the dow~richard russell comments

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    February 22, 2005 -- News: Oh no, the bank of Korea announces that they are going to diversify their reserves into other currencies -- translation, "We have too many dollars." South Korea is fourth in the world as to amount of reserves it holds. You can be sure that the central bank of Korea discussed "diversification" with other central banks before making this public announcement. Russia has already stated that it is using euro in its reserves.
    This is Alan Greenspan speaking, or I should say Alan Greenspan thinking. So talk. Alan, talk -- "Blast it, the core rate of inflation in January surged 0.8 percent. On an annualized basis this puts the rate of inflation at almost 10 percent. My low inflation spiel isn't working any more. So clearly I'll have to keep raising short rates to show the world that I'm an 'inflation-fighter.' But whoa, it isn't that easy -- not any more.

    "These 'measured' rate increases are beginning to squeeze the long rates, and that means trouble for real estate. I can't let that happen, but at the same time I can't let inflation continue to heat up. Yeah, I know, Paul Volcker would have stamped out inflation with three or four percent boosts in the Fed Funds, but Volcker didn't have this damn real estate bubble (oops, did I say bubble?) I meant these towering real estate prices to worry about.

    "Guess I'll just have to take a chance and continue boosting short rates. I warned about the coming rising rates in my talk before Congress, but those bird-brains don't understand what's happing -- they don't even ask the right questions. Hmm, wonder how far I can raise rates before this over-leveraged economy topples over?"

    Question -- Russell, how do you know that the above is what Greenspan is thinking?

    Answer -- Greenspan talks in his sleep -- and I've got his bedroom wired. But please, not a word of this to anyone, I could get into trouble.

    The paragraphs below were written and placed on this site over the three day weekend. But I'm afraid that very few subscribers read this, since I said that I wasn't writing anything over the weekend. For that reason, I'm repeating the weekend piece below.

    On February 7, I received a brilliant report by Trey Reik of Clapboard Hill Partners. One particular chart in Reik's report caught my attention. It was a chart showing total credit in the US as a percentage of the US Gross Domestic Product. The immediate lesson here is that it's taking more and more credit in order to produce less and less of the US Gross National Product.

    Happily, Alan Abelson must have received a copy of the same Reik report, and also happily, Alan reproduced Reik's credit chart in this week's Barron's.

    A few facts from the chart. At the 1929 stock market high, total US credit was 176 percent of GDP. In 1933 with GDP collapsing and the Depression in full force, total credit rose to 287 percent of what was left of GDP

    Now get this -- in 2000 at the top of the late bull market, total credit was 269% of GDP. That was wild enough, but do you know where we are today? Currently, total credit is 304 percent of GDP!

    In other words, under Alan Greenspan's liquidity explosion and his mini-short interest rates, the United States is now awash with credit. And with it all, the Dow still can't make it back to its 2000 bull market high.

    And then there's the law of "regression to the mean." Somewhere ahead the credit bubble is going to burst. When it does, the bear market will be on in full. Or -- somewhere ahead the stock market will topple over. When that happens the giant credit bubble will fall apart. Either way, the Greenspan Fed has created the greatest credit-balloon this nation has ever seen. This credit-balloon has created inflation, which is just now becoming visible -- even in the government's statistics.

    Greenspan is now in the process of trying to "calm down" the credit bubble. He's doing it with his "measured" increases in short rates . But this is a very dangerous process. It's like rubbing a balloon with a pin rather than just puncturing the balloon. Will Greenspan be successful? Can Greenspan get out of office by early 2006 without triggering a disaster? Place your bets. Either way, it promises to be a fascinating year, and we still have ten months to go. (This is the end of the piece that appeared over the three-day weekend).

    What if the credit balloon actually does burst? What could we expect? One thought is this -- if the credit balloon collapses, there's going to be a panic for cash, cash to stave off bankruptcy on the part of tens of thousands of over-leveraged individuals and companies. This could set off a panic for dollars. Everybody would need dollars in order to stay "alive."

    Which brings up another of the Russell scenarios. The giant US credit bubble constitutes a synthetic short position against the dollar. A credit contraction could trigger a mad rush to accumulate dollars. These dollars would be needed by individuals and corporations in order to remain solvent.

    During the Great Depression of the '30s everybody hoarded dollars. Nobody wanted to borrow anything, nobody wanted to lend anything. Dollars meant safety. Pessimism ruled. People hung on to their dollars as if their lives depended on those dollars. And in many situations, that was actually the case.

