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The bond market turned up decisively on June 28 (see chart below), with interest rates simultaneously heading down. The stock market loves lower rates, and last week we saw the market up five days in a row. That hasn't happened since last April. The stock market's first reaction was to accept lower interest rates as a plus -- this, rather than accepting lower rates as a forecast of declining business ahead.

So question -- was the stock market simply bouncing up from an oversold condition -- or does the stock market know something that we don't know?

You can get every answer under the sun from that question. For instance, Abbey Cohen of Goldman Sachs believes stocks are undervalued by as much as 15 percent and will be heading higher. But the Congressional Budget Office sees a drop of 8% in corporate tax intake next year and a trend to lower corporate tax intake running through until 2010.

This is dangerous territory for comments, but my initial impression is that the stock market rally was a phony. I say that because I never saw the rising volume, the new highs, all the items that tell me that important institutional money was coming into the market. Subsequent action may prove me wrong, but that's the way I see it, after studying last week's statistics.

Now I want to say something about gold. I'm almost sick of all the analysis of every minor move in gold. "It's overbought." "It's consolidating." "It's topping out." "It's getting too much publicity." "The Commercials are doing this, or they're doing that."

I'll let you in on a secret. I really don't give a damn about all the daily comments on gold coming from the experts. Here's what I've done. When I look at my total assets, I put gold in a separate column. I don't place it in my asset column at all. I simply keep a total in my head. The "total" is deal with is ounces of gold that I own, and I don't calculate the price. I do that because I have no plans ever to sell my gold, and I don't care whether the gold price drops to 300 or whether gold rises to 3,000. I consider gold as an asset that I want to own no matter what.

You see, I believe the dollar is doomed. Just as every fiat currency ever created by man has been doomed, I believe the dollar is also doomed. I say this because it's in the nature of politicians to spend a paper currency into worthlessness. Under the fiat paper system, there's no restriction on what politicians will spend. After all, spending is the way the politicians give the electorate what it wants -- spending is the way politicians get elected.

Thus, the demise of the dollar is not a question of whether, it's a question of when. When Alan Greenspan took over the Fed the dollar seemed to be in fair shape and the US was a major creditor. But in the 18 year of the Greenspan reign, the dollar lost roughly 50% of its purchasing power. And today the US is the world's greatest debtor. On that basis, I expect the purchasing power of the dollar to decline considerably faster than it did even under the Greenspan years.

This, then, is why I'm not personally interested in analyzing gold on a daily, a weekly, or a monthly basis. Frankly, I don't care about the short or even the intermediate trend of gold. I know that ultimately gold will possess real purchasing power when the dollar is a worthless piece of paper.

I'm 82 years old. I've seen what has happened to the purchasing power of the dollar in my lifetime. That's not going to change, and it doesn't seem that politicians are going to change. So when it comes to gold, I'm only interested in one thing -- how many ounces do I own, and whether I want to add more today or whether I want to wait a while before adding more.

Of course, that doesn't mean that I don't have to write about gold. I'm selling an advisory report, and people want to know about gold today and tomorrow and next week. Fine, then my advice is to read what I write regarding gold -- but from an investment standpoint, my advice is to accumulate the metal and forget the trend. The trend is for fun, the long-term meaning of gold is a matter of financial survival. But what about the target price for gold? Forget it, better to ask, "What's the future of the purchasing power of the dollar? That's a question I can answer. The future purchasing power of the dollar is zero, nada, niente, zip.

Under the current system with a central bank creating and controlling our money, you are guaranteed to lose purchasing power two different ways -- via taxes and via inflation. The central bank system is the greatest scam ever perpetrated on an ignorant public. The eternal enemy of every central bank is -- gold.

The Fed under Greenspan refused to allow the economy to correct, thus holding the inevitable bear market at bay. The Fed did this by allowing tech to reach bubble status. When the tech bubble fell apart, Greenspan lowered rates to 1%, blew up the money supply and created the housing bubble. Now the housing bubble is deflating, and Bernanke may not be willing to create a third bubble (assuming he even can).

It's conceivable that the new "war on terror" will suffice for a third bubble. But each successive bubble requires more spending, more credit, and probably low interest rates. The US consumer is tapped out. US corporations are, in general, holding onto their cash. It's now up to the government to do the spending, to create the next bubble. But aside from wild spending, what the US government is creating is increasing debt and future liabilities. The dollar will be under pressure from deficits in US trade, budget and its current account. The US has become a giant credit, debt and deficit balloon. Can the giant debt-balloon be kept afloat? That's what we're going to find out in coming months.

Meanwhile, the US "survives" by selling pieces of itself to the rest of the world to the tune of $2.4 billion a day. And I wonder, "How long can this go on before reality strikes?"

Dollar -- I studied a lot of items over the weekend. Almost everything appears to be locked into a trading range. To my mind, the most interesting item on my computer screen today is the Dollar Index. Of course, the implication of a dollar breakdown are momentous. Consequently, let's study the chart of the Dollar Index (daily) below.

We see a series of four red arrows, each one lower than the preceding. The critical level for the Dollar Index is at the third horizontal blue baseline at #3. From the base at #3, the Dollar Index rallied to the third red arrow, then declined to baseline at #4. The big question is whether the Dollar Index will break below baseline #4 to attack the key support at #3. The Dollar Index is trading today at 84.40, with 83 the critical level -- the must-hold level.

