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.

Source: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/6/25_Richard_Russell_-_A_New_Monetary_System_%26_End_Of_The_Fed.html

Softening My Views On Gold

I continue to maintain that the Fed’s unprecedented and extreme current policy stance has already been deceptively inflationary, will likely lead to significant inflation in the medium to long term, and should lead to an accompanying large increase in the price of gold. I also must acknowledge, however, that I fell prey to a false sense of certainty. The combination of the consistency of the gold price rise over the course of a long period of time, my early success in this area and the rationality and logical basis of the investment thesis caused me to make exceptions to rules that I always had followed – rules against excessive concentration and rules preventing me from venturing beyond stocks, my area of expertise and the category of investment that I like best for good reason. I will never make such exceptions again.

I had previously never invested in unproductive assets such as currency-based investments, preferring stocks because they confer ownership stakes in large, profitable companies, no different than owning a small business, rental real estate or a farm in terms of being productive. I made an exception for gold and silver, because I considered them to be the ultimate form of money and likely to perform better than stocks in a highly inflationary environment. Upon further reflection after an unfortunate experience, I have concluded that one must have respect for the current form of money, regardless of whether it is being abused and debased. We live in a dollar-based world, and until gold is reintroduced into the monetary system (the prospects of which are not guaranteed as macroeconomic developments are notoriously difficult to predict), it is really simply a collectible no different than say fine art in that ownership provides no income as it has no cash flows associated with it. Instead the owner is reliant upon another investor or speculator being willing to pay more for it, thus voiding valuation techniques.

With all of that said, it is worth repeating that I do still believe that the price of gold is likely to rise very significantly over time. I expect that my fund will benefit from this insight, but not via physical gold holdings. Instead our focus is on mining stocks, which are productive assets that can be valued on the basis of earnings, dividends and the historical relationship between these stocks and the spot price of gold – all of which does not necessarily require a forecast of the gold price or a very strong view about it. With long-term interest rates rising and reported inflation falling, gold very well may remain under pressure, but even in such an event I believe that the miners are still priced attractively enough to deliver solid returns.

Moving on to my stock market outlook, it remains strongly negative for all of the same reasons that I have been repeating for quite some time. Each month that the market moves higher, conditions continue to become more extreme – namely overvaluation and extremely complacent investor sentiment measures. This long uncorrected and quite mature bull market is also now showing a record high level of margin debt associated with it on an absolute basis, and on a relative basis compared with the size of the economy it is now right around levels that have only been reached twice before – 2000 and 2007, just before the two most recent major bear markets. Increasingly I hear people only tempering their enthusiasm with expectations of a correction, as if a full-blown bear market is out of the question. But when the crowd agrees on something, it is usually wrong. It is vital to remember that markets move in cycles.

On the last trading day of the month, there was a steep late-day sell-off as fears of the Fed tapering its easy monetary policy (unlikely), weak Chinese data, Japanese stock and bond market volatility and now suddenly rising interest rates all came to the fore. Perhaps this is the beginning of what I have been anticipating, or perhaps the final top has still yet to be reached. Either way, my outlook will continue to remain negative until hostile market conditions are cleared. Accordingly, my fund still retains a limited market exposure and a very large cash balance, presently just about half of the portfolio. With so much cash it is important to repeat again that cash that stands ready to be deployed quickly is a weapon, as compared to cash that is allocated as such which over time is guaranteed to lose out to inflation.

Despite such a dismal market outlook, I will always remain a bottom-up investor. While I am concerned about indiscriminate selling, even at times such as this there are still pockets of value (the most prominent example of such right now being the gold miners as discussed above).

Source: http://seekingalpha.com/article/1516472-softening-my-views-on-gold

Banks Poised For Gold & Silver Turn As Central Planners Panic

With the Fed decision taking place, and continued volatility in gold and silver, today John Embry complained about kitco’s “gobbledygook” reporting, and he stated that central panners are panicking, which is why Bernanke is leaving the Fed.  Embry also spoke with KWN about physical gold demand, what the Chinese are up to, and what to expect from the price of silver going forward.  Below is what Embry had to say in this powerful interview.

Embry:  “Yesterday was another one of those days where the stock market was up sharply and the gold market was down significantly.  It’s frustrating for anybody who recognizes what’s going on.  If they were really worried about a Fed ‘taper,’  the stock market should be getting crushed.

The fact that the stock market was surging says to me that there will be no Fed tapering.  As this becomes obvious to gold market participants, the Fed will have achieved its goal of having the gold price rebound from a depressed level.  So gold remains chronically underpriced.

But I think all of this is a major ‘holding’ action.  I see the second half of the year being chaotic….

“At that point gold and silver will finally reflect their true values.  The other thing that is getting to me is the commentary coming from the mainstream world.

I believe it is orchestrated because they are hammering away in a negative manner against gold and silver.  I was just looking at one (article) that popped up on kitco, ‘Gold Weighed By Downside Risks – UBS.’  They (kitco) said, ‘Gold is suffering from an atmosphere that is clearly difficult for gold at the moment and downside risks loom.’  Whatever the hell that means.

Source: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/6/19_Banks_Poised_For_Gold_%26_Silver_Turn_As_Central_Planners_Panic.html