Richard Russell:  “I’m exiting this market”

“When things get this crazy, one has to go by the seat of one’s pants.  According to Gene Epstein in this week’s Barron’s, the US jobless rate is not 7.6%, it’s actually 7.9%.  Since the 2009 lows, the nation’s Gross National Product has swelled by $1.3 trillion, but the stock market has gained $12 trillion in value.

Meanwhile, the VIX has dropped to a multi-month low under 12, meaning that option traders see low volatility in coming months.  And I’m thinking, after the calm comes the storm.  For all the above reasons plus a churning in my stomach, I’m exiting this market (good-bye DIAs), and I suggest that maybe my subscribers might do the same.  But it’s up to the individual.  You might stick around with a mental stop loss on your DIAs if they break below 154.

The drivers of this market are the money managers who are playing the upside for all it’s worth.  After all, where else are they going to go?  Some bears are predicting that the economy is not through deflating and deleveraging, and therefore the Treasuries should head higher.

There are just too many “ifs” in the stew for me, so I am happy to retire to the sidelines.  Sure, with the Industrials and Transports at new record highs, technical analysis and the Dow Theory say that this market “should” go higher.  But for me, it’s a case of the weird getting weirder, and it’s all a little too much for my tired nerves.  The Dow Theory does emphasize VALUES, and the D-J Industrials now sell at 16.83 times earnings while dividends are a micro 2.35%.

… The markets are now trading on manipulated information (CPI and GDP) about the economy, and manipulated stimulus from the Federal Reserve.  I will say that in the 60 years I’ve been studying markets, I’ve never, ever seen anything like the situation the markets and the economy now find themselves in.  I have only one comment and prediction — It will not end in a good way. 

In the meantime, gold has formed a sort of misshapen head-and-shoulders bottom pattern, as you can see in the chart below.

It maybe corny, but it is true. Confidence is not about merely being outwardly proud, it is all about believing in your own ability. The same is true with regard to the economy. Even Keynes realized it is WHAT you believe that counts, not even if it is actually true. Indeed, a false GOOD rumor will still move markets. Consequently, even Keynes knew you have to rekindle the “animal spirits” that led to confidence after a turning point.

In commodities, they have been moving them around for decades to try to create the impression there is a shortage and you better buy for it’s a bargain. That was the game when Buffett was buying silver in London so the supply declined in NYC as it was shipped to London. This old trick has suckering in even the well educated for decades. It sounds logical that a decline in supply means prices should rise. But prices will rise only withCONFIDENCE not supply. Something can be in short supply for decades and nothing will happen.

“Animal Spirits” is the term John Maynard Keynes used to describe the instincts, proclivities and emotions that ostensibly influence and guide human behavior, and which can be measured in terms of, for example, consumer confidence in his 1936 book: The General Theory of Employment, Interest and Money. It has since been argued that trust is also included in or produced by “animal spirits”. It is effectively the BELIEF in the market that counts – never reality.

This is why in a bear market GOOD news is never “good enough” and in a bull market “bearish news” is always ignored. It is what you believe that counts. So pay no attention to the promoters who say buy now because inventories are declining. Inventories in commodities decline in bear markets and always have. That is NEVER anything to pay attention to – only price movement. Look at all the yelling about the $3 trillion expansion by the Fed – it did not produce inflation. It is what the majority believes that rules the day.

So as everyone swear the stock market will crash and the dollar will crash, they have been saying the same nonsense for quite some time now. Silver fell 35% with declining inventories as did gold but it declined only 23%. So focusing on single isolated trends in the domestic economy is like assuming the world is still flat. Sorry – the world is round and it is a global economy – not just domestic.

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