    Remember, the Fed can create liquidity. But the public and corporations create the credit, and they create credit by borrowing. Saving, paying off debt, cutting back on economic activity is basically deflationary. And that's why the Fed is so deathly afraid of a trend toward less spending and more saving on the part of the US consumer.

    Technicals -- April gold gapped up 7 dollars on the Korean "diversification" news. Today's move took gold well above its 50-day moving average (430) and moved gold into its "buy" mode.

    At the same time the dollar gapped broadly below its 50-day moving average, and had the "look"' of wanting to go lower.

    March crude surged over two dollars, putting the price of March crude at over 51 dollars a barrel!

    The chart below is a KEY chart for the US economy. This is the Philly Housing Index, and, as subscribers know, the current US "prosperity" lives by courtesy of the housing bubble. For this reason, I am watching the Housing Index very carefully.

    Up to this point, nothing has shaken the bullish composure of the US consumer. But if housing tops out, this, I believe, would finally cause consumers to turn cautious if not actually bearish.

    Just for the fun of it, Faye and I visited numerous homes that are on the market here in La Jolla. My impression -- It's like a descent into madness, and, of course, I'm talking about the prices. Even the meanest little shack in La Jolla costs near or above a million dollars. The scariest four words in the US economy today are the following -- "Regression to the mean."

    Below we see the daily chart of the Financials. Big break here, and next to the housing picture, I guess you could place financials as equal in importance. Housing and Financials breaking down! How dangerous is this picture!

    Something cracked in the markets today. Was is the swooning dollar? Was it the surging oil. Was is the plunge in the housing index? I don't know, I only know what I see on the charts, and today was an "everybody out of the water day." In fact, you don't see many days that are this damaging.

    Subscribers who have listened to me and are mostly liquid and in some form of cash (plus gold) are in the correct mode. But as far as what's going on, all I can say is that the market "cracked" today. It's as if something just "gave way."

    TODAY'S MARKET ACTION -- My PTI was down a full 8 today to 5577. Moving average was 5549, so my PTI remains bullish.

    The Dow was down a Watusi 174.02 points to 10611.20. One mover, UTX down 2.27 to 989.64.

    April crude rocketed up 2.41 to 51.42. "Fill 'er up, wait, just fill it half up."

    Transports were down a fat 79.82 to 3540.15.

    Utilities down a big 9.46 to 342.91.

    There were 735 advances and 2658 declines. Down volume was a large 84.5% of up + down volume.

    There were 213 new highs and 38 new lows. My 5-day high-low differentials declined from Friday's plus 1258 to today's plus 1161.

    Total NYSE volume was an expanding 1.66 billion shares.

    S&P was down 17.43 to 1174.16.

    Nasdaq was down 28.30 to 2030.32 on a rising volume of 2.03 billion shares.

    My Big Money Breadth Index was down 10 to 758.

    Mar. Dollar Index was down 1.16 to 82.30. Mar. euro was up 1.86 to 132.61. Mar. yen was up 1.41 to 96.21.

    German DAX was down 30 to 4323. Mar. Nikkei was down 210 to 11,485.

    Bonds were down a bit. Mar. 30 year T-bond was down 9/32nds to 113.21. Mar. 10 year T-note was down 4/32nds to 111.11 to yield 4.28%.

    April gold was up 7.40 to 436.80. Mar. Silver was up 10 to 7.52. April platinum up 10.10 to 876.60.

    Gold advance-decline line was up 18 to 1319.

    XAU up 3.64 to 99.93. HUI was up 7.85 to 217.74.

    ABX up .97, ASA up 1.09, DROOY up .07, NEM up 2.03, SSRI up .36, PDG up .69.

    Gold breakout above 430 is bullish, and it's increasingly clear that gold has turned the corner -- to the upside.

    STOCKS -- My Most Active Stocks Index was down 11 to 403.

    The five most active stocks on the NYSE today were -- PFE down .21, LU down .05, MRK down 1.40, NT down .11, XOM down 1.16. Home Depot (home furnishing) down 4.14 percent to 40.28.

    VIX was up a large 1.96 to 13.14.

    McClellan Oscillator was down 94 to minus 168.

    CONCLUSION -- As I said above, something "cracked" in the markets today. Oil surging, copper near a 14 year high, all home-building stocks down 2 to 6 points, gold up over 7, Fannie Mae under 58, Freddie just above 60, dollar whacked, breadth lousy -- and I ask myself, "Is the fun over." And the answer is that it's too early to tell.

    Meanwhile, Southern California is under water. In San Diego we average a total of 10.77 inches of rain a YEAR. Last year at this time we got a total of 2.24 inches of rain. So far in 2005 we've received 18.33 inches of rain, mostly in the last month. My cactus love it. They're almost bursting at the seams. Me, I've had enough.

