richard russell - moving towards doomsday

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    June 25, 2003

    Someday a year, five years, ten year from now, people will back on the antics of 2003 and the paper-money system and wonder what in God's name we were thinking of. Or more likely, they will wonder what our trading partners were thinking of as they sold their goods, merchandise and services for fiat Federal Reserve Notes that cost the US literally nothing to manufacture.

    Of course, you and I work for these same "dollars," and as long as everybody agrees that fantasy money is OK, the system will work. But now we're coming to a period where the world is turning out too much in the way of manufactured goods. Every nation now knows how to turn out goods, and every nation wants to sell its goods to the US. And more recently, many nations know how to turn out software programs, practice accounting, and perform specialized services. So what we have at present it too much of everything, plus a huge differential in the cost of wages.

    This is basically price deflation. And this price deflation plus the huge differential in wages is causing unemployment in the US as jobs and manufacturing facilities are moved overseas. The result -- stagnation in the US, slow business, with inflation in certain areas and deflation in other areas.

    The Fed doesn't like this it all. In fact, it hates it. Consequently, the Fed has lowered rates on 12 different occasions, driven short rates down to their lowest levels since the '50s, and still there's no real pick-up in US business and still there's no halt in layoffs. What to do? There's an election coming up in next year, and there's a president who's busting his britches to get reelected.

    So what's the big problem -- just keep the money spigots open and drop rates another quarter. Since there's no restriction on manufacturing fiat "money," keep it coming, make holding cash a "punishment" (since there's no gain in holding it), and try to force the economy higher. And, of course, justify it all by warning almost every day about the deadly dangers of deflation.

    The smart boys are arguing about whether the Fed will stand pat, drop rates a quarter or maybe even drop rates a half. The Russell bet is they'll drop rates a quarter. Why? Because the Fed is interested in only one thing -- keeping asset inflation on the rise, which means keeping housing prices heading higher and keeping the stock market at least holding and preferably moving higher.

    What will a quarter point drop in the rates accomplish? It will help the bond market to some extent (it certainly won't hurt it), and it will MAKE SAVING EVEN LESS ATTRACTIVE. Since you now receive literally nothing on your saving, you might as well spend the lousy money. And believe me, the Fed is doing everything it can to FORCE savers to get rid of their savings -- force people to spend it.

    Furthermore, we know that the Fed doesn't like to surprise or disappoint the markets. Therefore, I see a .25 point cut. A .50 points cut would kill the money market funds, so again I see a .25% cut.

    And what about gold? Only the foresighted buy gold, and that alone eliminates 99% of the population. The foresighted also buy diamonds and objects of art and anything that is tangible and intrinsic. The foresighted know that the paper system, technically known as the fractional reserve system, is doomed, but the foresighted don't know WHEN.

    When you buy a diamond or a Picasso or a home you don't check in every day for the price. You simply know that it's real, and it can't be manufactured by the government at no cost. You know that when this phoney system of fiat money collapses, which it ultimately will, your Picasso or your diamond or your home will still be worth something. And that's what it's all about if you, like me, are a survivor.

    So if you're buying anything tangible including gold for a quick profit, save yourself the trouble. Relax. You're not seeing the picture. The real picture is survival in a system that's as dishonest as the day is long. It's dishonest to create wealth without working. And that's the business the Fed is in today. It grinds out "money" while nobody at the Fed is doing any real work. They're basically sitting on their asses and figuring how much inflation to create. It's basically an evil system, and the only power evil has is the power to ultimately destroy itself…..

    * * * * *

    Yesterday we got the latest report -- margin debt on the NYSE in May rose to $146 billion. The speculators were back, maybe not big-time, but they were back.

    We know that during previous bear markets margin debt tend to drop 90% from its bull market high to the final bear market low. At the true bear market lows, the speculators are defeated, they are destroyed, which is why at bear market bottoms margin debt is usually about 10% of what it was at the preceding bull market top.

    Yet margin debt has only declined about 53% from the 2000 high to the 2002 low. That's doesn't sound like a completed bear market. Not to me it doesn't.

    What happened? It's clear -- the Fed fought the bear "tooth and nail." In doing so, the Fed brought the bubbles back. In doing so, the Fed has made the situation that much worse. As a result, I believe the ultimate end of this bear market will be much worse than anyone today expects. Years of excess will be washed out of this market.

    It's also my guess that the entire monetary system will collapse at or near the ultimate bottom of this bear market. The monetary system will have to be re-engineered, literally "done over." The system of fiat money, money created out of "thin air," will be condemned. An asset-backed currency will again come into being. The central banks will be discredited. And the world will start over again.

    Paper-money wealth will be wiped out. Losses will be incalculable. It will be the end of a world built on fantasy money and false wealth and endless paper lies.

    Richard Russell’s Dow Theory Letters

    PO Box 1759

    La Jolla, CA 92038

    17 Letters Per Year - $250 Annually
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