Dow Theory Letters Richard Russell: to tell you the Truth, I’m Scared

In his latest edition of the longest-running financial newsletter ever penned by a single author, that author, Richard Russell, announced to his readers what his gut tells him is around the corner as 2011 moves closer to a close.

In short, he wrote, “I’m scared.”

The 87-year-old Russell, publisher of the 53-year-old newsletter Dow Theory Letters has seen enough of the best, and certainly more than his fair share of the worst American experiences throughout his long life—all, of which, has awarded him the additional respect from his peers in the financial writing business, above and beyond his rare acumen for the markets.

Among the worst of the Russell experience, stored in, what Market Watch’s Peter Brimelow refers to as, that “brilliant” mind, most certainly would include the Great Depression, WWII, all post-WWII recessions—especially the stagflation years of the 1970s, which nestled nicely within the 1968-1982 bear market in stocks—and various currency collapses throughout the world during his unsurpassed longevity working the charts, indicators and exercising prudent judgment.

Today, Russell wrestles with his emotions during his day-to-day observations of markedly increased homelessness in his affluent town of La Jolla, Calif., with “signs of hard times” everywhere you look, he wrote, “but will it get harder?” he asked.  “It all brings back bad memories of the 1930s.  And to tell you the truth I’m scared.”

And to drive home the gravity of the seriousness of Russell’s sixth sense for trouble, especially to those still sitting on the fence wondering what to do next with their portfolios, let’s review Russell’s expectations for 2011, originally published on the Internet as early as January 10, 2011.  You may agree; his nose for future events has developed quite well throughout the decades.

“This year [2011] might even be a black swan year,” stated Russell. “Certain events are now in place, events that have never been seen before in human history … we are dealing with debts so monstrous, so huge, that most people can’t fathom them … The Muslim community is huge, and it has moved heavily into many European nations. The radical Muslims intend to express their world leadership … Dictators in North Korea and Burma and Iran and Africa are no longer safe in that they can no longer keep their populations ignorant and in slavery,” he added.

“There is a huge disparity between the wealthy and the poor. The poor greatly outnumber the wealthy. This has all the ingredients for revolutions in the age of instant and world-wide communication.”

The makings of a “black swan” event are in place for 2011, he concluded.

Russell’s intuition apparently told him that the Bernanke Fed was about to upset the applecart with his well-telegraphed plans—first, in disrupting those countries with very low global Purchasing Power Parity among its population.  Inflation raises food and energy prices, initially, destroying family budgets in poor countries such as Tunisia, Egypt, Morocco and other faraway places, where more than half of household income spent there goes to food and energy expenses.

Now it appears money printing will resume once again—and at a big clip, too.  The eurozone bailouts, the Japanese weak-currency policy, the Swiss loosely pegging the franc to the euro, China’s reinstatement of a U.S. dollar peg, the further monetary easing at the UK, and the U.S. Fed now hinting that additional easing above ‘Operation Twist’ may be necessary.  It’s not much of a stretch to wonder why Russell is scared.

“Gold — When all else is suffering from devastation, when politicians have destroyed their own sovereign money, gold will still have value, and gold will still represent buying power,” he wrote earlier this week. “I’m holding mine for the same reason that I own health insurance.”

Echoing Russell’s sentiments regarding the merits of owning gold at this time, precious metals specialists, GoldCore recently wrote in a recent gold market assessment piece on its Web site, and linked from “This demand [for gold] is due to concerns about the global economy, growing inflation risks and the real risks posed by currency debasement being seen globally.”

Adding, “Should gold go parabolic, it may be time to reduce allocations to gold – but we appear to be a long way from there yet.”

Continuing, “This is not the end game which unfortunately looks increasingly like an international monetary crisis – centered on either the U.S. dollar or the euro or both.”

“This demand is due to concerns about the global economy, growing inflation risks and the real risks posed by currency debasement being seen globally.”

Yup, scary times, indeed.

Dexia Collapse further demonstrates Case for Gold

At this point, during the third year of the Kondratiev Winter, the politicians’ blueprint to hide another global Lehman-like collapse of the financial system should be clearly evident to anyone even remotely paying attention to the mentally-exhausting saga in Europe.

With this weekend’s collapse of the Belgium/France retail bank Dexia Group, the obfuscations, misinformation campaign and downright lies surrounding the imminent fall of this behemoth financial institution could easily serve as yet another textbook case for owning gold.

The kickoff to gold’s rise to prominence, once again, began this Sunday with the fall of Dexia and events leading up to its fall as not reported by media, a leading Wall Street institution and a credit agency.

“A severe crisis in Europe could cause significant damage by undermining confidence and weakening demand,” Treasury Secretary Tim Geithner told the U.S. Senate Banking Committee.

Taking politicians’ comments as worthless is obviously a given, but when those paid in the private sector to provide the heads up continue failing time and time again, gold shines—as it always has throughout history’s enumerable variations on the same play, but performed by different actors.

Here’s how the Dexia collapse was handled by those worthy of the big bucks:

First, the European banking system ‘stress test’ was performed to demonstrate the health (or lack thereof) of individual banks to absorb an impact of debt write-offs during the crisis.  Bogus results, either intentional, or not, were dressed up in  pomp to an ‘elite’ audience of financial shamans last week.  The irony of the conference in London wreaks of Captain Smith’s ‘unsinkable’ Titanic.

