11 November 2008

Richard Russell on Gold

November 7, 2008 -- I was born on July 22, 1924. In those days, families that could afford it had their babies in a hospital. Those were the days before air conditioning. My mom told me I was born during the hottest New York July she could ever remember. I grew up during the Jazz age; I was seven when the '29 crash hit and changed everything. As a teenager, I grew up during the Great Depression. I still remember those days well. My parents' best friends lost their jobs, kids moved back with their parents, and job openings literally disappeared. I often ate lunch at the Automat. Hungry men and women would be sitting at empty tables. As you left the restaurant, your plate was studied. If there was any food on the plate, somebody would immediately sit at the table and finish up the food that was left. Outside, men on street corners had little stands at which they sold apples. My dad always bought an apple for a dime. Each time he would mumble, "He needs it more than I do." Dad had a soft heart, and hated seeing old men in tattered clothes standing in the cold with a little stand on which apples were displayed. Long lines of desperate men strung out at employment agencies, you often see pictures of those lines in today's newspapers. Parks were dotted with makeshift houses called "hoovervilles," huts made of cardboard and flattened tin cans stapled together. Hollow-eyed men walked the streets of New York, asking for "spare change." Peddlers leading horses and wagons shouted, "I give cash for clothes." (Note: Goldman Sachs was founded by a street peddler.)

Last night Ryan and Faye and I went to my favorite restaurant. We were the ONLY people in the place. "This is eerie," I remarked, "It's scary,-- it reminds me of the Depression." The owner came over to talk to us. "How are things going?" I asked. The owner replied, "It's tough, but we have one thing in our favor. We own the building."

Yesterday, Ryan and I went to a Toyota dealer to look at a Prius. A few months ago people were paying a thousand dollar surcharge to get one of the hot Priuses. This time I was tough on the salesman. I told him what I was willing to spend. He looked at me as if to decide whether I was serious. Then he brought out his sales manager. He showed us a Prius, with the company internal rundown which showed the dealer's exact cost. I told the sales manager, "Look, I'm in the financial business. I know you guys want to get rid of inventory, and you've got a heck of a lot of it (the lot was crowded with cars). Let's trade this car for cash -- your cost. I'll give you your dealer's COST for the car." The sales manager paused a few seconds and started filling out paperwork. "What are you doing?" I asked. He looked up and smiled, "It's a deal." We shook hands.

Afterwards, Ryan turned to me and said, "I didn't know you could be so tough, Dad." I replied, "Hey, I'm a Depression baby. There aren't many people alive today who have seen what I've seen." Ryan asked, "Do you think we're going to have another depression?" I thought a minute and replied, "Yeah, I think we're seeing the start of it now." Which is exactly what I think.

I also went through the 1973-74 market collapse. This thing is almost worse. This week we saw the Dow fall over 900 points in two days. Wednesday and Thursday experienced two crushing 90% down-days in volume. Lowry's Selling Pressure Index is now down just 6 points from its recent record high. There's still a mountain of stocks to be sold. I'm afraid this bear market is saying something very serious. By next year I think anyone under the age of 50 will be dealing with the toughest economic times they have ever experienced. Why do I say that? Take it as the instincts of an old guy who has been there before. Last night in the restaurant brought back ugly memories. So did our trip to the Toyota dealer. The punch bowl has been smashed, and the wine, like blood, is running into the streets.

But there's a major difference between now and the 1930's. During the '30s nobody had dollars. Dollars were scarce as frog's teeth. If you did have dollars in the '30s, nobody doubted their value. Today I doubt the viability of Federal Reserve Notes (dollars). I wonder what they'll be worth a few years from now. Fiat currency is "fool's money". It's only money because some government says it is. All fiat money is a function of debt and confidence. There's only one currency that represents intrinsic wealth (no debt) on its own. And it's gold. If you can't understand that, you'll never understand why men over thousands of years have fought, explored, and died in the never-ending search for gold.

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