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Richard Russell Comments

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    Richard's Remarks:

    May 20, 2002 -- Do subscribers like this print or the larger print? I've received both opinions. Some subscribers complain that when they run the site off on paper, the larger print takes up too much paper. I can't please everybody. Which way do I go? You tell me.

    I want to start by again referring to the great article by Lowry's Paul Desmond, an article which appeared in today's Barron's. In the article Paul describes the 90% Upside and 90% Downside Days, days which characterize either extreme panic or an opposite extreme of buying desire.

    I'm reminded of the years after World War II when many analysts and economists were convinced that a second "Great Depression" would soon be upon us. In those days the sentiment of most stock buyers (and there weren't many) was stubbornly bearish -- the were "turned off" by anything that had to do with Wall Street.

    When I graduated from NYU in 1947 almost nobody thought of going to Wall Street as a profession. The brokerage houses were empty. The tape would stutter by lazily, often stopping half a minute or longer at a time. A typical day's volume would be a bit over 2 million shares.

    In those days people didn't talk about stocks. There was literally no interest in stocks as an investment. The Dow was dragging around well below 200, and the 1929 high of Dow 381 was considered an unobtainable lost dream.

    I spent a lot of my time at the old Bache office on Lexington at 42nd Street where one of my classmates was working. Or I'd go down to the old Commerce Exchange just north of Wall Street where a buddy of mine was employed. His job was to chalk in the changing prices of cotton and potatoes and, I think chickens, on a giant slate panel.

    Of course, much of the gloom, distrust and disdain of the late '40s was an outgrowth of World War II and the Great Depression. Memories were recent and vivid, and Wall Street was not a place where you went to make a living.

    Contrast that sentiment with the almost surreal bullishness of today. The cycle has swung from due south to due north. Today bullishness is so stubborn, so ingrained, that even though stocks are selling at their highest valuations in history and risk is given short shrift, the crowd remains bullish, bullish and more bullish.

    To get back to the Lowry's article in Barron's, Paul Desmond documents the fact that almost every important stock market low has been characterized by one or more panicky 90% Downside Days, followed fairly soon by one or more 90% Upside Days.

    Now the fascinating phenomenon is that during the drop to the September low of 2001 ("the Twin Towers decline in NYC") the market never, as Desmond describes it, "reached the panic proportions found near almost all major market bottoms of the last 69 years. Not even a single 90% Downside Day was recorded from May through September. . . . In short, the final bottom had not been seen in September 2001." By the same token, we haven't seen a single 90% Upside Day during the rally that has followed the September low.

    How could that be? Here's the Russell explanation. Bullishness then, as now, was so ingrained that even the shocking destruction of the Twin Towers and the attack on the Pentagon was not enough to bring about panicky conditions. It seems that it might take World War III to evoke enough bearishness to set off the typical one or more 90% Downside Days.

    The implications of all this, it seems to me are momentous:

    September 2001 did not represent a major market bottom.

    Following the September 2001 lows, we've never had enough buying enthusiasm to trigger even a single 90% Upside Day. Thus the rally since September 2001 has been weak and extremely selective.

    When the current weak rally fizzles out, we could see another decline which might test the September 2001 lows. My guess is that if those lows are broken, the ensuing decline could conceivably generate enough fear to set off one or more 90% Downside Days.

    Somewhere ahead the era of incredibly stubborn bullishness will be broken, and the beginning of a long period of increasing bearishness will be ushered in.

    I would guess that this coming "era of bearishness" will be extended and severe. It should be roughly the mirror-image of the "era of bullishness" that has characterized the last 10 years.

    The total absence of any 90% Downside Days during the May to September 2001 decline is a confirmation of the thesis that bullishness is now at its highest level in the history of the US stock market.

    A second confirmation of the extreme bullish thesis is that price-earnings ratios are at their highest levels in history and stock yields (those stocks that have any yields at all) are at roughly their lowest levels in history.

    Every primary bear market in history has ultimately produced two phenomena --

    Great values in blue chip stocks, and --

    Black pessimism on the part of the investing public.

    Those two phenomena lie ahead, maybe even years ahead.

    Gold -- The action of gold is interesting to say the least. I watch a number of ratios, and one that I report on almost daily is the Gold/Dollar Index ratio. This ratio has been highs daily, indicating that gold is outperforming the Dollar Index.

    Many investors have been waiting (and predicting) a correction in the price of gold so they can buy certain gold shares at the hoped for "corrected" prices. Obviously, I don't know how the situation will work out, but recently gold has been very reluctant to back off enough to allow for corrections in the various gold shares.

    I've been suggesting that my subscriber buy an assortment of gold stocks, and it's just been a case of "buy 'em at the market" because there hasn't been much give in them. This presents a problem for many people, since they hate to buy any stock at or near its high. But this has been the story of the gold shares -- you want 'em, you have to just put in order at the market and buy them.

    I have urged subscribers not to buy just one or two gold shares. You should buy an assortment of at least five.
    Gold shares I recommend are NEM, PDG, AEM, AU, HGMCY, GFI, GG, DROOY, MDG and the lower priced GLG, KGC and BGO.

    I run gold with a 20-month and a 40-month moving average. In January of 1987 the 20-month MA crossed down below the 40-month MA. This set off a new bear segment of the long two-decade bear market in gold. That segment has lasted 5 years. Both moving average are now rising, and the 20-month MA is just a hair away from rising ABOVE the 40-month MA.

    When this happens, I'll consider that the bull market in gold is on its way. My guess is that the new bull market in gold should last from at least a few years, maybe as long as five years. But let me put it this way -- based on my long-term moving average studies, it appears that the new bull market in gold is just starting.

