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Richard Russell: “We are living in amazing times.  These are times that have ushered in unprecedented events.  For instance, did you know that the Dow has risen on 21 of the last 25 weeks?  On top of that, borrowing (margin debt) is at a near-record high of $346 billion (the record was $381 billion in July, 2007).  Never before has there been so little cash in money market funds relative to stocks and bonds.  Last week the yield on Barclays US high yield index fell to a record low 4.97%, the first time it has ever fallen below 5%.

The whole situation can be described in one sentence -- the search for yield has reached almost insane levels.  The question -- have investors driven certain assets to extremes in height, and have they placed various markets on dangerously thin ice?  Are we looking at a collection of new Fed-created super-bubbles?

What's the Russell advice?  My average subscriber is not a money manager.  Therefore, my average subscriber's job does not depend on his producing income or even profits.  My preference is to sit with cash and gold.  True, the purchasing power of cash is going steadily down.  This must be bothering the Fed.  What's the Fed's response?  Easy, just lie about the rate of inflation.  Or change the CPI. Actually, according to yesterday's Financial Times, the Fed is considering tapering off on its monthly buying of $85 billion worth of bonds and mortgage-backed securities.

So again, I say, let's try to keep it simple.  Our job is to watch the US dollar and to watch the Treasuries.  Below, two years of TLT for perspective. Key support on this chart is at 114.

The stock averages are over-bought, over-valued, over-loved and at record highs.  Margin debt is sky-high, showing that there is a great deal of speculation built into this market.  The Fed's activities have acted as a “put” under the stock market.  If stocks begin to slide, investors are certain that they can depend on the Fed to increase its QE4ever.  Our foreign creditors are fed up with the US's increasing debts and deficits.  They don't see how the Treasury bonds which they hold will ever be paid off with stable dollars. 

From the standpoint of our foreign creditors, they are stuck with dollars and Treasuries that are steadily losing purchasing power.  This was never a problem when the dollar was readily convertible into gold.  But that's history.  The problem that our creditors currently face is to diversify their reserves out of Treasuries, T-bills and dollars. This is happening now, but it must be done very subtly and carefully, lest they “break” the markets.

The story is that nobody (our creditors) any longer trusts paper or fiat money.  Welcome to the new bull market in real money -- gold.

As the dollar systematically loses purchasing power, this impacts the Treasury bonds.  If the giant Treasury market starts to fall, interest rates will rise (rates rise as bonds fall), and the whole question of US prosperity comes to the fore.  Thus, as I write, there are many problems that are brewing secretly and out of the public's sight -- they are problems not normally covered by the newspapers.

The Dow hit a record high on Friday, unconfirmed by the Transports.  Everybody is ignoring the series of non-confirmations.  But old-timer Richard Russell takes them seriously.  Be very wary and careful as the Treasury bonds fall (yes, they are now falling).  Hold GDX and GDXJ and be very patient with them.  If the world turns against the fiat currencies (as I think it will), gold will head for the skies.”

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© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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Eric King

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