“World War II marked the end of the British Empire and the pound as the reserve currency. The monetary forces of deflation may have ended the US Empire. In its frantic effort to hold back the forces of deflation, the Federal Reserve has created trillions of federal reserve notes.
Against this tide of liquidity, the dollar, so far, has held its own. I’ve been saying that the dollar is the Achilles heel of the US economy. As long as the dollar index holds above 78, I think it will continue as the world’s reserve currency. I believe one of two positions will occur in the near future: either the dollar will begin to break down, or interest rates will rise. Either course will set off a parade of mishaps.
Meanwhile, the newspapers are filled with stories about the US economy. But we read very little about the rising ocean of debt. It takes money to carry debt, and this in itself is deflationary. Therefore I see the year 2014 as a key year in US history.
All serious investors know that the US is facing a debt predicament. If so, what is the answer? We know that the current expansion of debt in the US is unsustainable. We also know that governments will do anything they have to — to remain in power. So what, I ask, are we going to do about our compounding debt? The newspapers are filled with talk and gossip about business and profits, but not a word about the exploding debt.
Could the US simply announce that it is going to renege on its debt? To most serious analysts, that would be unthinkable. The Russell view is that the whole monetary system could come apart. And if it does, the entire world would be affected. I believe a new monetary system would have to be invented.
At present, it seems to me that the overriding trend is to “get out of dollars,” and maybe to spend dollars on US goods and assets. Buy US corporations, land, real estate and even New York apartments.
In the coming nightmare mishmash, serious money will want to be in the safest of all currencies, and by that I mean gold. If the current monetary system comes unglued, I believe the big investors of the world will go for the gold.
My own stance is to stand aside and watch history unfold. I’m not sure why, but I believe that this year is the year when the excrement hits the fan. My instinct is to be in gold and pray that it all turns out for the best. I think one of the main issues of the year will be the incredible disparity in income between the wealthy 1% and the rest of the population. I believe a second bone of contention will be computers and robots taking the place of middle and lower class laborers.
As I see it, we are in the latter stages of a bull market. My feeling is that this long bull market will end in an absolute explosion of excitement as prices rise to unbelievable heights. We are not there yet, but the trend is up, and we have not seen the end of the melt-up. From this point on, I believe matters will accelerate, and time will be shortened. The year 2014 should end up as one hell of a year.
Meanwhile, gold closed higher and the entire universe of gold ended across the board higher (Friday). With each passing day, gold is shining brighter.
It’s a mystery how many items can be manipulated – gold, short rates, bonds, long rates, the stock market, the dollar, the CPI, and the economy. All of these are being juggled. The overall situation is unsustainable. Some area is going to give, and my guess is that the dollar will be first. Meanwhile debt continues to expand in almost every area. The Fed now owns over $4 trillion in assorted bonds. How they’re ever going to get rid of this mountain of debt is beyond me.
Overall, the Fed’s nonstop creation of dollars is creating an avalanche of liquidity, and it’s liquidity that’s driving the stock market higher. As I see it, the picture is one of a market melt-up that will not be denied. It reminds me of a child’s game of building blocks, piling block upon block, until one last block topples the structure. Valuations are ignored in this historic melt-up.
Money managers cannot afford to be out of the melt-up and they’re not thinking of answers to the build-up. Their only thought is to be part of this year’s rising tide. The tide will continue rising until the structure is so top-heavy that it tumbles over. I don’t know how the mountain of rising debt will be solved. It’s like a force of nature that seems to be unstoppable. Could the US simply announce to the world that it cannot pay its debts? That would be tantamount to bankruptcy and would result in a loss of the dollar as a reserve currency. But is there another way out? If something is unsustainable it must have an end. The build-up of debt in the US is unsustainable. But the stock market could not care less. It is caught in a psychological melt-up that will not be denied.
As I see it the year 2014 will be a headline in the history of the United States. Who to blame our unsustainable position on? My choice – fiat money. Fiat money created by the Fed. Obviously the stock market cares about only one thing: liquidity, as created by an out of control Federal Reserve.
