- My birthday comes up on July 22. On that day I'll have
survived for 79 years. Honestly, I never thought I'd get this far. I almost
died at age 8 from a mastoid infection (that was before the great days
of antibiotics). I survived combat in World War II. I survived a heart
attack when I was age 45. I survived a quintuple bypass in 1986. I survived
another mess when one of the bypasses clogged up and a stent was put in.
I survived when I had a high-speed wobble, and my motorcycle went down
at 65 MPH. I survived dealing with an autistic daughter, and that damn
near killed me. I survived two divorces, and I still love both my ex-wives,
and we're still the best of friends. Let's see, did I leave anything out?
Well, yeah, but the above is enough.
-
- So, how am I celebrating 79 years on planet earth? One
way is that I made a decision. Today (I've been thinking about this for
weeks) I sold ALL my bonds, every last one.
-
- Why did I do it? I did it because the US is heading for
maybe the greatest financial mess in world history. The US is far too extended
financially, militarily and socially (socially in the way of entitlements
that we can't afford and can't pay for).
-
- This nation has taken on too much. Too much in the way
of promises, too much in the way of ambitions, too much by way of being
policeman to the world, too much in the way of debt, too much in enjoying
the pleasures of life such as homes on borrowed money, cars on borrowed
money, vacations on borrowed money, the good life on borrowed money.
-
- How about our corporations? At the end of the first quarter,
America's corporations had $4 trillion in debt outstanding. Total US debt
of all kinds and varieties is estimated at around $38 trillion. As a famous
Senator once put it, "Pretty soon you're talking about 'real money'."
-
- How about this? A senior economist at the Federal Reserve
at Cleveland did some homework. The fellow's name is Jagadeesh Gokhale.
His partner was Kent Smetters, former deputy secretary of economic policy
at the US Treasury. What these two did was compare the present value of
all the revenue that the US government can expect to collect in the future
with the present value of all the future expenditure commitments including
all the debt service expenses.
-
- And they came up with quite a shortfall. Do you know
what the shortfall comes to? Are you sitting down? The shortfall comes
to $44 trillion. What can we compare that with? Well, let's compare it
with the current US government debt. The current debt is about $ 6.5 trillion.
-
- In about five years, the first of the "baby boomers"
will start collecting from the government. They'll collect Social Security
and a few years later they'll collect Medicare. Then what?
-
- If you can understand the above, if you can "take
it in," you'll have some idea of what this bear market is going to
be all about. What we've seen so far is just the beginning, what I call
"the early taste of the bear."
-
- So how will we handle this gathering specter of debt
and deficits and shortfalls?
-
- I'll tell you the truth, I really don't know. I'll be
writing a lot more about this as we go along -- but first some initial
thoughts.
-
- There are two ways of even beginning to "handle"
this incoming disaster. One way is to cut back drastically -- cut back
in spending, cut back in government services, cut back on Social Security
and medical, even cut back on the military.
-
- But I don't think they'll do any cutting back at first.
No, I think they'll try to deal with the debt and deficit and liabilities
by printing more Federal Reserve Notes, oops, excuse me, by printing more
dollars.
-
- What will that do to the dollar? It will kill the dollar.
It will run the dollar into the lower depths. The world will lose confidence
in the dollar. But most of the reserves of foreign central banks are in
dollars. As we move closer to the disaster, the central banks will start
moving to diversify out of dollars.
-
- Where can they go? They can go to the yen, to the euro
and to gold. I believe they'll go to all three. But since these central
bank were selling their gold near the lows, I think these idiots will be
too embarrassed to come back and buy gold at substantially higher prices.
No, the gold-buyers will be large investors, big money, who understand
the situation and are moving to a position of safety outside of fiat currency.
-
- The above is just a very brief picture of what I see
ahead. But it's enough to make me move out of all my bonds. So question
-- what if the average person does that, meaning move out of bonds? Where
will he or she get any income? Short rates pay nothing, and when you move
out of bonds you move into short money, T-bills. Ah, that's going to be
a massive problem, as it already is already for millions of Americans.
-
- I said when this bear market started that the operative
word was going to be INCOME. Everyone is going to need income. Income to
live on, income to carry their debts, income to pay off their mortgages.
-
- Now I'm going to reveal to you the word that will be
the most dreaded word coming up as this bear market matures. The dreaded
word, the feared word, the hated word -- will be DEBT.
-
- Question -- What about Greenspan? He must know what's
going on. What will be do?
-
- Answer -- I think Greenspan will take one more year as
Fed head and then retire. He's thinking, "I see the mess ahead, but
I'll be out of here before the real mess hits. Then I'll be the Fed chief
with the longest number of years on the job. I'll be out with my skin intact.
People will look back and say, "If we only had Alan Greenspan in there
as Fed chief all would be well. Where are you, Alan, when we need you?"
-
- Anyway, I think that's the Greenspan fantasy. Will it
work out that way, or will Greenspan get caught in the maelstrom? If I
had to guess, I'd guess he'll be caught in the maelstrom.
