The Fed Has Set America Up For Disaster

On the heels of continued volatility in key global markets, the Godfather of newsletter writers, Richard Russell, discussed gold at length and also warned that the Federal Reserve has set America up for “disaster.” This is a fantastic piece where Russell notes the gold market may be ready to roar as physical gold is continuing to be drained from the COMEX.

Richard Russell: “Everybody knows that the US has an almost unsolvable problem with debt. Let’s call it a predicament, since there is no way of solving the debt problem in an acceptable way (I mean in a politically acceptable way). Of course we could declare sovereign bankruptcy — or we could turn to hyperinflation and literally inflate our way out of the debt-trap. But neither would be acceptable or politically possible.

But before the predicted disaster, you can be certain that the coming trouble will be sensed and registered in the price of something. It will show in the price of stocks or gold or bonds or the dollar. In other words, it will show somewhere in price.

What about the bond market — isn’t the bond market now saying, “trouble ahead?” In my opinion, not yet. True, bonds have taken a beating in recent months, but I don’t call the decline in bonds, so far, a red-flag prediction of disaster … And the stock market continues to rise, probably based on the current ocean of liquidity.

How about gold? Ah, gold may be about to raise the red alarm-flag. But not quite yet. As a personal opinion, I believe gold has now put in a major bottom. Wait — what about price? Ah, there you’ve got me. Even if a bottom has been put in, we have not yet seen the “meat.” The price of gold has not yet started to boom. It’s one thing to say that you believe “the bottom is in,” but it’s another thing to see the item surge off its low.


Gold Now Rising On A “Stairway Of Hatred”

On the heels of continued volatility in key global markets, the Godfather of newsletter writers, Richard Russell, put out one of his most import notes. This is a fantastic piece where Russell notes that the gold market is now rising on a “stairway of hatred.” The legendary writer also includes 7 key charts.

Richard Russell: “Friday ended with a late sell-off in the Dow, and some fireworks in the gold area. The real gold action was in the mining shares, which, because they are highly leveraged, tend to lead the actual price of gold bullion.

It’s notable that nobody talks or writes any more about the price movement in the market. 99% of everything written about the market has to do with the news and how it might affect the market. As a result, I feel all alone in writing about the action of the stock averages, and its implications.

For instance, I’ve described the “box” or the trading range that we now find the Dow in. What are the implications of a Dow break out above or below the trading range? In the meantime, what are the Transports and the A-D line doing? I search Barron’s for a column or even a paragraph on the price action but not a word. It’s all endless conjectures regarding what the Fed may or may not do.

When I first started Dow Theory Letters in 1958, technical analysis was unknown, and most market people called technical analysis “voodoo.” I feel as though I’m back in 1958 again.


Next, I want to talk about another forbidden and hated subject — gold and gold miners (my, how gold is despised these days).

I am going to show charts of some representative gold miners, and you’ll notice that RSI (relative strength) is, or was, in almost all cases below 30 which puts them in the oversold area. And note the bullish action of last Friday, which almost nobody has commented on.






Below, the ARCAgold bugs” Index



The AMEX gold miners index



What’s significant is that all these gold items saw RSI in the oversold (below 30) area, and all surged higher on Friday. Also, anti-precious metals sentiment was so black-bearish last week that I thought, along with RSI below 30, that we might, at last, have struck a true bottom in the precious metals. Of course, it’s always possible that after Friday’s explosion, the gold miners may back off this week and test last week’s lows.


A New Monetary System & End Of The Fed

One the heels of last week’s propaganda by the Fed, the Godfather of newsletter writers, Richard Russell, writes about the end of the current monetary system, the bond market collapse, volatility in stocks and the end of the Federal Reserve.  This is a fantastic piece where Russell includes two key charts.

Richard Russell:  “The great bull market that started in 1982 with the Dow at 776 possessed one great advantage — It had a bull market in Treasury bonds behind it.  At the time (in 1982) the yield on long T bonds was around 15%.  The bond market and the stock market rose together until the 2000s.  The stock market hit its bull market high on October 7, 2007 at 14,164.53 on the Dow.  The bond market hit its bull market peak in May of 2013.

Now the great bond bull market has topped out, and a new bear market in bonds is underway.  This will mean rising interest rates for as far as the eye can see, with accompanying interest rate pressure on stocks.

Question — Russell, you stuck your neck out last week and stated that the stock market may be in major trouble.  How come?

Answer — First, I believe the bull market in bonds is over.  That means that we may face many years of irregularly rising interest rates.  Remember, the Bernanke Fed artificially depressed interest rates with its huge QE program, during which it bought massive quantities of bonds.  The Fed’s program cannot continue forever — in fact, Bernanke has recently conceded that the Fed is making plans to “taper” (down) its bond buying program.  When the Fed tapers, bond prices will decline towards their normal, free-market levels, and interest rates will rise (bonds and their yields move in opposite directions).

Next, one crucial characteristic of a bear market bottom is the appearance of great values in blue-chip stocks.  At the lows of 2009 we never saw blue chip stocks selling at classic great values.  At the bear market lows of 1932, 1942, 1949, 1974 and 1982, the Dow sold at less than 10 times earnings with dividend yields in the 5-7% range.

For instance, in 1974 dividend yields on the Dow were as high as 7%.  In 1932 dividend yields on the Dow were 10%.  The absence of great values at the 2009 low made me suspicious and led me to believe that the low of 2009 was not a true bear market bottom.  The fabulous values that accompany true bear market lows were just not there.

Last night I read through the latest issue of Barron’s from cover to cover, and nowhere did I see a single mention of a primary bear market.  This made me suspicious.  Obviously, I can’t guarantee that we’re in a primary bear market, but I certainly can suspect as much.  The worst part is that if indeed we are in a bear market, then the vast majority of investors are not positioned or prepared for such an event.  I believe that most investors think that last week’s sell-off was simply a gut-check reaction to Bernanke’s remarks about a potential cessation of QE.

If indeed a bear market has started, one hint will be provided by volume.  On declines in a bear market, volume will tend to expand, while during rallies volume tends to subside.  Also, in a primary bear market the down-legs tend to be extended and “dragging,” while the counter-trend rallies will usually be sudden and violent.  Therefore, volatility will be on the high side during a primary bear market.

Of course, price limits have to do with classifying a bear market.  By common acceptance, a decline of 20% from the preceding peak identifies a bear market.  I pick Dow 10,000 as a key level.  Below 10,000 is the point of no return.

… Now we come to the question of consequences.  What are the consequences if you sit stubbornly with your portfolio of stocks, insisting that we are simply experiencing a correction, and it turns out that you are wrong?  The consequences could be catastrophic.

For that reason, I suggest that my subscribers act “as though” we are possibly in the second part of the primary bear market that started in 2007 — we will know more as we go along.

… To repeat, I maintain that the bear market that began in 2007 was never completed.  In my worst scenario, the remainder of the bear market that started in 2007 is now on its way to completion.