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SINCE 1958


PO Box 1759, La Jolla, California 92038

17 Letters Per Year - $300 Annually


July 8, 2010

AUSTERITY OR LOSS OF LIBERTY The end of Keynesianism? Yes, I think were seeing it now. Fed Chief Bernanke in his writing blamed the Great Depression on the Fed for shrinking the money supply. In fact, Bernanke even apologized on the part of the Fed for causing the Great Depression. Bernanke, wrote a famous piece explaining to us know-nothings that the Fed had a magic instrument, it was the ability to print money, and, if necessary, to drop this Fed-created money to the American people from helicopters. With his magic power, concluded Ben, there was no way the US could slide into another Great Depression. It was great and comforting concept, but it didnt work. After leaving rates at zero, printing over two trillion dollars and backing billions of dollars in stimulus plans, unemployment remains high, housing stays in the dumps and the national debt has sky-rocketed beyond all reckoning. The spending plans of the Obama administration and the expansion of money by the Fed has left the US in worse shape than ever. Unemployment is still high, and the US has taken its place along with Greece and Portugal as another halfbroke banana republic. How did this horror story befall the once greatest nation on earth and the one-time Arsenal of Democracy? If a house is built on sandstone and with rotten timber its not a question of whether that house will fall apart its a question of WHEN. Ever since the end of World War II, Americans have been enjoying the greatest standard of living the world has ever seen. How did we do it? Was it hard work, sweat, original thinking, risk-taking or pure luck? Hardly any of those, it was through borrowing and creating a gigantic house-of-cards. The cards were the newly-created bits of paper that we call dollars (actually, they are Federal Reserve notes backed by nothing). Without its abilities to create fiat money, the US could never have built its house-of-cards economy. Without the insidious Fed, the US would never have had the ability to create trillions of unbacked Fed notes. Ive insisted all along that the US should have allowed the primary bear forces to fully express themselves, as they inevitably will do anyway. But in its arrogance and ignorance, the administration decided that they could halt or sidestep a recession by printing us out of trouble. Its been a terrible and expensive mistake. Finally, with debts now pushing above 90% of GDP, the American people have shouted Stop, its not working, we cant find jobs, and you people in Washington are pushing us and our children into a state of bankruptcy. If you dont know what youre doing stop it! When the voters are mad as hell, the politicians take notice. Whats happened is that 65 years of over-spending and Letter 1477 July 8, 2010 Page 1

June 18, DJIA 10450.64; PTI 6110; A-D Ratio +48.27 June 25, DJIA 10143.81; PTI 6093; A-D Ratio +46.71 July 2, DJIA 9686.48; PTI 6066; A-D Ratio +44.23 Dow Yield: 2.87% Dow P/E: 14.06 S&P Yield: 2.52% S&P P/E: 12.21 Gold 50-Day: 1211.60

borrowing has never been corrected in a major way. But the gods of the market have finally warned, You nations of the world have crossed a line in the sand. Now its pay-back or correction time. Now is the time to pay for 65 years of unearned prosperity. You wouldnt build up your economies through hard work, sweat and tears. Like children youve demanded, I want it, and I want it now. Whats next? I think Washington will continue trying to spend us out of recession. This did not work in the past, and its not going to work now. The primary bear market will not allow it to work. But what if the Administration gives up and allows the forces of deflation and correction to express themselves? Heres where my crystal ball gets very cloudy. I dont see Washington accepting another long, drawn-out recession or another Great Depression. The temptation will be too strong to try to print us out of the recession or to create enough government-sponsored jobs to drag us out of the recession. Thats what I see happening. What would I have done? I would have done exactly the opposite of what has been done by Obama. Instead of promising prosperity and back to normal, Id have told the nation the truth. Youve lived the great and unearned life for 65 years, all created by credit and borrowing, funs over. You must now pay for it with SACRIFICE. Americans must cut back to the bone. Children may have to move back with their parents, Americans may have to build victory gardens as we did during World War II. Well have to learn to save and scrimp. If you want to buy a house or a car or a washing machine, youll have to wait until you earn enough to pay for those items. The difficult choice is to sacrifice or America shrinks to a has-been power this is the hard rain Ive been warning about. Question Russell, the story now is sacrifice or lose our freedom and become a second or even third class power. Is that your scary story? Answer Thats right. My generation is called the greatest generation. Why? Because we had to sacrifice, first through the Great Depression and then through World War II. But we did survive. At the end of the War, America was accepted as the greatest and most powerful nation on earth. Every man and woman in the world wanted to come to America, where the streets were paved with gold and people were free. Thats about over now. America is losing engineers and scientists and its best minds to other nations where it is thought that opportunities are better. Its hard to believe, but its the bitter truth. Obama My thought is that Obama has no deep convictions. He is a highly-intelligent man, and he knows it, and the voters know it. Obama thought that once president, he could listen to all sides and come up with the correct answers. We now know that he has failed with that strategy. I think that Obamas master plan up to now has been to follow the path of FDR. Let the government take over and regulate the nation in every area from medicine to energy to Wall Street to agriculture. The government will do it right. Thus, as America weakens, it approaches the socialistic (well take care of you) states of Europe. Again what would Richard Russell do? If I were president Id tell the people the truth. Youve got to earn what you buy, scrimp and save, roll up your sleeves, were going to enter hard times. But weve had hard time before, and weve emerged stronger than ever. Were ending the free lunch era, and were taking away the bubbly punch bowl. As in World War II, were going to sacrifice whatever it takes in order to remain free and once again be the arsenal of democracy for the world. Gold Most people dont understand the meaning of gold. People who buy gold today are thinking of climbing on the band-wagon and ending up with fabulous profits. Forget it, that isnt why you buy and own gold. Besides, the government wont let you show a profit in gold. The IRS will tax your ass off if you try to sell your gold mining stocks or your goldPage 2 Letter 1477 July 8, 2010