    My princess of a female poodle won't go outside -- she's afraid of getting her dainty little feet wet. I told her this morning that "Poodles, especially standard poodles, are water dogs -- so shape up." She doesn't believe me. How did I raise such a canine princess? It's embarrassing.

    Let's see what tomorrow brings (in the markets -- not the weather).

    Cheers (blub, blub)

    Below, an e-mail from an old friend, none other than Ian McAvity, who writes the world-famous "Deliberations" out of Toronto. Ian has probably written more and drawn more charts on gold than any other human being alive. Like Richard Russell, Ian tends to be a bit of a worrier. But so what, there's plenty to worry about these days.

    Hi Richard,
    Great to hear back from you.

    I've watched and worried about that Total Credit Market Debt/GDP Ratio for
    years, and have no doubt it ultimately will be looked back on by future
    historians as the key to why a once great society broke down... you can
    almost here them muttering: "What were they thinking..." in much they same
    way we look back at John Law being hailed as a hero while he bankrupted

    The problem is we have no criteria to gauge 'How much is too much' to try
    and project a breaking point. Barnum was apparently very right with his
    'one born every minute' thesis.

    I often use the analogy that with consumers leveraging up their home with
    ever greater debt levels, they're effectively consuming their house one
    brick at a time... like the farmer eating the seed corn. The first hiccup
    in housing prices, or some fiddle going awry in the mess that is Fannie Mae
    could become a trigger.

    Or perhaps the Chinese, Indians and Russia will decide they've milked the
    trade imbalance to the max for now, and pull a Jacques Rueff in response to
    some international gaffe by W's team... and threaten an exit from the Dollar
    and force Bernanke's helicopter fleet into the air.

    The line I always use in speeches when I flash the Debt/GDP Chart is to say
    nobody knows how far this madness can go, but the real problem is that
    somebody somewhere holds the other side of it, and "thinks its an asset..."

    I agree with your synthetic short thesis, and suspect a massive dollar short
    squeeze that could bruise the new generation of gold bugs just prior to the
    transition point where gold separates from the Dollar and the Dollar
    alternative currencies. See these two slides (#33 and #34) of 1977/79 from
    that same speech that focus on the transition before and after Oct/Nov 1978.

    Some of the new gold bugs accuse me of worrying too much about the 1974/76
    correction phase and that Oct/Nov 1978 shakeout... but I recall a lot of
    believers jumping in and out of the boat at precisely the wrong times back
    then. I may fall into that same trap with all my cautions about the
    excessive share issuance by the miners in the past two years, but I feel it
    really needs a strong shakeout to weaken the conviction of the newbies...
    then the real game can begin. The launch of the gold ETF's and a new gold
    stock index by the Amex in Q4'04 struck me as significant Contrarian top
    indicators. (People forgot that Amex launched the HUI Gold Bugs Index in
    July 1996, just after that top... stock exchanges only react to excessive
    obvious demand. They've never demonstrated foresight in product launches.)

    Slide 35 is a reminder that it took 9 years and 9 months to reach gold $400. Then
    16 weeks to $850, and it was back under $500 8 weeks after that. This is
    the slide I use to focus on the significance of $500 as the threshold by
    which a chart reader will able to conclude that the sytem has lost control
    if/as/when we blow through $500 with conviction. But I keep cautioning that
    the other side has the ability to change the rules to perpetuate their game.
    "Be careful what you wish for" is invariably a conclusion I draw.

    By the year 2015, I have no doubt that gold in hindsight will have preserved
    purchasing power better than any other financial asset class. But I suspect
    the road ahead has numerous hidden potholes with our names written all over
    them, to make sure the trip isn't too easy!

    I loved the posting of Laurens travels. She's got refreshingly natural
    writing/communicating skills that have an obvious genetic origin!

    All the best

    One of the questions I'm asked most often is "Why gold? Why is gold used for money?" My old friend, Doug Casey supplies the answer, and here it is below --

    1. Gold is Durable - That's why we don't use wheat.

    2. Gold is Divisible - That's why we don't use diamonds.

    3. Gold is Convenient - That's why we don't use lead.

    4. Gold is Constant - That's why we don't use real estate.

    5. Gold has Intrinsic Value - That's why we don't use paper!

    And I'll add a few more if I may -- Russell

    6 Gold doesn't tarnish -- That's why we don't use copper.

    7 Gold is beautiful -- That's why we don't use iron.

    8 Gold has a long history as money -- that's why we don't use ivory.


    Hello Mr, Russell,

    I am sure you saw the Steve Schurr article in Friday, February 18, 2005
    edition of the Financial Times where he compared NASDAQ from 1996 -
    2000 to the SP Housing Index from March 2000 to February of 2005.

