Russell On The Markets & Gold
March 13, 2006 -- March 13 (Bloomberg) -- The U.S. current account deficit swelled to a record last year. The gap between the views of Federal Reserve Chairman Ben S. Bernanke and other central bankers about it may be just as large.
Bernanke, meeting the world's central bankers for the first time since taking office Feb. 1, may find himself under fire for his view that the deficit doesn't threaten the global economy. Bank of Canada Governor David Dodge says the deficit risks an ``outright recession,'' while European Central Bank President Jean-Claude Trichet says the world economy will have to ``pay a price'' for U.S. profligacy.
The dispute may turn Bernanke into a more controversial figure on the world stage than his predecessor, Alan Greenspan, and help determine the path of interest rates, economic growth and currencies around the world, say former central bankers from the U.S., Canada and Europe.
"Bernanke's view is diametrically opposed to the view typical outside the U.S. that, by running a larger current account deficit, the U.S. is imposing a risk on the global economy,'' said former Fed Governor Laurence Meyer, now vice chairman at Macroeconomic Advisers LLC, a St. Louis forecasting firm. `"He's throwing it back in their face.'' Russell Comment -- The rest of the world doesn't believe US deficits are sustainable. Bernanke disagrees, and blames the world for our deficits. I think Bernanke's going to run into trouble.
On the surface, at least looking at the Dow, the market looks alright. But looks can be deceiving. The fact is that fewer and fewer of the great mass of stocks have been following the Dow. One of the ways of measuring strength is via the number of new highs. For instance, the peak of new highs on the NYSE came back in December 2003 when 628 stocks hit new highs. On January 27 of this year there were 458 new highs with the Dow at 10907. Friday with the Dow at 11076 there were 122 new highs. Even the Dow itself is showing deterioration. Lowry's notes that while the Dow is down just 1.5% from its 2000 high, the thirty stocks that make up the Dow are down an average of 22.1% from their 2000 high.
From a value standpoint, the Dow is now selling at 21.56 times trailing earning while yielding a mini-2.26%. These valuations are not conducive over the long run to creating profits. At these valuations, the stock market is not priced for any kind of surprises or risks. The yield on the S&P is now 1.85%, which is less than half the yield provided by the 4.56% yield provided by the "safe" 91-day Treasury bills. I realize that this is the "age of adventure" in investing, but old-timer like Richard Russell would rather put money in T-bills than stocks (please forgive me).
The futures are projecting a boost to 4.75% in the Fed funds at the end of this month, and they are saying that the odds are high that there will be another boost to 5% by June. A few smart analysts (Bill Gross included) believe that despite a coming rise in rates, business will be slower towards the end of this year at which time the Fed will reverse itself, and rates will be declining again.
Utilities -- The Utes have a history of turning down ahead of the rest of the stock market. This is often true, but not always. The Utilities hit their highs in late-January, 2006, and they have been descending ever since. I bought utilities for my kids at much lower prices. They all pay good dividends, and I have not sold any. Fingers crossed on the Utes.
Bonds -- The only bond I've bought are AAA-rated California municipal bonds, I've still got these babies and I've never sold any. Here's the dreaded secret. I bought these bonds back in the 1990's when they were yielding 5% to 5.25%. They're all free of state and federal income taxes. I wish I'd done nothing but bought Cal Munis ever since the late-1990s and just compounded the returns. Had I done so, I would have done better than fooling around with the high-priced stock market.
Stocks are great when they're cheap and when nobody wants them. Buying stocks now and "putting 'em away" will prove to be a loser over coming years. I can almost guarantee it.
Gold -- I like gold because it gives me a sense of security. Listen, despite the low stock market volatility, despite the fact that investors don't think there's any risk ahead, plenty of bad things can or could happen. I could list them all day long. A few -- extremists could blow up a few oil pipe lines. There could be another 9/11 type attack. A nuclear bomb could be set off somewhere in the US. The administration could continue doing dumb things and could get this nation into even deeper into trouble. The US could sink into deflation. US consumers could start cutting back on their buying, and we could have a world recession. A plague could hit the world including the US -- bird flu maybe?
Aw, I don't won't the present a "horror list," but one other thought comes to mind. This is the only time in US history when two generations have gone by and none of these lucky people have ever seen what I call hard times. Can this continue? Sure it can, but frankly, I'll be surprised if it happens.
At any rate, as subscribers know, I think the whole central bank, fiat paper system is a fraud, and frauds ultimately fall apart. Remember, there's nothing behind the dollars you and I work for -- except the promises of the US government to pay. And if the dollar runs into trouble, what would the US government back the dollar with? What would the US government pay its debt with? Easy -- just more dollars.
But there is one money that is outside our fraudulent central bank system. That money is gold. The Fed can implode tomorrow, the world can sink into the dark ages, Air Force One can run out of gas over Washington, but gold will still be, will always be -- wealth. The Fed insists that it is creating wealth. The big lie continues, but only those of us who have lived 50. 60, 70, 80 years remember what prices used to be and what they are today. Yes, the dollar buys anything and almost everything today -- but what will it buy next year and five years from now? One word -- less. And 20 or 30 or less years out what will the dollar buy? Possibly nothing, because a new system will have be installed. Frauds don't work forever.
Gold technical position. I show GLD, the gold ETF which is worth one-tenth of an ounce of gold. It looks to me as though there is strong support for gold at 544 (April gold closed at 547.50 today). Gold is still far above its (red) 200-day moving average. MACD is down in the area of its November correction low. Meanwhile, the "full stochastics declined to just below 20 and could be turning up again. At the bottom of the chart we see the 12-day rate-of-change turning up from a low above its February 16 low, which is good action.
What to do? First let it be understood that when I see conditions change, I change. I believe the bear will resume this year. If it doesn't -- I guess we should thank our lucky stars. If it does, it could be a lu lu, a true duzie. Best to have cash (T-bills), gold, and maybe a home fully paid for. In general, be as liquid as possible. Remember, in the next year to two years $2 trillion in a variety of adjustable-rate mortgages are due to be re-set.
Going back to the stock market, one thing I don't care for is the way this market top is slowly forming. Normally, the longer the distribution and the bigger and the more extended the top, the worse the bear market that follows.
As I reported last week, Lowry's Buying Power index had now dropped to its lowest level since May of last year. Meanwhile, Lowry's Selling Pressure Index has risen to its highest point since October of 2003. It seems to me that the stock market is preparing perhaps a "big time surprise" for us poor mortals. It's got me worried, but as subscribers know -- I'm a champion, first-class worrier.
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsf
March 13, 2006
The 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.
Email this Article to a Friend 
Printer Friendly Version