related ETFs or gold funds.


5/3/10 6143 10/9/07 5974 12/5/06 5796 4/27/10 +51.10 6/4/07 +42.03 12/5/06 +34.53

7/16/99 5382

89-Day Moving Average (PTI)

2/11/04 5439

5/26/00 5109 1/6/99 -6.16 5/3/02 +3.75

12/30/03 +13.21

11/20/08 +30.84

The reason rich men accumulate gold is as follows. Gold is eternal wealth. Own three thousand ounces of gold, and youll always be wealthy. Holding gold entails no risk. Gold owes its value to its indisputable intrinsic value. You want to ensure eternal wealth? Pretend you have to make that decision, and its the year 1990. You load up on three blue chips, GE, GM and C. If you loaded up on these three, by now youd be broke.

You want to feel wealthy in any kind of market or in any kind of political system? One way is to own physical gold. A great inflation materializes and 10/9/02 3/14/00 -5.33 your gold will probably rise with infla-8.14 tion. A great deflationary depression arrives. The price of everything crashes. And worst of all, that bubble that we call the dollar crashes as well. The dollar wont buy a damn thing. Nobody will part with food or land or merchandise for dollars. All things denominated in dollars (stocks, bonds, real estate) collapse with the dollar.

Holding gold itself is a standard of wealth. You never sell your bullion gold. But when you buy gold mining shares, you are speculating on making a profit. If I own enough gold, I dont care what the dollar the price of gold is. Im a wealthy man as long as I hold my gold. If I own five Picassos Im a wealthy man. If I own 20 acres on the Southern California coast Im a wealthy man. But Picassos can go out of style. And land on the California coast can be confiscated. Not so with gold. Gold can be hidden, it can be accumulated, and it exists outside the system. By the way, Im wondering whether great diamonds will soon be in that same category. I note that the price of great, high-quality diamonds is surging. What man makes, man can destroy. The value or purchasing power of the dollar (fiat currency) can collapse. But gold cannot be devalued, because its not beholden to any man or any sovereign government. Golds value is based on 6,000 years of history, and its value lies outside the system. The US Treasury now values its gold at $42.20 an ounce. The world doesnt give a damn what the US Treasury values its gold at. The world is saying that an ounce of gold is worth $1250 dollars, and the hell with the gold-haters. Deflation The stock market is now starting on its long journey to deflation. When stocks go down, as they have been, thats deflation. Stocks discount the future. Todays sick stock market is warning, Deflation lies ahead, pay attention. Todays sick stock market is not telling us that the employment situation is sick or that consumer buying is fading. We know that; its old news and the stock market is not interested in old news. The stock market is telling a story that nobody wants to accept funs over, and hard times are coming. The greatest inflationary bubble in history is bursting. The very worth of the dollar is coming into question. Question Russell, if the worth of the dollar is in question, how come smart investors are rushing headlong into dollars or US Treasury bonds as safe havens? Letter 1477 July 8, 2010 Page 3

Answer Todays dollar bugs dont realize that the dollar is the biggest bubble of all. Weve created too many of them. The dollar is a bubble today, and ultimately, all bubbles burst. The dollar will be no exception. Question Then why own any dollars? Answer Convenience. Hold em as long as people accept them for items like meals, rent, medical or college tuition. Dollars are just a convenience today but unlike gold, they are NOT a store of value. When gold rises in terms of dollars, it means that the dollar is losing value or purchasing power against the standard gold. This scares hell out of the Fed because the Feds power lies in ACCEPTANCE of the dollar. Rising gold means the Federal Reserve system is losing power. And the systems reason for existence is to wield monetary power over the nation. The bankers want the good life, and they have the formula control the nations money. Above, one of the greatest tops in stock market history is nearing completion. The critical level of Dow 10,000 has been breeched again, as I write. The critical numbers are now Dow 9980 and Transports at 4040. Gold technicals Gold is holding above its blue 50-day MA, which in turn is holding above it red 200-day MA.

