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Russell: “The market fooled me. I thought the Dow would advance to a new high, unconfirmed by the Transports. But what actually happened was that the Transports advanced to a new record high, unconfirmed by the Dow! If the market turns down from here, and the two Averages break below recent lows -- well, it could get very ugly.

The dreaded fact that nobody wants to face -- the world is suffering from a deflationary depression. Germany, the strongest economy in Europe, is slowing down. China, too, is suffering from a real estate collapse. Economist John Williams predicts that second quarter GDP will be down. If so, with two successive quarters lower, the US will officially be in recession. With the US, China, and Europe sinking, I would expect the various central banks to fight deflation and open their spigots wide.

I read Barron's early Saturday, and I was surprised at what I read. Therefore, I read Barron's page-by-page a second time, and I was not mistaken, Barron's had turned cautiously bearish. The lead article by brilliant editor Randall Forsythe noted that despite the fact that employment news was good, consumers are not spending. I include charts below of companies mentioned in the lead article in Barron's.

Actually, I think the dreaded news is now out and accepted that second quarter consumer spending will be down. Considering that consumer spending accounts for 70% of Gross Domestic Product, this is a serious situation. For this reason, I'm giving up on my thought that the Dow will have the strength to test its recent record high.

I might add that this market is in no shape to deal with a bearish surprise-revelation such as second quarter GDP will be down. But as for my subscribers and me, all is well in that we are not in the stock market but are mainly in silver and gold items, which should stand up against bearish economic news. If second quarter GDP is down, the Fed will be in an embarrassing spot, and I think they will have to reverse their strategy of terminating QE -- they will elect to continue QE. If so, this will be an admission that the Fed has been dead wrong on the trend of the economy.

Below is the gold-bond ratio. When the ratio is rising in favor of gold (as now) it's telling us that inflation is the wave of the future.

From Wealth, War and Wisdom by Barton Bigg

“World War II was about freedom and democracy, but it was also about the survival of capitalism, and, in a way, the future existence of stock markets and all the beauty and ugliness attached to them. Functioning, free equity

markets working as suppliers of capital with independently determined prices are simply not compatible with

either authoritarian Socialist dictatorships or Communism. In the chaos and turmoil of the early 1940s, stock

markets around the world occasionally dimly but brilliantly most of the time comprehended the ebb

and flow of war. It had to be the inherent wisdom of crowds because both sides controlled the war

news reaching the civilian population and used propaganda as a weapon.”


Late Notes -- Opening comment from John Williams of Shadow Statistics: “Second-Quarter GDP contraction looms.”

“I want to go over the picture once more. The previous record high for the Dow was 17,068. The previous record high for the Transports was 8,294. As I write a half hour before the close, the Dow is at 17,061, seven points

below its record high, and the Transports are at 8316, well above their previous record high. Thus we have

a new high on the Transports, unconfirmed by the Dow. This is a dangerous situation. If the two Averages

turn down now, and break below their recent lows, we could have a very bearish situation -- a further

decline, a full correction or even a primary bear market. The safest and preferred position would be

in physical silver and gold or anywhere in the precious metals universe. Personally, from the

standpoint of my children, I don't like the situation. We may have come to the end of the road as

far as US debts and borrowing. It's interesting that all this is happening on a Monday, with

four days to go before the end of the week. God bless America,

and God bless all my faithful subscribers.”

King World News note:  The section below was written by Russell's daughter Daria Russell Doering (fantastic job Daria) and it covers the information which was shared by economist Richard Yamarone.  Yamarone has always told it like it is and the information below is a sober reality of how bad the U.S. economy really is.

Richard Yamarone

Richard Yamarone is an economist and author with 25 years experience on Wall Street, currently a writer for Bloomberg Briefs. He was affectionately introduced as “Darth Vader,” and said he wanted to convince the audience to “come to the dark side.” I found what he said interesting, so let’s at least take a visit!

Yamarone reads 300 quarterly earnings reports – he says he doesn’t have much of a life – and has been doing this for decades. He reads the reports of not the biggest companies but the most economically sensitive ones, for clues as to where the economy is going. Unlike other readers, he does not focus on earnings or P/E ratios, but on what the executives are saying. He compiles this into his “Bloomberg Orange Book.” Yamarone claims it is better than the Fed’s “Beige Book” (anecdotal reports from the 12 Fed districts, published eight times yearly), and how does he know this? Because, off the record, nine Fed bank presidents and one Fed governor have told him! I agree it is certainly more interesting.

Here are the excerpts that stuck in my mind:

“And so we’re still seeing that midnight shopping in our stores when that EBT card, it’s like a debit card, when it is ready and it is funded, there are people who are in the store at midnight because they know it turns on. And they have shopped from like 10:45 to midnight and they’re waiting for that card and then our lines open up. And we’ve had some of our busiest hours at midnight.” -- Rosalind Brewer, Executive Vice-President, Wal-Mart 

“I think the most telling indicator for us that economic weakness and employment is the key issue driving soft volumes, is the fact that we continue to see, as – in contrast to the historical norms, we continue to see volume pick up heavily at the beginning of each month, and then steadily erode through the month, being particularly soft in the last week to 10 days of the month. That just tells us that people are running out of money.” -- Gregg Engles, CEO, Dean Foods

Yamarone, being a person after my own heart -- a skeptical soul, and not believing anyone -- went to Wal-Mart to check this out for himself. And yes, on the first day of the month when those EBT (Electronic Benefits Transfer) cards are refilled, a bunch of shoppers arrive around 11 PM, ready to check out the moment the cards fund at midnight. These are moms buying diapers, food and infant formula. 

Yamarone stressed that the most important economic indicator, hands down, is employment. There are both financial and social consequences of employment, unemployment being a leading cause of divorce, crime and suicide. ... We’ve all heard that the jobs being created are mainly low-paying and part-time.

He showed a chart indicating that the highest paying jobs – Financial, Information and Utilities – have been the biggest losers of jobs since 2010 (other than government, which has eliminated the greatest number of jobs by far – over 600,000 in the last four years). In manufacturing, there has been a great surge in productivity, but that has not generated jobs. The increased productivity has come from automation. Fortunately or sadly, manufacturing is only 13% of our economy. But this is one reason stock prices are up but employment is down.”

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

© 2014 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.

IMPORTANT - KWN has many more interviews being released today.

The audio interviews with Eric Sprott, Bill Fleckenstein, David Stockman, William Kaye, Dr. Stephen Leeb, Paul Craig Roberts, John Hathaway, Gerald Celente, Grant Williams, Andrew Maguire, Egon von Greyerz and Dr. Marc Faber are available now. Other recent KWN interviews include Jim Grant and Felix Zulauf -- to listen CLICK HERE.

Eric King

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