What do you and I do?

Richard Russell BIG snippet
Dow Theory Letters
Feb 24, 2011

February 22, 2011 -- Over the weekend I gave the following a lot of thought. Does any of the following make me a bad person?

I never cared at all as to which teams would be in the Super Bowl or which team would win.

I didn't like the Grammys and I didn't wait to see who won in any category.

I couldn't care less who will win the Academy Awards. I'm tired of watching the entertainment business congratulate itself.

I don't really care whether Microsoft ever comes up with anything original.

I don't care if Sarah Palin becomes the GOP's presidential candidate or if she doesn't.

I don't really give a damn whether Michael Vick ever speaks the truth about his true sentiment toward dogs. I just think Michael Vick is a dog, a dirty dog.

I don't care whether Ben Bernanke (he's the Fed Chairman) ever confesses that he doesn't know what he's doing with quantitative easing.

Those are some of the items I thought about over the three-day weekend. And just in case you're interested, I decided that I'm not a bad person. Below are a few more of my weekend thoughts.

I like the Constitution of the United States.

I am suspicious of all fiat currency.

I think the US should print its own money. [????]

I'm all for the gold standard.

I like gold and silver.

I like dogs, and I like aquarium fish, both fresh-water and salt-water.

I loved my mother, and I was good to her (at least, I think I was).

I'm an optimist regarding the future of the world (although I think we're going to see tough times before we see good times again).

I believe (assume) that there is a great and divine power, but I don't like organized religions. I believe organized religions throughout history have done more harm than good.

I believe that all men (well, MOST men) have larceny in their souls.

I'm all for Arab revolutions. But the big kahuna, the really evil one, is stone-age Saudi Arabia, the ultimate cruel dictatorship.

I believe a hungry man is an angry man.

I think that in due time the world will go vegan. I can't believe (it's true) that we slaughter 125,000 cattle each and every day.

If it's considered uncouth to wear furs, why is it OK to eat hamburgers by the hundreds of millions each and every day?

Germany was nearly destroyed by inflation. To this day Germans fear inflation. America was nearly destroyed by deflation. To this day, Americans fear deflation.

President Obama is obsessed with being re-elected. So far, he's done nothing to reduce the US deficit. Will Obama sell the nation "down the river" to get re-elected? Obama has turned the whole problem over to the GOP, which is cute. Will anything at all get done about the deficits? We'll know before 2012 election time.

Long ago, I came up with two expressions that fit every occasion in life --

(1) Nothing's easy.
(2) Nothing works.

And I've also come up with the two most difficult tasks in life --

(1) To get the correct information about any particular matter.
(2) To get anyone to do what they say they are going to do.

OK, enough Russell nonsense. Referring to number 2 above, I said I was going to write a site on Tuesday, and now I'm going to do it.

Retire, get-away, escape, stay-cation, vacation, time out, sabbatical, down-time, hiatus, lay-back. There are dozens of words in the English language to describe the act of ending one's life work and relaxing and doing nothing during the precious years that are left.

But those words may be ancient history for future US generations. According to an article in last weekend's WSJ:

"The median household, headed by a person 60 to 62 with a 401(k) account has less than one quarter of what is needed in the account to maintain one's standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for the Wall Street Journal. Even counting Social Security and any pensions or other savings, most participants appear to have insufficient savings. Data from other sources also show big gaps between savings and what people need, and the current financial crisis has made things worse.

"Facing shortfalls, many people are postponing retirement, moving to cheaper housing, buying less-expensive food, cutting back on travel, taking bigger risks with their investments, and making other sacrifices that they never imagined."

The tax-deferred 401(k) accounts came into wide use in the 1980s. About 60% of households nearing retirement age have 401(k) accounts, according to government data, and these accounts represent the majority of most people's savings.

Vanguard Group, one of the biggest providers of 401(k) plans, has been advising people to place 9 to 12 percent of their income into retirement plans. Vanguard now advises that people place 12-15 percent of their income into retirement plans.

With the cost of food, energy, taxes, college, medicine and almost everything else rising, owners of 401(k) plans are having a difficult time putting even 9% of their income into their plans.

