DEEP THOUGHTS FROM RICHARD RUSSELL

Regular readers know that I am a huge fan of Richard Russell’s work. For those who aren’t familiar with Russell, he is the author of The Dow Theory letters. Obviously, he is a student of Dow Theory (perhaps professor is more appropriate). Most importantly though Russell is about as experienced an investor as you’ll find on the planet. He has lived through cycles that no one else can even remember.

I like to think that the market works on a different clock from the rest of the world. Economic cycles are often long and drawn out. It can be hard for humans to comprehend economic cycles because the length of an economic cycle is not based in years or months. It can literally work on its own clock. The current deleveraging cycle is particularly frustrating for investors because these types of recessions tend to be long and drawn out unlike your average 8-16 month recession. A full economic cycle can be anywhere from 5 years to 25 years from peak to trough. Humans, particularly investors, have trouble seeing past the next 5 to 25 minutes. It’s safe to say that Mr. Russell has seen more cycles than anyone and his educational and priceless commentary is evidence of this. I’ve included some of his notes from this latest week and highly recommend his newsletter. His ability to grasp the big picture is truly unmatched:

Question — Russell, you seem to think this is going to be a world-class bear market. Why do you think that?

Answer — The US and its people have been borrowing and leveraging for decades or ever since WW II. There’s never been a true correction in the economy, although there have been corrections in the stock market (1973-74 and 1957-58). Consumer buying makes up 70% of the Gross National Product of the US. For the first time in decades, US consumers are dealing with massive unemployment. This is scaring them and causing them to cut back in their buying and now they are actually saving. Fear is the strongest of all human emotions, and US consumers are finally dealing with naked fear. I believe this fear will bring on years of saving and a long period of debt contraction. This will thwart all the administration’s efforts to inspire consumers to spend again. Today, if you give the Average American money, he’ll save it or use it to pay off debt. For the first time since the Great Depression, debt has again become a “dirty word.”

I think the stock market and consumer pessimism will feed on each other. This bear market, like all others before it, will only end in exhaustion. And with exhaustion we will see stock values that this generation has never seen or imagined before.

Question — Why do you take the potential break-up of the rally that started on March 9 so seriously?

Answer — The public has been led to believe that the recession is about over. Moreover, they believe the stock market rally since March 9 is the market’s way of celebrating the forthcoming end of the recession. If this rally falls apart (as I think it will) and the March 9 lows are violated, the investing public is going to be more disillusioned and disappointed than ever. All the bulls that have been promising that the “worst is over” will be distrusted and even hated.

Question — Russell, why do you think this market is fated to fall apart?

Answer – Because the administration and the Treasury and the Fed has fought the primary trend of the market for so long and with such massive weapons. “The bigger they come, the harder the fall.” When the greatest attack on a primary bear market fails, the results are fated to be cataclysmic. The Administration will have shot all its ammunition. In fact, they may be OUT of ammo. And then what?

Question – Is there something different about this latest decline that began on June 12

Answer — Yes, there certainly is. Most market’s when they decline gradually become oversold. But this decline looks progressively worse as it continues. I’ve said that the span in Lowry’s Buying Power Index and their Selling Pressure Index is continuing to widen. Thus, instead of becoming oversold as the market sinks, the market is simply looking worse. On yesterday’s sell-off, the span between the two Lowry’s Indices widened to its greatest span in history — 790 points. Amazing — and bearish.

Depressing Comment — What’s so ominous about this market is that as it sinks lower, the internal statistics get worse! Normally, as a market descends it becomes increasingly oversold. Not this market. As this market heads lower, the Lowry’s statistics get worse.

“So how will this work out?” I ask myself. The market could just continue to sink with very little in the way of rallying ability, until the March 9 lows are tested and violated. The damn trouble with this market (from the bulls’ standpoint) is that it shows no signs of becoming oversold, the Selling Pressure Index just keeps creeping higher, and the Buying Power Index continues to deteriorate. This is one nasty bear market if there ever was one.

If you’re holding a fat portfolio of stocks, you’re literally standing on the tracks with the train heading towards you at 70 MPH. My advice — get the hell off the tracks.

That does it for Tuesday,

Your buddy from the golden West,

Russell

If you can’t respect and love that kind of writing from an 85 year old trader with more experience than most of the TPC readers combined then it’s time to have your head checked. Great stuff Mr. Russell!

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.