Plain Talk: Primary Bear Market
May be Returning
OK, enough technical talk. How about some plain
talk. I have a sinking "feeling" that the primary
bear market that started in late-1999 to 2000 is in the process
of resuming.. . .
Russell, spit it out in plain language. What
do you think is going on in the markets and the economies
Answer — I hesitate to write this, because
it's so "early" in the game, and a lot of what I'm
going to say is simply instinct or, call it experience. I'm
worried that we're seeing the beginning of a world contraction.
I'll call it "fading inflation and rising interest rates
The U.S. and probably the rest of the world
are swimming in the greatest edifice of debt ever seen in
world history. Probably the core of the picture is the U.S.
consumer. The big-spending U.S. consumer has been the engine
of the worldwide boom. But now the U.S. consumer is running
into trouble. Housing has leveled off and in many areas has
even turned soft. The U.S consumer is not saving, on the contrary,
he's actually spending more money than he is taking in. This
spells trouble, and it's deflationary.
The world's business has been expanding with
the help of very low interest rates and massive liquidity.
But trees don't grow to the sky, and liquidity doesn't expand
forever. Neither do interest rates stay low forever. And I
sense that we've reached what I call "the great divide."
I hope I'm wrong, but I'm afraid I'm right. An invisible hand
is taking the punch bowl away.
The CRB Commodity Index hit its high on February
1, Since then it has carved out a lower peak. The stock markets
of the world are starting to back off. Even those exciting
emerging markets are backing off. The Dow, the backbone of
the U.S. economy, has refused, time after time, to confirm
new highs in the Transports. The Dow has never bettered its
2000 peak, Both of those situations have bothered.
All of this has me thinking that between Dow
Theory and my PTI and the Lowry's statistics — something
is wrong. The most negative possibility is that the primary
bear market has resumed.
The situation is very complex. We're dealing
with the whole world, with suspect currencies, with a fragile
oil situation, with questionable energy in general, with brutal
world competition, with ridiculous levels of debt, and with
a shaky real estate boom. I could go on and on, but much of
it is condensed into the movements of the stock averages.
And in that area, as I said, I don't care for what I'm seeing.
Why the steady distribution as seen in the Lowry's
statistics? Why the movement to the "safety" of
the big-cap stocks? Why the selling into every rally? Why
has my PTI finally broken down? Why has the Dow gone nowhere
over six years?
Well, we can ask a thousand questions —
it's easy to talk and hard to take action. The action to take,
I believe, is what I've been advocating over recent weeks.
My choice is to be basically in T-bills and gold bullion.
T-bills because the bills are safe and because you're guaranteed
to get your money back. Gold because if all goes wrong, gold
is real, time-tested wealth. Gold stands alone as money outside
the central bank system. If the Federal Reserve was abolished
tomorrow and the U.S. was to renege on all its debt -- gold
would still be money.
My sense is that the U.S. and the world economy
is at the "creaking stage." Strains are beginning
to show in the fabric of the world economy. I think its time
to get defensive.
Let me put it this way -- if the bear market
is about to resume, it's catching people at a very unfortunate
time. Everybody, it seems, has real estate, homes, stocks,
mutual funds, cars, things. But few people have liquidity
-- savings, cash, gold. I don't care for the picture, but
I'm sure the bear loves it.
by Richard Russell
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