RUSSELL ON BONDS & GOLDDo 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.
Below, I show a chart of the yield on the bellwether 10-year Treasury note, going back to the year 2000. What you see here is the breakout that keeps Alan Greenspan awake at night. If yields continue to climb, they're going to drive a dagger into the debt-bubble, and if that happens the Greenspan bubble bursts and the "sh-- will hit the fan."
Question -- "Russell, with galloping inflation in prices and the money supply, why isn't gold going through the roof?
Answer -- When gold hit its highs during the first quarter of 2004 too many people got aboard. Ads for gold dotted the newspapers. A lot of weak hands moved into gold. The decline in gold that began in March washed out most of the speculators.
A second possible reason for gold weakness is as follows. Almost every central bank in the world has been printing paper money. Just as the central banks and the various governments don't want their constituents to know they are debasing their currencies, they also don't want gold to rise. The one thing that tells the public that inflation is raging is steadily rising gold.
Therefore, the central banks, their "friends" in the commercial banks, and the brokers with close government connections have done everything possible to keep gold from rising. But holding the natural forces down is like stepping on a spring. When the foot is taken off the spring, the compressed energy is released. Somewhere ahead, gold will fully express itself. But it will happen without the blessings of the central banks or the various governments.
Now I want to turn to the stock market and provide my subscribers with some benchmarks. One of the methods I use to measure the intensity of a decline is the number of new lows on the NYSE. So far, the peak of new lows occurred on May 10 when there were 7 new highs and 860 new lows. Those 860 new lows means that on May 10, 860 stocks broke down to their lowest level in the last 52 weeks. Now its true that on another day the Dow may drop 100 points and there might be only 500 new lows. But if the market is really in a state of collapse I believe we will see over 860 new lows on the NYSE.
Every day on the NYSE around 3000 different stocks are traded. On May 10, 860 or around 28 percent of the stocks traded on the NYSE hit new 52-week lows. So I'll be watching to see how high the percentages go as this bear market develops.
Question -- "What if we never see more than 860 new lows on any declines of the future?
Answer -- If 860 new lows is the worst number this market can come up with, then I would call that a major plus for the bulls. But remember, the major stock average can drop a long ways even if those 860 lows are the worst that the bear can bring out. So let me put it this way -- I use the 860 new lows of May 10 as an important benchmark. And if those 860 lows are surpassed on any day -- watch out -- this down-leg has a lot more to go on the downside.
May 15, 2004
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsfThe inimitable and venerable Mr. Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron's during the late-'50s through the '90s. Through Barron's and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-'66 bull market. And almost to the day he called the bottom of the great 1972-'74 bear market, and the beginning of the great bull market which started in December 1974.