    How long will the new bull market last and how high could gold climb. I obviously don't know, but my experience with bull markets is that they usually go further on the upside than anyone thinks possible.

    Today's Market Action -- I think there's a good chance that the advance has topped out. My PTI was down 2 to 5298 with the moving average at 5318. The PTI remains in its bear mode.

    The Dow was down 123.58 to 10229.50. There was one mover in the Dow, dear old MSFT down 2.02 to 54.01.

    July crude was up .05 to 27.20.

    Transports were down 36.99 to 2761.37.

    Utilities were up 4.94 to 287.65.

    There were 1198 advances and 1956 declines.

    There were 100 new highs and 24 new lows.

    Big Board volume was a low 993 million shares, but declining stocks on contracting volume is bearish in a bear market. It means that stocks are going down but nobody is getting out.

    S&P was down 14.72 to 1091.60.

    Nasdaq was down 39.79 to 1701.60 on 1.41 billion shares.

    My Big Money Breadth Index was down 10 to 814 (low for the year was 810).

    June Dollar Index was down .20 to a new low of 112.98. June euro was up .08 to 92.11. June yen was up .32 to 79.92.

    Bonds were higher with the June 30 year T-bond up 15 ticks to 100.21 where it yields 5.69%. June 10 year T-note up 11 ticks to 105.06 to yield 5.19%. June muni futures up 12 ticks to 103.06.

    If the dollar continues to fall, it will impact on the bonds and rates will go up. With the incredible amount of debt built into the US economy, the last thing the Fed wants is higher interest rates. Also rising rates would put a pin in the housing bubble -- and yes, Mr. Greenspan, it is a bubble -- even though you stated that it isn't a bubble (Greenie couldn't recognize a bubble even if he was sitting on one).

    Gold is starting to roll. June gold was up 5.10 (shades of the '70s) to 316.00, thereby closing above the 315 resistance level and at a new high. On the point & figure chart, gold is now ABOVE all its descending trendlines.

    The Gold/Dollar Index was up 5.00 to 279.82, a new high in favor of gold.

    July silver was up a big 11 cents to 4.78. July platinum was up .65 to 544.20. June palladium was up 8.30 to 382.80.

    XAU was up 2.51 to a new closing high of 83.18. NEM up .69, PDG up .49, ABX up .54, AEM up .48, HL up .49.

    GLG closed at 8.83. GG at 21.00, DROOY at 4.54, HGMCY at 16.74, MDG at 17.96, BGO at 1.74, KGC at 2.45, GFI at 15.44.

    McClellan Osc. was minus 50 today.

    STOCKS -- My Most Active Index was up 2 to 411.

    The 15 active stocks on the NYSE were TYC up 1.55, ACN up 1.46, GE down 85, LU up .02, DYN up 1.58, EMC down .34, AOL down .60, T up .44, HD up .41, HPQ down .19, LOW up 2.04, PFE down .66, NT down .26, MOT up .02

    More -- IBM down, JNJ down 1.02, IBM down 1.24, COST down .41, MO down .10, CAT down .75, MER down .66, DELL down .72, JPM down .64, MSFT down 2.02, D up 55. ED up .31, TXU up 1.48, WCOM up .14, GS down .28, DD down .43, GM down .12, KSS down .13.

    CONCLUSION -- I didn't care for today's action. I don't like stocks sliding on low volume days. It's kind of spooky, I've seen too many of these kinds of days and they often lead to trouble.

    Maybe tomorrow will be better, but this is a bear market, and in a bear market it's wise never bet on tomorrow being an up-day.

    Better still, don't bet at all. Betting is for gamblers, and gambling is another word for losing. But don't get me started on gambling, because I'll let you in on a secret -- gambling is one of the stupidest of all human endeavors. Gambling is for psychic masochists.

    That's it for Monday, but be sure to check below.


    I graduated from New York University in 1947. Alan Greenspan graduated from New York University in 1948. I played the Trumpet in a swing band. Alan Greenspan played the saxophone in a swing band. I detest the Federal Reserve. Alan Greenspan is Chairman of the Federal Reserve. I've got more than passing interest in the Fed and in Greenspan.

    The article posted below was written by Alan Greenspan in 1966. It was sent to me by a subscriber. I'm reprinting it below in its entirety as a service to my subscribers. It's a long piece, and if you read nothing else in this article, please read the last paragraph.

    The question is asked, if Alan Greenspan wrote this article and obviously believed what he wrote, how can he preside today over an institution which is opposed to gold and which has been throughout its history an engine of inflation?

    My answer is that Greenspan went for the power and the glory. He "sold out" to the bankers and the establishment and became part of the banking establishment.

    It's not generally known but before Greenspan rose to his current position of power and influence, he was a member of the executive committee of the Morgan flagship commercial bank, the Morgan Guaranty Trust Company. Thus "Greenie," as I discourteously call him, was a loyal member of the ruling bankers' crowd. This is the same crowd that has "stolen" control of our nation's money.

    But I have to wonder what, in the dead of night, Greenie really thinks about the Federal Reserve and its long-ago abandonment of the moral and Constitutional system wherein gold and silver alone were accepted as real and true money.

    Gold and Economic Freedom by Alan Greenspan, an article that originally appeared in the newsletter, The Objectivist, in 1966.

    An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense - perhaps more clearly and subtly than many consistent defenders of laissez-faire - that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
    In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

    Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

    The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

    What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

    In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

    Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

    A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

    When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one-so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.

    A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

    But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.

    When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.

    With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

    Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

    In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

    This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

    Alan Greenspan"

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