taxes will all take their turns in eating into the good life that Americans have enjoyed since the end of World War II.

The years since World War II have been characterized by leveraging, borrowing, money creation and debt. Plus the US's great advantage of having a monopoly on the world's reserve currency. Since WW II, the US could print all the money it needed, and the world would accept that money.

I've always said that the dollar was the Achilles Heel of the US economy. Now, nations with low-salaried workers are competing with the high-cost workers of the US. The US insists that it wants a "strong dollar." But a weak dollar better serves the US's interests. A weak dollar helps US exports, and it eases the near-impossible task of servicing the monster debts of the US.

For decades, the rising price of gold has, in effect, devalued the US dollar. Those who hold large quantities of both real and paper gold have kept up with, or even improved, their relative standard of living. Gold is now held by a tiny minority of Americans. More recently, Americans have poured their money into an area that they "understand" and feel comfortable with. That area is the supposed safe-haven area of blue-chip US stocks.

Will the rising stock market serve to preserve the great American dream? The dividend yield on the S&P 500 Composite is now a "micro" 1.80%. This is as low as anything I can remember.

Since World War II, better than half the increase in the S&P Composite has been a function of reinvestment of dividends. But buying stocks today for their dividend yield is a fool's game. The only reason to buy stocks today is that you believe top-quality stocks (i.e. the Dow) will continue to rise and thereby serve as a safe-haven against the predations of the Fed and the US government.

From Ben Bernanke's standpoint, he's seen money-printing and low interest rates send tech stocks through the roof, he's seen money-printing and low interest rates send housing prices to the sky. And now Bernanke is watching and hoping as money-printing and near-zero interest rates send the stock market heavenward. If stocks continue to rocket higher, thinks Ben Bernanke, won't that spill over to housing and consumer confidence? "It has to," concludes Bernanke, who is opening the flood-gates via Qe2 and probably thinking about Qe3 if it's necessary.

In the meantime, the Bernanke-Obama team continues to worry about nonexistent deflation. The main deflation today is in the living standard of the majority of Americans.

And what do you and I do? The best I can come up with is that we sit with our holdings of gold and silver.

FYI, non-confirmation of Dow Jones Transport Index and Dow Jones Industrial Average was right there in January and February for those who subscribe to Dow Theory and think it's still a valid indicator of a trend change in the stock market. When Dow Transport finally made a new high with Dow Industrial Average, that was one day before the market started to go down on a large volume.

(It is a whole lot more scientific or objective, than my personal, unscientific indicator; but both worked very well this time. For more, see my TA blog posts, here and here.)

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Dow Theory's Richard Russell: Sell Sell Sell!

and batten down the hatches!

Business Insider reports that Richard Russell, famous for his Dow Theory Letters, issued an extremely dire warning to his subscribers:

Dow Theorist Richard Russell: Sell Everything Liquid, You Won't Recognize America By The End Of The Year (Joe Weisenthal, 5/18/2010 Business Insider)

"Richard Russell, the famous writer of the Dow Theory Letters, has a chilling line in today's note:

Do your friends a favor. Tell them to "batten down the hatches" because there's a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don't need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won't recognize the country. They'll retort, "How the dickens does Russell know -- who told him?" Tell them the stock market told him.

Update: By popular demand, here's more on what he sees in the market. The gist is that the markets recent gyrations are telling him that the economy is in trouble:

And I ask myself, "Am I seeing things? The April 26 high for the Dow was 11205.03. The Dow is selling as write at 10557 down 648 points from its April high. If business is even better than expected, then why is the Dow down over 600 points? And why, if there were 674 new highs on the NYSE on April 26, were there only 20 new highs on Friday, May 14? And if my PTI was 6133 on April 26, why is it down 17 points since its April high?

The fact is that I've been seeing deterioration in the stock market ever since early-April, and this in the face of improving business news. The D-J Industrial Average is composed of 30 internationally known top-quality blue-chip stocks. These are 30 of "America's biggest companies." If Barron's is so bullish on the future of America's biggest companies, then why isn't the Dow advancing to new highs?

Clearly something is wrong. But what could it be? Much as I love Barron's, I trust the stock market more. If I read the stock market correctly, it's telling me that there is a surprise ahead. And that surprise will be a reversal to the downside for the economy, plus a collection of other troubles ahead.

About Dow Theory -- First, we saw the recent April highs in the Averages. Then we saw a plunge in both Averages to their May 7 lows -- Industrials to 10380.43, Transports to 4298.12, next a short rally. If ahead, the two Averages turn down and violate their May 7 lows, that would be the clincher. Such action would signal the certain resumption of the primary bear market.

Just as for years I asked, cajoled, insisted, threatened, demanded, that my subscribers buy gold, I am now insisting, demanding, begging my subscribers to get OUT of stocks (including C and BYD, but not including golds) and get into cash or gold (bullion if possible). If the two Averages violate their May 7 lows, I see a major crash as the outcome. Pul - leeze, get out of stocks now, and I don't give a damn whether you have paper losses or paper profits!"

Dire warning, indeed. But I have one problem.

Richard Russell clearly thinks this is still a stock market of old, more or less, which is a price-finding mechanism. After what happened on May 6, more and more people have realized that it is no such thing; it is a playground for high-frequency algo bots.

Those bots may or may not be reacting to the real world, but when they seems to be doing so they tend to run to the same side all at once (thus the 'flash crash', as May 6 event is now called). When they are not reacting to the real world, they tend to run to the same side all at once, anyway. And these high-frequency trading firms who account for as much as 70% of daily volume at stock exchanges are paid by the exchanges for putting in a trade.

That kind of reminds me of a website that gives reviews on shops and restaurants, and those shops and restaurants will get favorable reviews or have negative reviews moved down if they advertise on the site.

Just as that site is not an independent, peer review site, this stock market is not a market where information about the companies, the economy, new government regulations, etc. gets priced.

The stock market started ramping up in March 2009 and kept on going nearly a year, while the real economy continued to struggle and the unemployment remained (still remains) high. Russell could point that out and say the market is forward-looking.

I'd say the stock market is not looking anywhere in particular. If anything, it is reactive. What is it reacting to? I'd say the credit market and the foreign exchange market. The stock market by itself doesn't mean much in the age of algo bots.

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