With continued chaos and uncertainty in Markets, the 90 year old Richard Russell who has been publishing the Dow Theory Letter for 60 years (he was the first newsletter writer) gives his assessment of the current situation and his opinion on how one can protect themselves, and even profit from the chaos he believes is coming soon. – Money Talks

 “The US is now actually borrowing to pay off the interest on its huge and growing debt.  The Treasury continually issues bonds.  But who will buy them?  Can you believe it, the US is reduced to actually buying its own debt via the Federal Reserve.  What does the Fed buy our debt with?  It buys our own debt with money that it conjures up out of thin air by means of a bookkeeping entry.  The Fed has been doing this for years and the Fed’s basket of bonds is now over $4 trillion dollars worth of assorted bonds.

The continuing buying of bonds (QE), now $60 billion every meeting, has driven stocks up to overvalued levels.  Companies are taking advantage of the lower rate environment in the limited period that these low rates are going to be around.

Now the Fed is trimming back its QE ($10 billion less at each meeting, so far) with the thought that QE will be completely removed by the end of the year — this on the hope that the US economy by year end will be strong enough to function on its own without any QE.  After February’s report that more jobs had been created than predicted, the Fed’s plan to eliminate QE was strengthened.

As to valuations, the S&P 500 now trades at 16 times its component companies’ earnings for the past year.  That is double its level of five years ago and almost identical to the level at which stocks topped out at the beginning of the decline in October, 2007.  Nobel Prize winner Robert Shiller puts the S&P at 25 times average earnings, far above the historical average of 15.5. 

Technically, the tech-heavy NASDAQ has five distribution days on its ledger, and the S&P has one distribution day.  From another technical standpoint, on Friday the D-J Transportation Average closed at a new record high, although the Dow failed to confirm.  At this point valuations are of no particular use, nor are the technicals.  It’s now a matter of how long and how far the players are willing to bet on the markets continuing to levitate.

Since this is a manipulated market, I have little to tell me if or whether this market is at or near trouble.  You stay in as long as the stock market continues to make headway, and you cash out when the early signs of trouble appear (assuming they do appear).  Clearly, the traders in this market believe that when trouble appears, they can exit quickly while at the same time capturing most of the profits they have gained from the five-year ascent.

Note that much of the poor economic statistics have been blamed on the inclement weather.  Now that the worst weather may be over, we will get a clear and more honest picture of the US economy.”

Russell added: “America has produced two documents that surpass anything ever produced by any country before.  These are the Declaration of Independence and the Constitution of the United States.  I believe these documents were God given.  And for this reason, they cannot be destroyed by time or by a bear market.  After much consideration, I have concluded that the future of the United States is a good one. 

Turning to the stock market, this market is as directionless as any I have ever dealt with.  I’ve given it a lot of thought as to the correct investment stance.  My conclusion is that I will sit with gold and a small amount of cash and simply await developments. 

In reading many investment advisories, I note that many highly intelligent advisors are warning of a deadly market crash.  Others present long lists of stocks to buy.  Still others note that the reason the stock market has been doing as well as it has is based on the manipulation of the Fed and its copious portions of QE.  I don’t see anything wrong with the position of standing still and observing.  

My stance is to sit with gold, and to watch history unfold.  Every speck of gold ever discovered or mined has value today.  This is a fact that gold haters choose to ignore.  Gold represents pure wealth and it does not need the backing of any group of men or of any nation.  The dollar was originally described as a specific weight of silver.  Gold is both a currency and an item of pure wealth.  

Gold is frequently mentioned in the Bible, and desire for it is built into the DNA of the human race.  I’ve chosen to sit with gold and watch history unfold.  If the market continues higher, I will not be envious, since I am where I want to be.  If the market lapses into a bear market, I’ll be happy to be on the sidelines, and I’ll hope for the best.”

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About Richard Russell

Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.

Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron’s during the late-’50s through the ’90s. Through Barron’s and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-’66 bull market. And almost to the day he called the bottom of the great 1972-’74 bear market, and the beginning of the great bull market which started in December 1974.

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