Regular readers know that I am a huge fan of Richard Russell’s work. For those who aren’t familiar with Russell, he is the author of The Dow Theory letters. Obviously, he is a student of Dow Theory (perhaps professor is more appropriate). Most importantly though Russell is about as experienced an investor as you’ll find on the planet. He has lived through cycles that no one else can even remember.
I like to think that the market works on a different clock from the rest of the world. Economic cycles are often long and drawn out. It can be hard for humans to comprehend economic cycles because the length of an economic cycle is not based in years or months. It can literally work on its own clock. The current deleveraging cycle is particularly frustrating for investors because these types of recessions tend to be long and drawn out unlike your average 8-16 month recession. A full economic cycle can be anywhere from 5 years to 25 years from peak to trough. Humans, particularly investors, have trouble seeing past the next 5 to 25 minutes. It’s safe to say that Mr. Russell has seen more cycles than anyone and his educational and priceless commentary is evidence of this. I’ve included some of his notes from this latest week and highly recommend his newsletter. His ability to grasp the big picture is truly unmatched:
Question — Russell, you seem to think this is going to be a world-class bear market. Why do you think that?
Answer — The US and its people have been borrowing and leveraging for decades or ever since WW II. There’s never been a true correction in the economy, although there have been corrections in the stock market (1973-74 and 1957-58). Consumer buying makes up 70% of the Gross National Product of the US. For the first time in decades, US consumers are dealing with massive unemployment. This is scaring them and causing them to cut back in their buying and now they are actually saving. Fear is the strongest of all human emotions, and US consumers are finally dealing with naked fear. I believe this fear will bring on years of saving and a long period of debt contraction. This will thwart all the administration’s efforts to inspire consumers to spend again. Today, if you give the Average American money, he’ll save it or use it to pay off debt. For the first time since the Great Depression, debt has again become a “dirty word.”
I think the stock market and consumer pessimism will feed on each other. This bear market, like all others before it, will only end in exhaustion. And with exhaustion we will see stock values that this generation has never seen or imagined before.
Question — Why do you take the potential break-up of the rally that started on March 9 so seriously?
Answer — The public has been led to believe that the recession is about over. Moreover, they believe the stock market rally since March 9 is the market’s way of celebrating the forthcoming end of the recession. If this rally falls apart (as I think it will) and the March 9 lows are violated, the investing public is going to be more disillusioned and disappointed than ever. All the bulls that have been promising that the “worst is over” will be distrusted and even hated.
Question — Russell, why do you think this market is fated to fall apart?
Answer — Because the administration and the Treasury and the Fed has fought the primary trend of the market for so long and with such massive weapons. “The bigger they come, the harder the fall.” When the greatest attack on a primary bear market fails, the results are fated to be cataclysmic. The Administration will have shot all its ammunition. In fact, they may be OUT of ammo. And then what?
Question — Is there something different about this latest decline that began on June 12
Answer — Yes, there certainly is. Most market’s when they decline gradually become oversold. But this decline looks progressively worse as it continues. I’ve said that the span in Lowry’s Buying Power Index and their Selling Pressure Index is continuing to widen. Thus, instead of becoming oversold as the market sinks, the market is simply looking worse. On yesterday’s sell-off, the span between the two Lowry’s Indices widened to its greatest span in history — 790 points. Amazing — and bearish.
Depressing Comment — What’s so ominous about this market is that as it sinks lower, the internal statistics get worse! Normally, as a market descends it becomes increasingly oversold. Not this market. As this market heads lower, the Lowry’s statistics get worse.
“So how will this work out?” I ask myself. The market could just continue to sink with very little in the way of rallying ability, until the March 9 lows are tested and violated. The damn trouble with this market (from the bulls’ standpoint) is that it shows no signs of becoming oversold, the Selling Pressure Index just keeps creeping higher, and the Buying Power Index continues to deteriorate. This is one nasty bear market if there ever was one.
If you’re holding a fat portfolio of stocks, you’re literally standing on the tracks with the train heading towards you at 70 MPH. My advice — get the hell off the tracks.
That does it for Tuesday,
Your buddy from the golden West,
If you can’t respect and love that kind of writing from an 85 year old trader with more experience than most of the TPC readers combined then it’s time to have your head checked. Great stuff Mr. Russell!
*For more from Russell and his July 1 bearish call see here.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.