-
- Question -- Russell, if I sell my bonds, what'll I do
for income?
-
- Answer -- You'll have to cut back on your living expenses.
That's going to happen anyway, so you might as well get some practice at
it now. Look at it this way -- the American people have been living the
good life for at least 20 years, the good life based on the world's accepting
our fiat dollars for the rest of the world's goods and services. That good
life is slowly coming to an end. It will come to an end as bonds decline,
and as the dollar loses favor.
-
- How fast the trouble comes is, obviously, unknowable.
But remember, the markets look ahead. They discount. That's what the bear
market is all about.
-
- Question -- How will gold fit into all the above?
-
- Answer -- Gold is the ultimate money, the true money
against which all fiat paper is ultimately judged. But remember, you don't
pay your rent with gold, you don't do your banking with gold. So as I see
it, gold is in the very early phase of its bull market.
-
- As the bear's grip tightens on the economy, the first
rush will be to accumulate dollars. You stave off bankruptcy with dollars,
you pay off your debt with dollars, you buy your groceries with dollars.
But when the nation hits the wall of those $44 trillion in liabilities,
the dollar will start to unravel as the US attempts to print its way out
of the disaster.
-
- That's when people will turn to gold as the only wealth
that is not someone else's debt. That's when the only island of safety
will be gold, real money that is not deemed "legal tender" by
some government.
-
- Question -- In the face of what you've been writing,
why did the precious metals sell off today?
-
- Answer -- Note that the dollar was considerably higher
today. I think the metals at this point are very closely keyed to the dollar.
I wrote that as the grip of the bear tightens, we could see almost a panic
to get dollars -- dollars to stave off bankruptcy, dollars to carry debts.
This is what happened in the early '30s, and it could easily happen again.
As a matter of fact, the debt situation today is far worse than it was
in 1929. So just how this bear market will work out, and which item goes
before which is unknowable.
-
- I hate to do it, but I will repeat my most important
bear market adage -- "In a bear market everyone loses, and the winner
is the one who loses the least." So please get used to it, we are
all going to be hurt before this bear market breathes its last. If we're
not going to be hurt one way, we'll be hurt another way. It's the bear's
choice. The bear will find a way.
-
- It could be that the hardest and meanest and cruelest
part of this bear market is that the safer you are, the less income you're
going to bring in. The Fed has seen to that with its 45-year low in interest
rates.
-
- Items -- Today, for the first time, the differential
between the yield on the 10-year T-note and the TIPS jumped above 1.80.
The yield on the 10-year T-note today is 3.86%. The yield on the TIPS is
1.99%. The yield differential is 1.87, a big jump from yesterday's 1.74.
The bond market is beginning to smell inflation, better known as the government's
move to finance its huge debts via printing paper.
- ...........................
- The average age of Americans is now 35. This is the oldest
it's ever been. As these people move into the old age bracket, government
expenses rise. By the time the "baby boomers" have all retired
in 30 years, the US will have doubled the size of its elderly population
but the number of workers of an age to pay for these benefits will have
increased only 18%.
- ..........................
- Buying climaxes have been over 100 for 11 out of the
last 14 weeks in which records have been kept. Three weeks ago there were
a huge 325 buying climaxes. This is distribution. Also, the heavy level
of insider selling constitutes distribution.
- ..................................
- My Big Money Breadth Index has been weak, and this again
suggests distribution, at least distribution by the big-cap stocks.
- ........................................
- Do you remember that when Greenspan spoke before Congress,
the stock market would always rally. Not today. I listened to Greenspan
for quite a while today, and I noted that the usual genuflecting and ultra-respect
is missing. Many questions directed at Greenspan were simply ignored. He's
most annoying when he simply avoids the answer to questions.
- .........................................................
-
- Just announced --The US budget deficit will swell to
$450 billion this year -- this will be the largest shortfall in US history.
It's being blamed on the war and the tax cuts. This together with the current
account deficit of half a trillion dollars, and you can see why the bond
market collapsed today.
-
- TODAY'S MARKET ACTION -- My PTI was down 5 today to 5305.
The moving average was 5280, so the PTI remains bullish by 25 points.
-
- The Dow was down 48.18 to 9128.97. No Dow movers today.
-
- August crude was up .35 to 31.62. Jan. natural gas, still
sinking -- down .89 to 5.59 (Greenspan still worrying about a shortage?).
-
- Transports were up 1.08 to 2573.97.
-
- Utilities down 3.38 to 238.63.
-
- There were 1062 advances and 2219 declines. Down volume
was 66% of up + down volume -- another mild down-day, well, all except
for the bonds.
-
- There were 233 new highs and 14 new lows. My High-Low
Index was up 219 to 6557.
-
- Total NYSE volume was 1.5 billion shares.
-
- S&P was down 3.44 to 1000.42.
-
- Nasdaq was down 1.54 to 1753.28 on 1.86 billion shares.
-
- My Big Money Breadth Index was unchanged at 696.