    The SP Housing Index hit 127 in March of 2000 and today it over 1000
    for an almost 700 percent return. The NASDAQ from 1996 - 2000 only
    returned about 400 percent in that time. This is amazing.

    I just had to say something based on the housing stories that I am
    seeing much too often. In 1999 and 2000 I remember seeing the exact
    same type of stuff on stocks - stocks NEVER go down over any period of
    time, all you have to do with stocks is buy them and go to sleep, etc..
    Well the exact same thing appears to now be occurring in housing.

    Hey, maybe housing can continue to go up while our incomes go down.
    However, I have to quote Richard Nixon's Chairman of the Council of
    Economic Advisers, Herbert Stein, "Things that can't go on forever,

    Sure, housing may hold up for another year or three, but the "Greater
    Fool Theory" of investing still applies. This is the stock market
    theory where people buy stocks because prices are rising and there is
    always a greater fool than yourself to sell to. The problem for the
    stock market in 2000 was that there was no greater fool left after
    March of 2000 to sell to. Everyone who could buy stocks had. This is
    what may be occurring in housing. Please see the articles on housing

    The article from Las Vegas is especially pertinent because a lot of
    Californians are buying 2nd and 3rd houses in Las Vegas for an
    "investment" The smart money left Vegas 3-4 months ago and went to
    Phoenix. Soon the Greater Fools from Vegas will move to Phoenix and
    that will end that housing boom too. If these people were really
    investors they would have been buying in 1994 and 1995.
    Las Vegas Real Estate

    My experience with San Jose Housing
    In 1994 I bought a house in San Jose. The house I bought was worth
    $90,000 in 1980; $145,000 in 1987; $270,000 in 1989; $230,000 in 1994,
    and too much today. In 1994, housing prices on the low end were 20
    percent lower than in 1989. On the high end they were down 50-75
    percent from their 1989-1990 highs.

    The reason I bought in 1994 was that no one was willing to buy my
    house. There were very few lookers and no buyers. At the time, my
    neighbor's house had been on the market for 6 months at $225,000. I
    even tried to get a good friend of mine to buy my neighbor's house. He
    would not because he knew housing prices were going to go lower.

    In 1995, I started driving around the area where I live (close to
    Campbell and Los Gatos) to see open homes. Housing prices were lower in
    1995 than in 1994. Real Estate agents were despondent. About 5 percent
    of the houses I saw were bank repossessions.

    The best house/deal I saw was on Alpine Road in Los Gatos. The house
    was up in the hills, but was still within 1-1 1/2 miles of downtown.
    The house was 4,000 square feet. This house had sold in 1989 for $1.3
    million to a high tech exec. In 1990 he lost his job and the bank
    repo'ed the house. From 1991 to 1995 the bank tried to sell the house.
    The real estate flyer showed the following prices asked by the bank:
    1991 - $1.2 million; 1992 $1.1 million; 1993 $999,000; 1994 $799,000;
    1995 $699,000.

    When I saw the house in March of 1995, the bank was asking $625,000 and
    they told me that if I could put $100,000 down that they would do the
    following: 1. Lower the price to $525,000 2. Give me a 5 year loan at
    the then unheard of price of 6 percent (going rate was 8 1/2 - 9
    percent) 3. Give me $25,000 back to fix up the house.

    Back then (as now) $100,000 was really big money. No one had yet become
    an internet millionaire or billionaire. I was making much too little to
    dream of buying this house. I tried to get 4 people to join me in
    putting up $25,000 each and buy and live in it for five years (we were
    all around 25-28 years old) and then sell it when the price got to
    $1,000,000. Most people thought I was crazy as housing prices would
    only go lower or they didn't have the money. No one would go in and buy
    this house with me and so I had to pass on the deal. Today the house
    probably is worth $2-3 million.

    Why was I so sure that house prices would rebound? Easy - the realtors
    showing the house were so depressed that I had to cheer them up.
    Second, since I joined HP in 1989, I had not gotten a single call from
    a job recruiter. In 1995 I had received 2 job offers. I just knew the
    job market had changed for the better. Also, owning a primary residence
    is rarely ever wrong. Luckily I was right and I bought my first house.

    Today, I should think people should be careful when buying a second,
    third, or fifth home. However, maybe we can all hope that housing
    prices will never go down again.

    Best regards,
    Soumen Sanyal

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