I have a lot of new subscribers, and they have not seen or read any of my WWII stories…
Last night I went to a party. It was given by a lady who is the CEO of a large start-up company. The wealthy venture capitalist who was backing the start-up was there too, along with about six other people. Nobody at the gathering was over 50, most were in their late 30s and 40s. We finished a delicious appetizer, and somehow the talk drifted to Italian wines. It seems, the venture capitalist was an expert on Italian wines. He told us that he had just purchased a great case of a rare Italian wine with a cost of just over one thousand dollars. I wasn’t particularly interested in the wine stories. The wine tales droned on, and I started to doze …
Wine, Italian wine. Spumante. The voices at the party fade. My mind drifts off to another time and another place. I’m in Italy. It’s 1945. We’ve just returned from a difficult mission, and our nerves are still on edge. We’re on a pebbly beach on the shores of the Adriatic Sea. My Pilot, Art Herron, is with me along with our tail gunner, big Hank Buhrmaster. We’re watching an Italian family as they unwrap their picnic baskets. They bring out bottles of wine. It’s Italian wine. They’re drinking Spumante, which is a light, sparkling Italian wine, much like a carbonated sauterne. There aren’t a lot of spirits to drink in Italy here in 1945 — except for cheap Spumante and dry vermouth. No hard liquor at all. No whisky and no ice.
I watch the Italians tie thin ropes around the necks of their bottles of Spumante. Then they toss the bottles into the sea to keep them cool. They wrap the other end of the ropes around large rocks. Clever, I think — I’ve never seen people do that before. After an hour in the hot Italian sun we decide to take a swim. We strip to our shorts (we don’t have bathing suits), and slide into the cold Adriatic water.
When I’m about 10 feet from the shore, I see something floating in the water. It appears to be a log. I paddle closer. It’s a body floating face down in the water. I move still closer. The body is headless — a long streamer like a strand of spaghetti trails out from its headless neck. I call Art over. We see that it’s the body of a German airman. We immediately recognize the uniform — he’s an officer. He must have been shot down at sea and now he’s floating to shore.
The German is wearing a pistol. I wonder whether it’s a Luger, which is much wanted by every G.I.. I move up to the body, and with an effort I undue the holster (the leather is wet). I tug at the pistol. It’s not a Luger, it’s a P-38. (The P-38 is a standard German side-arm that has been manufactured by Nazi slave labor). I work the P-38 out of its holster and return with it to shore. Art looks at it and says, “Too bad it wasn’t a Luger.”
I look back. The body of the dead German bobs up and down with the undulation of the waves. The Italian family is busy eating, they don’t pay any attention to the body. We move down the beach about 30 yards and continue our swimming. It’s no shocker. Corpses are no novelty in war-torn Italy in 1945. Nevertheless, I feel slightly nauseous. Maybe I should have left the P-38 with the poor dead German. I think, “He was somebody’s son and maybe the father of children.” I still have the P-38 pistol today.”
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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.
The Letters, published every three weeks, cover the US stock market, foreign markets, bonds, precious metals, commodities, economics –plus Russell’s widely-followed comments and observations and stock market philosophy.
In 1989 Russell took over Julian Snyder’s well-known advisory service, “International Moneyline”, a service which Mr. Synder ran from Switzerland. Then, in 1998 Russell took over the Zweig Forecast from famed market analyst, Martin Zweig. Russell has written articles and been quoted in such publications as Bloomberg magazine, Barron’s, Time, Newsweek, Money Magazine, the Wall Street Journal, the New York Times, Reuters, and others. Subscribers to Dow Theory Letters number over 12,000, hailing from all 50 states and dozens of overseas counties.
A native New Yorker (born in 1924) Russell has lived through depressions and booms, through good times and bad, through war and peace. He was educated at Rutgers and received his BA at NYU. Russell flew as a combat bombardier on B-25 Mitchell Bombers with the 12th Air Force during World War II.
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“Rich Man, Poor Man (The Power of Compounding)“
