The latest Richard Russell newsletter:
February 3, 2003 -- Stop Loss? -- You think a stop loss will get you out at your stop loss price? Wrong. This morning I was talking to broker of a large brokerage house. His customer went short platinum Friday with a stop loss just above Friday's close. This morning platinum gapped up, and the customer's stop loss was triggered. The customer was stopped out at the market, which was 20 points higher. Platinum opened today on a gap, up 23 dollars.
Before I forget, be SURE to read John Mauldin's latest report, it's a beaut ,and it's must reading at www.2000wave.com.
John talks about the latest Fed report, and I agree with him. The report's an absurdity, it's a mess, it's a puzzle. And it's the Fed that's puzzled. The report indicates that the Fed hasn't a clue as to what's going on. Deflation? They're afraid that it's happening, but they say they can prevent it. The economy, the "soft patch" that Greenspan mumbled about is turning into the longest "soft patch" since the '30s. What to do about it? The Fed doesn't know, and they literally admit that they don't know.
I've talked about China until I'm blue in the face (the blue is hidden by my S. California suntan). "Ah, if only China would let their currency float." But the shrewd Chinese have tied the yuan to the dollar, and as the dollar
sinks the yuan sinks. So Chinese goods are cheap, cheap, cheap, and now even Microsoft is screaming that the Chinese are copying their stuff. Is anyone safe, is any manufacturer safe?
Well, if you can't beat 'em (and you can't), then join 'em. And that's what's happening as factory after factory closes down in the US and the manufacturing is transferred to China where the same items can be produced for a fraction of the price. The result -- the US is rapidly losing its
manufacturing base, and unemployment in the US continue to rise.
The process is even hurting Mexico where US factories in Mexico are closing down and the facilities are being transferred to China. As a result, the Mexican peso is "falling out of bed," and many economist are asking why.
I've just told you why.
In Europe, and forces of deflation are also taking their toll. The "engine of the European economy, Germany, is reduced to growth of maybe 1% (same for France), and in both countries unemployment (and unlike the US, they provide
honest numbers) has risen to 10%.
As for Japan, as they say on New York's Delancy Street, "Don't ask." Japan is sinking into its fourth recession in the last ten years, and this time Japan's consumers are definitely cutting back on their spending. Japan's debt is sky-high, and their banks continue to be in deep trouble. Of late, Japan has been intervening, buying dollars in an attempt to knock down the
value of the yen.
Back to the US. It's a bear market here, as it is throughout the world. What to do about it? I'm not sure I know. I do know this -- the primary trend of the stock market will have it's way. It will run to conclusion as sure as night follows day.
The problem, as I see it, is that the bull market should never been allowed to become as speculative as it did. The damn fools who run the central banks (these are the same idiots who sold tons of gold at the recent lows) think they can control the tides of history. They think they can create big bull markets, and then prevent bear markets from following. They believe that they can stave off bear markets by generating oceans of fiat money. And if real money, gold, rears its head, they think they can choke off the rise of real money with moronic propaganda and occasional sales of the yellow metal to "frighten the believers."
At this point, the Bush administration have adopted a new silent or internal theme. What's their theme? Here it is --
IT'S THE STOCK MARKET, STUPID. ***
Since half the US families own some kind of stock or mutual fund, The Bushies have decided that they've got to get the stock market higher (of course, the Fed claims that it doesn't target the stock market).
It won't be easy, because at this point we've got ourselves a big, bad bear market. It's a sad state of affairs for the world, its a tragedy for millions of people who have, or will, lose their jobs and their savings. And it's a task for my subscribers. The task is this -- what do we do or how do we do it -- to get through this bear market?
I'll tell you a secret. I don't have the ultimate answer, and neither does anyone else. But I have some ideas. In a long, dragged out bear market (and I believe that's what we're dealing with) you have to face one fact. Financial assets are going to get hurt. The reason they are going to get hurt can be boiled down to three words -- too much debt.
