Friday morning presented one of those very special moments that I will treasure for the rest of my life. The occasion was my first one-on-one discussion with the legendary Richard Russell (having only met in groups previously). I am visiting La Jolla, San Diego to attend my partner John Mauldin’s annual investment conference and couldn’t let the opportunity pass by to look up the 84-year old author of the Dow Theory Letters in his office in La Jolla Village.
Mr. Russell hardly ever takes appointments, but I had the perfect excuse: I have just acquired a copy of the first edition of his book “The Dow Theory Today,” that was first published in 1961, and he kindly consented to autograph the book.
Images of the cover and the autographed (and personalized!) page are shown below.
This was a truly memorable encounter as I have been subscribing to the Dow Theory Letters (which have been published since 1957) for the past 25 years, and I consider Mr Russell as my mentor (albeit not in person), in the common-sense faculty of investment.
We shared a few stories as I was sitting next to him in front of the computer screen on which Friday’s newsletter was taking shape. Although the visit was brief, and we did not get to discuss markets in any detail, I thought a few paragraphs from Monday’s Dow Theory Letters would provide readers with an apt summary of how Mr Russell sees the outlook for the stock market at this point in time.
Question: Russell, please answer this, at the January 2008 lows, stock values never came close to what we expect at a primary bear market bottom. What do you make of that?
Answer: I’ve thought about this situation, just as I thought about this same situation at the October 2002 lows. My answer is the following – neither October 2002 nor January 2008 represented a major or primary bear market bottom. Both, I believe, were important secondary or cyclical correction-bottoms within a continuing primary bull market. I see no other explanation. Remember, one of the most important Dow Theory concepts is that bear markets end with stocks at great values. Stocks were not great values in the classic sense at October 2002 or January 2008.
Question: Wait, Russell, whoa – are you telling me that we’ve been in a primary bull market ever since the early 1980s, and that we’re still in that same primary bull market?
Answer: That’s correct. That’s what I’m saying. Somewhere ahead we’re finally going to enter a true primary bear market, maybe one of the greatest and most tragic in history. That future bear market will end with something we haven’t seen since the 1980 to 1982 period, and I’m talking about great values in stocks. And when I say great values I’m talking about blue-chip stocks selling in single-digit price/earnings ratios while at the same time providing dividend yields of 6-7-8%, the kind of yields we last saw at the lows of the early 1980s.
Question: What do you think could bring stocks down to those levels? What might the market be discounting?
Answer: Here I’m only guessing, but I think it could be the dollar losing its reserve currency status. If that happens, the US would no longer possess the incredible and singular privilege of printing the same money in which it is indebted. In other words, the dollar would no longer be accepted by the rest of the world as the reserve currency. And the US could no longer print itself into solvency.
Question: Russell, to get back to your previous statement, you said that we are still in a primary bull market – the same one that started from the lows of the early 1980s. If that’s correct, if we’re still in a bull market, then almost by definition shouldn’t we see new highs in the major stock averages somewhere ahead?
Answer: Strange, almost impossible as that may seem, yes I think there’s a definite chance that somewhere between 2008 and 2010 we will see new highs in the major Averages. The stock market occasionally does the totally unexpected, and you can put ‘new highs’ in the major stock averages on that list.
Consider the following – pessimism has now enveloped almost the entire nation. Estimates of home foreclosures are running into the millions of units. The American consumer is buried in debt and stranded with little or no savings. Manufacturing is slowing down in the US. Leading analysts are competing with each other with bearish forecasts. People are calling the Fed impotent or even helpless in the face of the enormity of the problems we face. On top of everything else, the unfunded liabilities in Medicare and Social Security are running into the multi-trillions of dollars. The presidential candidates do not even want to talk about the nation’s potential liabilities. And on top of everything else, we’re mired in one of the longest and most expensive wars in US history.
Yet slowly, almost imperceptibly, the major stock averages have been building huge bases. Since January 22, the majority of stocks have stopped going down – in fact, they’ve been rising.
In the face of these improving market conditions, the short interest on the NYSE continues to build. The latest statistics, covering the latest two-week period to March 31, show that the short interest on the NYSE has risen to an all-time record high of 16.142 million shares sold short. If I’m correct, if we have concluded a correction in an ongoing bull market, then this is an explosive situation with a record number of shorts locked in on the wrong side of the market. As the market slowly builds strength, these shorts will be forced to cover.
Question: Russell, what kind of fundamentals would you expect to accompany a resumption of the primary bull market?
Answer: An incredible amount of fiat paper (currencies) is being injected into the world markets. There’s also a mind-numbing amount of currency on the sidelines. There is more than $3.5 trillion parked in money market funds in the US. Trillions of dollars are now lodged in the so-called sovereign wealth funds. Arab coffers are bulging with dollars waiting to be spent. I’ve yet to see a figure covering all the currencies that are parked in banks, equity funds, mutual funds, pension funds, and in private hands. The sum total must be almost beyond belief.
Ironically, the longer this recession or whatever you want to call it lasts, the more money will be pumped into both the US and the world economies. Here in the US it now requires over five dollars in debt to generate one dollar of GDP. The creation of new money is massive, with the Fed and world central banks running the printing presses overtime as they seek to ward off recession and bring back prosperity.
Once it is recognized that we are in a bull market and that the market is headed considerably higher, a goodly percentage of this money is going to pour into the various stock markets of the world. The result should be a bull market speculative phase of epic proportions.
And that, according to the venerable R man, is the lie of the investment land.
Just a last thought: I paid $295 for the first edition book in 2008 compared to its original price of $3.95 in 1961. Any chance of another 47 years of a compound growth rate of 9.6%? But, then again, I am now the proud owner of a priceless item that, as a result of its author’s special place in my life, is not quantifiable in terms of money.