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Richard Russell:  “Ever since I started Dow Theory Letters I've been extolling the magic of compounding.  But how about the magic of compounding in reverse along with rising interest rates?  Below we see the widely-followed TLT fund, and sadly, it's in a distinct downtrend.  Declining bonds mean rising interest rates, and as the government rolls over its monstrous and compounding debt, the situations becomes increasingly impossible to manage.

Question -- where is the government going to get the additional money needed to manage the debt?  Easy, the Treasury will just issue more bonds.  And who will buy the bonds?  Certainly not Japan or China, they are trying to unload their cache of Treasuries.  Well, as usual, the Fed will buy the bonds -- hasn't the Fed been buying all the government's debt for months?  But as all this new money is being created, won't this flatten the dollar and cause inflation?  Maybe, but we'll worry about that later -- if it happens.

Why guess when we have charts that let us see exactly what is happening.  Below we see the US dollar.  The dollar has fallen below both its 50-day and 200-day moving averages.  Recent weakness in the dollar is probably due to the mounting budget and debt concerns.

What about interest rates?  Below we see the rate on the bellwether 10-Year Treasury Note.  The rate has doubled since earlier this year.  The normal rate, without QE, is thought to be about 4-5%.  As these rates rise, it pushes the national debt to new highs -- there's nothing more powerful than compounding our debt with increasingly higher rates.

Below, we see VIX, the volatility index.  The VIX has dropped to a super-low level, below 15.  I wonder if this could be the calm before the storm.

Russell opinions -- The institutions and pension funds need money -- income or profits.  There's no place that's offering safe income, so money managers are forced to go to the one place where there is upside activity, and that's the stock market and more specifically the Dow.  The concentrated buying in the Dow has propelled the Average to wonderland. 

If you buy the Dow or the DIAs here you are buying on the thesis that you will be able to sell your shares at a higher price to a greater fool.  You and I are not pressured to be in this market.  Because of the current madness, a few well-known money managers have recently quit the business.  I'm staying with it, but I'm offering fewer opinions and more charts.  The charts allow me to tell my subscribers what's happening and what has happened.  As one advisor put it, “I'm not only unsure of where the market's going, I'm not even sure of where it is.”

Russell also added:  “I was born in Lenox Hill Hospital in the heart of Manhattan.  I lived in New York City until the age of 31.  I graduated from New York University.  I subscribe to the New York Times and the New Yorker magazine and New York magazine.  And I can tell you that it's a lot easier to read about New York than to live there ... Life is tough for most people in New York, but at least there are jobs.

I wonder why most of New York's population lives there.  I think they are just used to the hassle -- or else they are tied to their jobs.  I'll never know why thousands of homeless men and women live in New York where they freeze in the winter.  Los Angeles has over 50,000 homeless and nobody has ever frozen to death in LA. San Diego has an increasing population of homeless.  They are visible at the beaches, in the fields, under bridges and in the doorways downtown.  God bless them -- many of them are ex-service men. 

My daughter Daria keeps a store of dollars which she passes out to them as they stand with their little cardboard signs at freeway exits or even in town.  Some of the homeless stand all day in the hot sun by the side of the road asking for money.  They are so bedraggled and beaten-up looking that they can't get jobs.  Whenever I pass one I say “God bless you,” under my breath.  There but for the kindness of God, go I or one of my kids.

Some day, maybe, I'll return to Gotham for a visit.  The City is changing even as I write.  The young kids can no longer afford to live in Manhattan, and Brooklyn is now the new New York.  But prices in Brooklyn have zoomed, and it looks as though Queens will be the next new New York.  Whites have already moved to Harlem.  When I was a boy, it was dangerous to visit Harlem.  Back in 1942 I used to visit the famed Minton's Playhouse to hear some of the jazz greats. Today I find it easier to read about New York than to be there. 

I still day-dream about my city, but I don't think I could live there at my age.  Most New Yorkers tell themselves that they are living in the center of the world.  But above all, living in NYC is a hassle.


Because it is so important, I'm including a P&F chart of silver below.  Silver has (recently) rallied and is now ready to attack resistance starting at the 27 box.  A bullish upside effort would arrive if silver can move into the 32 to 33 boxes.  This could just be an exciting week!

To subscribe to Richard Russell’s Dow Theory Letters CLICK HERE.

© 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.

The audio interviews with Eric Sprott, Andrew Maguire, Grant Williams, Stephen Leeb, Bill Fleckenstein, Pierre Lassonde, Dr. Paul Craig Roberts, Art Cashin, Egon von Greyerz and Marc Faber are available now. Also, other outstanding recent KWN interviews include Jim Grant and Felix Zulauf to listen CLICKING HERE.

Eric King

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