At the Bank of America Merrill Lynch Banking & Insurance CEO Conference held in London on October 6—three days before the Dexia bankruptcy announcement—America’s most destined to fail financial institution (that, for three days, shut down its Web site, presumably to prevent a run on Warren Buffett’s bank) assured the crowd of money ‘experts’ that Dexia would withstand a direct hit to an iceberg.

The now infamous ‘slide 9‘ of the presentation revealed that the champ of the rough financial seas was, indeed, Dexia Group.  The bank ranked No. 1 after the stress test.

Meanwhile, through the mainline arteries of financial information reporting, Moody’s eased itself into proving it was worthy of handicapping Dexia’s chances, decided on Oct. 3 to place Dexia on ‘review of a downgrade’ —fearing, again, it, too, would be placed on investors’ watch list for another credibility downgrade in the rating agency business.

“Moody’s Investors Service has today placed on review for downgrade the standalone bank financial strength ratings (BFSRs), the long-term deposit and senior debt ratings and the short-term ratings of Dexia Group’s three main operating entities — Dexia Bank Belgium (DBB), Dexia Credit Local (DCL) and Dexia Banque Internationale à Luxembourg (DBIL),” the credit reporting agency released in a statement.

“The review for downgrade of Dexia’s three main operating entities’ BFSRs is driven by Moody’s concerns about further deterioration in the liquidity position of the group in light of the worsening funding conditions in the wider market.”

Goldman Sachs, in its mission to do “God’s work,” almost missed warning investors of its concern for the Belgian/French bank by taking a full two days after Moody’s to figure out that its Buy recommendation may appear foolish days before the collapse.

“Our thesis was that, given time, Dexia’s legacy assets should run down, its unrealized loss pull to par (independently of credit spreads), in turn boosting equity growth and reducing funding requirements,” stated Goldman in a October 5 release.”

It continued, “The opposite took place: a deepening sovereign crisis increased the riskiness of these assets, resulting in a wider AFS negative reserve and forcing higher losses on disposal as well as higher than anticipated funding requirements. The headroom to progressively delever is therefore taken away and forced immediate action, as announced by the bank on October 4.”

After careful review, Goldman reported that Dexia was a tossup—downgrading the bank form a Buy to a Neutral.  Water was coming in at the bank’s hull, but the ship was already deemed unsinkable.

On Sunday, Dexia was reported as sinking to the ocean floor.

“Gold will eventually rally exponentially and investors who don’t own the precious metal are ‘insane,’ and may be showing ‘masochistic tendencies,’ Robin Griffiths, technical strategist at Cazenove Capital, told CNBC on Jan. 11.

Who’s Cazenove Capital?  It’s been rumored for decades to be the financial institution to the British royal family.

Warren Buffett’s strange $5 billion play in BofA

As Warren Buffett makes headlines again with his $5 billion preferred stake in Bank of America (NYSE: BAC), many questions have swirled surrounding Buffett’s thinking about this complete dog of a bank.

The problems with BofA’s balance sheet are so numerous, just with the bank’s tier 1 and 2 assets, alone, that the bank should have gone under in 2008 along with Lehman.

Here are the problems with BofA’s balance sheet:

Yves Smith (Susan Webber of Aurora Advisors) of has looked at the second-mortgages assets of BofA and cannot fathom a write down of anything less than 60% of the $80 billion reported by BofA.  That’s $48 billion.

Smith also winced at BofA’s “Goodwill” fluff of $78 billion, stating that “perhaps a lot of their $78 billion of goodwill might have air in it.” Add that to the $48 billion and we get a total of $126 billion in questionable valuations.

Next, BofA is being sued by everyone who’s ever heard of the bank, which according to could amount to $20 billion in judgments and/or settlements to make whole the customers of its Countrywide subsidiary.  Now we’re up to $146 billion of inflated garbage.

Next, European exposure to Europe sovereign debt totals $17 billion, of which $1.7 billion is on the line with the PIIGS (Portugal, Ireland, Italy and Spain).  $1.7 billion is not enough to put the bank in trouble, but the domino effect of contagion within the banks of France and Germany could be substantial.  Would BofA have to set aside billions more for the inevitable demise of the euro?

Lastly, the biggy.  The Bank of International Settlement (BIS), the central bank of central banks, has notified the 14 largest holders of tier 3 derivatives to begin clearing them by June 2012.  Of the $697 trillion on the books of the top 14 institutions, of which BofA is one of them, how much in write-offs will BofA have to take?  Who knows?  And that’s the problem.  BofA’s balance sheet, like the other TBTF banks report fictitious numbers.  That write off could be too large for anyone to bailout.

Buffett knows all of this.  Then, what in the world is he thinking?

The $5 billion “investment” in BofA may just be Buffett’s way of remaining a “good” guy with Washington and the American public during the slow-motion collapse of the financial system.  He’s already been the biggest beneficiary of TARP and clandestine shenanigans from the Fed in the bailout of AIG.  Hank Greenberg took the lion’s share of the hit in the AIG scandal, and the American people bailed out Buffett and his precious AIG.  Buffett owes the American people nearly everything he’s got, because he knows who’s going to be stuck paying the bill for the biggest mess yet to come.