June 28, 2010 -- "What did you hear, my blue eyed son? What did you hear, my darling young one? I heard the sound of thunder that roared out a warning, and it's hard, and it's hard --" Bob Dylan
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My investment strategy is now being voiced or followed by too many major hedge funds. The thinking is that as vanishing stimuli and de-leveraging takes over, the economies of the world pressured by central bank conservatism will force the US and western nations into a double-dip deflationary recession. The response will be to keep rates at zero and open the money spigots wide, wide, wide. This is where ownership of gold "was supposed to" come in.
Then, I ask myself, is this scenario too pat? Is it too popular? There's always a fooler. Where’s the fooler this time? I think the fooler will be the stock market. The stock market will be considerably worse than the smart boys are figuring on. Deflationary pressures will be severe and the need to re-inflate will be more pressing than ever.
Gold will be needed – not as a safe haven against inflation, but as a safe haven against crushing deflation. Deflation will flatten everything in sight including base metals, commodities, housing, job creation. The single island of preserving wealth will be gold. Unlike junk fiat currencies, gold cannot be devalued.
As I look ahead, the area that the experts do not understand is the stock market. Almost all the current opinions revolve around stocks remaining in a high-level trading range. This will prove to be an horrendous miscalculation.
Why do I think the stock market will be so rotten? Here's why. Look at the chart of the Dow in the current issue of Barron’s. Or study the chart of the Dow below. If this isn’t the mother of all head-and-shoulder top-formations, I’ve never seen one. If this formation falls apart, I expect the break to signal a the start of a brutal decline in stocks. The first area of support is Dow 10,000. The base of the entire formation comes in at Dow 9800. If the formation breaks down, I think all previous plans, scenarios and strategies will hit a stone wall. Wall Street and public sentiment will turn black-bearish. Consumers will head for the storm cellars and once in, they'll shut the door above them and lock it.
Question -- Russell, you keep talking about institutional selling. But from every corner, we hear how rapidly the economy is improving. I don't get it, if the economy is improving, why in hell would the smart money be selling stocks?
Answer -- First, you must understand that Wall Street is interested in only one thing -- MONEY. Wall Street feels no shame, no sorrow, no guilt, no remorse. Wall Street only has feelings for money. If the Street is truly bearish, if the institutions are negative, then their best strategy is to try to stir up optimism. And that's exactly what they're doing. Every plus in the economy, every improving statistic is blown up and fed to the media. You need an optimistic retail crowd to sell in to.
So shameless Wall Street creates the ideal background for selling stocks. Here look at the tell-tale evidence. "Distribution days" are days when volume expands on down markets. The profusion of distribution days is one of the studies that turned me bearish.
Here are the latest distribution figures covering the action of the last two weeks -- 3 for the S&P 500, 2 for the Dow and 2 for the NYSE Composite, and 1 for the NASDAQ.
So what's going on? Simple, the big money is unloading stocks all the while telling the public that the economy is improving. In the meantime, read Barron's, read Smart Money Magazine, read Fortune or Forbes. And what are they writing about? Stocks, stocks, stocks to buy. This is clearly against my advice which all along has been -- "Get the hell out of all stocks (except gold mining shares).
My position -- Own gold and gold items and cash. Write this on your blackboard ten times.
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The Recovering R-Man
The big G-20 meeting is over. They set a target of cutting deficits. Frankly, I don't see what came out of all this BS and publicity. Sure nations want to cut deficits. Only Germany has the will and the discipline. Other nations will complain, strike and keep spending more than they are taking in, all the while building up greater debts.
In the meantime, at the G-20 meeting China's Zhou eyed a bigger role for emerging nations. China's officials made it known that China wants to take a more active leadership in the post-recession world.
Russell Comment -- I believe China wants to own the world's reserve currency and lead the world as the US has done ever since WW II. China views the US and the West as a declining area. China has massive reserves, China is buying up the world (think Africa), China owns 97% of the world's rare earths, and China has the will and the patience -- and the plan.
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While in the hospital I awakened at 2:30 AM one morning. I turned on the TV, and there was this huge, fierce-looking man lecturing to a group of maybe 50 young, tough-looking tattooed men. The speaker was Hispanic, he told the crowd that he was an ex-doper, and a street-dealer that he had been a big-time gang leader in LA. He said he had broken free of the gang life, and was now devoting himself to helping "gang-bangers" do the same thing. Then he roared something that made me sit up in bed. He implored his audience, "Don't give your life over to something or somebody else. You were born free. Don't give your life away."
I thought about that statement for hours. And I realized how many people give their lives away. Some do it by joining the fast, destructive life of Hollywood. Others do it by joining a gang. Still others do it by turning over their lives to a cult. Others do it by turning over their lives to an organized religion.
The minute you give your life away, you have no life -- no identity. Why do people do it? That answer is fear -- they're afraid to exist on their own. They're afraid of the panic that comes from realizing that you have no parents to protect you. You have no identity. You look for some one else or some cult to provide you with an identity. You're afraid to exist "alone and afraid, in a world I never made" - (James Farrell).
It's one thing to be obsessed, say by medicine or the stock market or by fishing. That's just following your interests. But it doesn't mean giving your life away. When you give your life away you don't exist. You become a lost soul in somebody's else's world.
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I know -- you couldn't stop yourself.
