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A Shock

Richard Russell snippet
Dow Theory Letters
December 2, 2004

Extracted from the December 1st, 2004 edition of Richard's Remarks

Martin Wolf in today's Financial Times heads his always brilliant column, "Why America is Switching to a Weak Dollar Policy." Sub-title -- "The present path is unsustainable, since both the current account deficit and external liabilities are on an explosive upwards trajectory." And I quote from Wolf's column, "How far might the dollar fall? By as much as 50% from its peak, in trade-weighted nominal terms, suggest two distinguished international economists, Maurice Obstfeld of Cal Berkeley and Kenneth Rogoff of Harvard. Up to now, the fall has just been 17% on a broad trade-weighted basis. More, it seems, is on the way."

The Wolf column ends, "To bring about a substantial reduction in the external debt without a deep recession, the US needs a huge change in internal relative prices. If the financing of the deficit is indeed in doubt, a weak dollar is a certainty. Hard currency enthusiasts may want the US to choose a depression instead, or hope the deficit can grow without limit. Neither position is sensible. Big adjustments in the dollar's real value are a certainty. The only questions are when how, and how much."

Russell Comment -- Above is the hard-core, totally realistic view of the situation. Either the US takes a severe recession (which will result in a major reduction in spending) or the dollar must take the fall. At this point, it appears almost certain, to me, that the Fed and the Administration are willing to let the dollar take the fall. This will mean ultimately higher interest rates, and then the question is whether higher rates will bring on a recession anyway. In the meantime, US consumers continue to spend while their saving rate drops to almost zero. It's a barrel of fun while it lasts!

What does it mean for you and me when the dollar falls on a trend basis? It means that on an international or global basis, you and I are getting poorer. You don't believe it? Take a trip overseas and see what your dollars buy today, compared with what they bought a year or so ago.

What about stocks? Right now stocks are considered assets -- and the market is saying, "Buy anything, buy gold, buy silver, buy a house, buy stocks, buy diamonds, buy a Picasso -- buy any damn thing but get out of dollars!"

But what about declining stock profits? The hell with that -- just get out of dollars, and stocks are assets.

Amazing. It's come almost as a shock. "What, the Fed and the Administration are giving their blessing to a collapse in the dollar's international value! How can they do that? How could it happen? And me, sitting here with cash. Quick, tell me where to spend it. What should I buy?"

It's as if suddenly, the unconscious of investors and the markets recognize what I've said above. Now there's a panic for non-dollar assets. When you get this kind of situation, and they're rare, emotions take over and technical analysis or any other kind of serious analysis becomes almost useless. This market has turned very emotional, and emotional markets are the most treacherous. They can turn on a dime, or they can keep going. They "force you," they "beckon to you" to run with the crowd. That's what we've got now. Enjoy it or avoid it. It's here.

Gold/Silver -- The chart below shows the ratio of silver to gold. When the ratio rises, it means that silver is outperforming gold. Some pros play this ratio. They'd now be buying silver futures and shorting gold futures. I don't play this game -- too tough. Since June 3, 2004, silver has been outperforming gold. On one level, this is an indication of rising speculation in the metals. Silver is often referred to as "the poor man's gold."

One difference is that the US government's stock of silver is gone. Silver, unlike gold, is actually used up in manufacturing. There's now a net shortage of silver. On the other hand, in a bear market silver can be viewed as an industrial metal, which is never the case with gold.

Personally I like both metals and I like platinum and uranium.

But you can't be everywhere, so I still go to gold.

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Richard Russell
Dow Theory Letters

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