What does this mean, as we enter the time when the first generation of baby boomers reaches the retirement age of 65? It means that people will have to continue to work into their 70s and beyond. It also means that mass retirement will become an American memory.

The two areas that our government leaders have refused to attack (i.e. cut back on) are the military and entitlements. The military plus entitlements gobble up 80% of all government spending. If the US is to get anywhere at all with solving its monster deficit problem ($1.6 trillion for the current fiscal year), it will have to whittle back on both the military and our entitlements. If Social Security is pared down (and ultimately it will have to be attacked), retirement in America will be reserved for the very few.

This is going to cause trouble. Americans will have to face the fact that the standard of living in the US is in a downtrend.

To face stark reality, it doesn't make sense that the majority in China and India live just a step away from poverty while people in developed countries are continuing to live "the good life." This will change, and while the standard of living in the US and Europe will decline, the standard of living in Asia will improve.

All of which presents a problem for me and my subscribers. Is there any way that we can beat the dismal odds? The good old American way is as follows: We can make a fortune in the rising stock market or the precious metals market, fortunes that will tide us over during the coming difficult pay-back years. The other way is that we be invested so successfully that our investments will keep us "in good shape" during the coming deleveraging years.

But there's a problem. Stocks today are not priced to generate profits over the years ahead. Sure, under the auspices of the money-printing Fed, the stock market might continue to rise. But that's a risky bet on the Fed. For many investors it's the only course that makes sense.

There are roughly $2 trillion currently buried in the coffers of US corporations. Because of the many uncertainties that lie ahead, corporations are hoarding their cash. Corporate CEOs don't know what President Obama is planning next in his strategy of making the government "master of everything" while planing to distribute money from the "fat rich to the deserving poor" via taxation.

I've said before that the period of "making money" has essentially come to an end. The new era of "not losing money" or not losing purchasing power has arrived. Another way of putting it is that the era of protecting what we still have has arrived. Inflation, cost of living and rising taxes will all take their turns in eating into the good life that Americans have enjoyed since the end of World War II.

The years since World War II have been characterized by leveraging, borrowing, money creation and debt. Plus the US's great advantage of having a monopoly on the world's reserve currency. Since WW II, the US could print all the money it needed, and the world would accept that money.

I've always said that the dollar was the Achilles Heel of the US economy. Now, nations with low-salaried workers are competing with the high-cost workers of the US. The US insists that it wants a "strong dollar." But a weak dollar better serves the US's interests. A weak dollar helps US exports, and it eases the near-impossible task of servicing the monster debts of the US.

For decades, the rising price of gold has, in effect, devalued the US dollar. Those who hold large quantities of both real and paper gold have kept up with, or even improved, their relative standard of living. Gold is now held by a tiny minority of Americans. More recently, Americans have poured their money into an area that they "understand" and feel comfortable with. That area is the supposed safe-haven area of blue-chip US stocks.

Will the rising stock market serve to preserve the great American dream? The dividend yield on the S&P 500 Composite is now a "micro" 1.80%. This is as low as anything I can remember.

Since World War II, better than half the increase in the S&P Composite has been a function of reinvestment of dividends. But buying stocks today for their dividend yield is a fool's game. The only reason to buy stocks today is that you believe top-quality stocks (i.e. the Dow) will continue to rise and thereby serve as a safe-haven against the predations of the Fed and the US government.

From Ben Bernanke's standpoint, he's seen money-printing and low interest rates send tech stocks through the roof, he's seen money-printing and low interest rates send housing prices to the sky. And now Bernanke is watching and hoping as money-printing and near-zero interest rates send the stock market heavenward. If stocks continue to rocket higher, thinks Ben Bernanke, won't that spill over to housing and consumer confidence? "It has to," concludes Bernanke, who is opening the flood-gates via Qe2 and probably thinking about Qe3 if it's necessary.

In the meantime, the Bernanke-Obama team continues to worry about nonexistent deflation. The main deflation today is in the living standard of the majority of Americans.

And what do you and I do? The best I can come up with is that we sit with our holdings of gold and silver.

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Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters
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