And that's the reason the Fed is so terrified of deflation. The Fed crowd may not be brilliant, but they know one thing -- in a nation loaded with debt, deflation is a killer. If you owe $50,000 during inflationary times --
no problem. Over the months and years, that fifty grand becomes forty grand and then thirty grand. In other words, during inflation debt becomes increasingly manageable.
But if you owe $50,000 during deflation, then a year from now that fifty grand starts looking like sixty, then seventy. And your bank? Your bank is scared to death, because your salaries been cut, and your job is looking
increasingly "iffy." Next, the bank is starting to call you, asking why you were late on your last payment.
OK, OK, Russell, so what do we do?
First, get rid of as much debt as possible. If you own your home free and clear, then you actually do OWN your home. If you have a big mortgage on your home, then you're simply borrowing your home from the bank, and you can keep it as long as you keep up the payments.
Second -- own some gold, maybe not even gold shares, but actual gold. Gold is pure intrinsic wealth with no debt against it. Gold can't go down the drain like a paper currency. Gold can't go broke in a deflation. So own some
gold coins. And also own some gold stocks.
In a bear market, you're not going to make any money "holding stocks for the long term." You make money holding stocks for the long term during a bull
market. Yeah, I know, Prof. Jeremy Siegel says "Hold stocks for the long term and you'll get rich." Did anyone ever ask him what he was doing during 1973-74? Was he holding stocks then? I don't know -- maybe we should write and ask him.
So I'm saying, buy yourself a safe source of income or as safe a source as you can find. This includes highly rated bonds, bonds of entities that can survive a deflation. And another thing -- despite what they tell you, cash isn't trash.
Oh, I forget to write on my Saturday piece that the Confidence Index dropped again, this time back to 72.0 from the previous week's 73.5. A year ago the CI was at 84.5. The CI is the ratio of the yield of medium-grade to
high-grade bonds. The lower the CI, the less the bond market likes the credit situation. Let me put it this way -- the bond market is now very nervous about the credit situation.
All the smart guys are saying buy the high-yield (junk) bonds. Not me, I'm sticking with low-yield quality. The CI is telling me to do that. In my experience, any time the CI is under 80 it's NOT good news.
And develop a new level of patience. Why patience? Because somewhere ahead the market's going to produce a tradeable bottom. It may not be the final bottom, but it will be a severely sold-out bottom, a bottom good enough to generate a powerful rally in the bear market. Such a bottom was struck in late 1929, giving way to the huge bear market rally into April of 1930. We also saw a few such bottoms during the 1966-74 bear market.
I believe that there's a good chance that we'll see that kind of severely sold-out bottom sometime this year. It will be preceded by a series of 90% downside days. We haven't seen that kind of bottom in this bear market yet,
but I believe one is coming.
And that's where patience comes in. And that's where we can make up for other losses sustained in this vicious bear market.
Items -- The Bush fiscal budget deficit for the coming year will be a record $307 billion and $1trillion over the next five years. Russell comment -- Look for this year's deficit to be higher than the projected $307 billion.
This budget does NOT include a war with Iraq.
I just watched Paul McCulley, managing director of the giant Pimco bond funds. He is saying that monetary policy has done all it can -- now we must turn to fiscal policy to defeat deflation. McCulley wants an even bigger budget deficit than the $307 billion budget that Bush is ordering. McCulley says, sell Treasury bonds and buy high-yielding corporate bonds. Why? Because if the government can bring about the needed inflation, then T-bonds will sell off, and corporate bonds will do better, since the underlying corporations will be in better shape.
Says McCulley, we must tell Greenspan that we will be increasing the budget deficit substantially, and we need a commitment from the Fed that they will finance the increase. Russell Comment -- In other words, McCulley believe we can reinflate and reverse the primary bear trend.
The Russell answer -- watch out for the law of unintended consequences.--- Running the deficits even further through the roof will be extremely dangerous.
*** My asterisks. Finally, something starts to make sense. It's Bush & Co who are supporting the market. If true, then it looks like they have staked their political futures and who knows how much US taxpayers' money on keeping the market up. So, it is they who will stop this bear market. These are guys who will stand on the railroad track and attempt to stop an express train --- only this time it's the US taxpayer whose life is on the line. |