-
- Sept. Dollar Index was up a large .83 to 97.20. Sept.
euro was down .97 to 111.63. Sept. yen was down .11 to 85.08.
-
- German DAX was down 11 to 3384. Sept. Nikkei was down
55 to 9795.
-
- Bonds were down Big Time. Sept. 30 year T-bond was down
207 ticks to 12.15 to yield 4.92%. Sept. bellwether 10 year T-note was
down 113 ticks to 115.00 to yield 3.91%. Bond bull market over? I think
so.
-
- August gold was down 5.60 to 342.20. Sept. silver melted
-- down 13.90 to 4.64. Oct. platinum was up 7.00 to 688.00. Sept. palladium
was down 1.75 to 174.75. Was I wrong on silver? Looks like it.
-
- Gold/Dollar Index ratio was down 8.00 to 352.00.
-
- One share of the Dow will buy 26.87 ounces of gold.
-
- Gold advance-decline line was down 20 to 1148.
-
- ABX down .42, ASA down 1.56, AU down 1.97, GFI down 1.00,
GLG down .42, HMY down .94, NEM down 1.38, RGLD down 1.25.
-
- See below on gold.
-
- STOCKS -- My Most Active Stock Index was down 11 to 237
(the daily chart of this important Index can be brought up from the home
site).
-
- The 15 most active stocks on the NYSE were -- MO down
1.56, NT down .07, GE down .39, AOL down .14, MER up 2.35, MOT up .27,
C down .33, PFE down .08, FRX down 4.93, JNJ down .93, MCD down .78, EMC
down .12, HPQ down .64, MU down .11, XOM down .11.
-
- VIX was up .43 to 21.83 -- Option writers getting just
a teeny bit nervous?
-
- McClellan Oscillator was down 68 to minus 101
-
- Lowry's Buying Power dropped ominously today to a 2 1/2
month low.
-
- CONCLUSION -- Let's suppose. Let's put it that deflation
is actually entering the scene.
-
- Let's put it that despite all the Fed's efforts and fears
and warnings, deflation is starting to materialize. Does the Fed know something
is up? They very well might.
-
- Is that why the Fed has opened the flood-gates of money
creation? Is that why M-3 suddenly surged over $100 billion in the past
three weeks, as the Fed rushed to halt the deflation tide?
-
- Is that why the bonds got hit so hard today? The bonds
see the Fed now going all out to reinflate, and the bonds swooned at the
very thought of it.
-
- Is deflation why the metals got hit today?
-
- Is deflation why natural gas and many other commodities
are sliding?
-
- Is deflation why lumber got hit hard today?
-
- Is deflation why the home-builders got hit today -- PHM
down 1.93, KBH down 3.57, CTX down 3.91?
-
- If deflation is now winning, it's going to be a question
of timing. First we could see a rush to collect dollars, a panic to get
your hands on dollars so you can service your debts -- and stave off bankruptcy.
-
- If deflation comes in, the $ 38 trillion in US debt will
weigh like a million-ton stone on the US economy. Everything that is loaded
with debt will be in jeopardy.
-
- If that happens, there will be a panic for safety and
for real money, money that is not a function of debt. That could set off
the real bull market in gold.
-
- If deflation is to be our fate, then debt will be a dirty
word, and all debt-loaded items will be perched on the knife's edge.
-
- At any rate, this is the way I'm thinking. This is what
I'm thinking.
-
- The timing of events becomes impossible. You take your
positions, you take your stance, you get rid of debt and all items loaded
with debt. You put yourself in as strong a position as possible. You get
philosophical, because if deflation is our next reality, you're going to
see events that you've never seen before. This will be the real bursting
of the bubble. If deflation is coming in and the Fed is defeated, then
it's survival time, baby, and we're all in it together.
-
- And so -- on to Wednesday,
-
- Your scribe from the Golden West,
-
- Russell
-
- _________
-
-
- I am including the e-mail below, even though I know that
many of my older subscribers have seen this quote from Greenspan before.
And the question is -- in view of this quote, how can Greenspan justify
taking the job as head of the Federal Reserve? Greenspan must think as
follows -- "It's a dirty job, it's a phony job, but someone's got
to do it. The Federal Reserve is here, it's not going to change in my lifetime,
so I might as well take the job. Besides, it's a huge ego trip, I'll be
'the man.' Everybody will bow down before me. The power of the job is phenomenal.
I'm going to do it."
-
- And below is the e-mail --
-
- Hello Richard,
-
- Here are some interesting comments from Sir Alan, back
in the 60's. Hard to believe this is the same guy running the Fed today.
-
- "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....
-
- The law of supply and demand is not to be conned. As
the supply of money 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....
-
- 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...
-
- 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' tirade
against gold. Deficit spending is simply a scheme for the hidden confiscation
of wealth. Gold stands in the way of this insidious process. It stands
as a protector of property rights."
-
- From "Gold and Economic Freedom," in Capitalism:
The Unknown Ideal, 1967, Alan Greenspan
-
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