CHINA - Chinas real estate is in a bubble. The Chinese authorities have no intention of repeating the US experience of a bursting real estate bubble. So, theyve killed two birds with one stone by letting the renminbi float. Theyve satisfied the Americans and they put pressure on Chinese real estate prices. You really have to feel sorry for Obama. First the housing collapse, then the disastrous oil spill (to top
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it off, hitting the same geographic area as Katrina), now his general in Afghanistan calls him and his crowd a collection of know-nothings. This is a huge victory for the Taliban. An almost sure exit of one of Americas most talented generals. I just finished Gregory Zuckermans book ,The Greatest Trader Ever. Its the story of John Paulson and the $45 billion he made on the housing collapse, with $4 billion personally. Heres an interesting excerpt from the last part of the book: Whats Paulson doing now? Paulson made a simple calculation. A supply of dollars has expanded by 120% over several months. That surely would lead to a drop in its value and an eventual surge in inflation. With all this spending, were going to have massive inflation, Paulson told Hoine, arguing that all the major currencies were at risk other than the Chinese yuan. Whats the only asset that will hold value? Its got to be gold. Paulson acknowledged that his was a straightforward argument, but he paid the critics little heed and proceeded to buy more than $1 billion of shares of gold miners, or 12% of his largest fund. He also purchased billions of dollars of gold investments to back new classes of his funds denominated in gold, and chose these classes for his own money. Betting against the dollar would be his new trade. I couldnt be more confident, Paulson said in the summer of 2009. Three or four years from now people will ask why they didnt buy gold earlier. Over time our currency will lose value and inflation will rise thats our future.

AN EPIPHANY - Were now in the process of building one of the largest tops in stock market history. The result, I think, will be the most disastrous bear market since the 30s, and maybe worse. Question: What could possibly be behind such a bear market? you ask. The stock market is stirring up optimism on a weekly, if not daily basis, by not falling apart. Answer: This is the rest or dead zone I was talking about. Bear markets dont conclude in a day, a week or a month. Months will go by, often adding to the bulls optimism. I think the key element behind this great bear market will be the complete destruction of all fiat currencies. This has been a long time coming. Fiat currencies are wealth created by man. They are created without sacrifice, without labor, without risk, and without sweat. Basically they are an immoral device, created by secretive bankers. If you watch the figures carefully, youll note the subtle deterioration. For instance, the advance-decline ratio, although up slightly for the week, had a relatively weak performance with the Dow up several hundred points over the course of the week. And we broke the trendline in May (see the chart on the top of Page 6) showing the cumulative advance-decline line for NYSE Common Stock only, which is what we publish in our figures (courtesy of DecisionPoint The vertical lines are Jan 2008, Jan 2009 and Jan 2010 as you move to the right on the chart. My old friend, Bob Prechter, is talking about Dow 400. I used to think this was an absurd joke. I no longer think its a joke. The ultimate result will be a primary bear market shocking in duration and extent. Gold: As for gold, its stellar performance goes on. This in the face of ominous warnings of various worried experts. On Letter 1477 July 8, 2010 Page 5

Friday, August gold rose to a new record high. The next step will be into the 1300s point&figure upside objective is now 1310. Gold shares are lagging bullion in this last move, not yet showing the break-out seen in the yellow metal. The world (minus the US) is loading up with the yellow metal with banks running out of vault space. The great 10-year primary bull market is moving into its 11th year. The bull market in gold attests to the systematic decline in the value of the dollar compared with real money gold. One of the greatest modern traders, John Paulson, who made billions on the housing collapse, has, I understand, all his personal money in gold-related

items. Many of my subscribers have now built gold profits beyond anything they have ever achieved before. I know at this point one could get itchy fingers thinking of the profits achievable by switching gold for fiat currency. I warn subscribers, stay on the yellow brick road. The big profits, the astounding profits, will accrue when gold finally bursts loose of its prejudices and freely expresses itself. My advice now is to put as much of your money as youre comfortable with in bullion coins. Remember the simple phrase thats been around through years of history Theres no fever like gold fever. Fiat money is doomed. Act on it.
Next Mailing: July 28, 2010
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