TODAY'S MARKET ACTION -- My PTI was down 4 to 5688. Moving average was 5683, so my PTI remains bullish by only 5 points.

The Dow was down 36.42 to 11345.05. No movers in the Dow today.

Oct. crude was up 1.20 to 73.27.

Transports were down 90.02 to 4296.59.

Utilities were up .63 to 438.76.

There were 1335 advances and 1922 declines on the NYSE. Dow volume was 62.4% of up + down volume.

There were 102 new highs and 37 new lows. My 5-day high-low differentials improved from Friday's plus 360 to today's plus 405.

Total NYSE volume was a low 1.72 billion shares.

S&P was down 4.77 to 1297.53.

Nasdaq was down 16.20 to 2147.75.

My Big Money Breadth Index was down 4 to 716.

Sept. Dollar Index was down .45 to 84.53. Sept. euro was up .73 to 129.22. Sept. yen was up .01 to 86.66.

Bonds were higher again. Yield on the 10 year T-note was down to 4.82%. Yield on the 30 year T-bond was 4.96%.

Dec. gold was up 13.50 to 635.20. Sept. silver was up 31 to 12.34.

GDX was up 1.91 to 40.29. HUI was up 17.58 to 344.71.

ABX up 1.34, ASA up 2.50, GFI up 1.20, NEM up 1.84, PAAS up 1.40.

All around good day for gold and gold shares and silver. Gold closed above its 50-day (632) moving average today.

STOCKS -- My Most Active Stocks Index was - 8 to 351.

The five most active stocks on the NYSE today were -- F down .52, LU down .04, PFE down .38, XOM up .75, and S down .18.

The VIX was up; .58 to 12.22.

McClellan Oscillator down 56 to +95.

CONCLUSION -- Volume fading, fading, as investors show no clear mind as to what to do or which way to go. The rising oil caught a lot of shorts by surprise and did rising gold.

But I keep watching the dollar. If there are any surprises coming, I keep thinking they'll be in the action of the dollar.

That'll do it for Monday --

Russell

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I believe the most important comments of the day have been made by the brilliant Dr. John Hussman of the Hussman Funds. Here are a few of Hussman's most recent comments -- on his site he includes a chart showing that the growth rate of federal debt was declining throughout the Greenspan era, but the growth rate turned up in 2002. And it is still rising.

"Greenspan's term began in 1987. Only recently did inflation turn persistently higher. This isn't hard to understand. During Greenspan's term, the fiscal discipline of both the Republican and Democratic leadership brought the growth rate of the U.S. gross public debt down from 16% at an annual rate, to just 2% annually. It's relatively easy for the economy to thrive and for inflation to fall, provided the government isn't sopping up the economy's resources and issuing liabilities in return.

"The Fed's job is essentially to decide whether government debt should be forced into the hands of the public as Treasury securities, or purchased by the Federal Reserve (thereby creating currency and bank reserves instead). So while the Fed can control the form that the U.S. government's liabilities take, it has no control over the total quantity of those government liabilities (which is determined solely by fiscal policy). Fiscal discipline can make a genius out of any Fed Chairman. Fiscal irresponsibility, on the other hand, cannot even be rescued by genius.

"Dr. Greenspan will undoubtedly be glad that his exit was so fortunately timed. Dr. Bernanke, probably not so much. His main fault, most likely, will be in believing that the Fed can actually exert much power independent of fiscal policy."

Under the Bush Presidency, the growth rate of federal debt has moved steadily higher. Remember, Bush never met a spending bill he didn't love. Proof -- Bush never once used his veto to cancel a spending bill. Under these circumstances, the odds are that inflation is due to heat up in the period ahead. Government pencil-pushers will do their best to hide the indications of inflation.

A major deception used by the duplicitous Alan Greenspan was to remove the M-3 statistics. If you can't kill the messenger, at least hide him. Fed chief Bernanke claimed he wanted greater transparency at the Fed. Really? OK, Ben, then I dare you to bring back the weekly M-3 statistics. Let us know how much money and credit is being created. Yeah, I double-dare you.

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Floyd Norris, veteran columnist of the New York Times, has a very interesting article in Saturday's paper. The article is entitled, "Car-Sales Indicator Suggests a Recession is Near or Already Here."

The article (and chart) shows that whenever the rate of sales by new-car dealer has dropped 2 percent or more on a year-over-year basis, we have been on the edge or actually in a recession. The record is shown below --

Sept. 1970, index was down 2.9%, recession began 9 months earlier.

Apr. 1974, index was down 3.2%, recession began 5 months earlier

Nov. 1979, index was down 2.6%, recession started 2 months later.

Feb. 1991, index was down 2.6%, recession started 7 months earlier.

May, 2001, index was down 2.6%, recession started 2 months earlier.

June, 2006, index was down 2.4%, recession ???

Note -- many times a recession is already underway, but it is not recognized at the time.

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There's a really fascinating interview in this week's Barron's with David Richards (interview by Sandra Ward). Richards, formerly a top money manager. Richards sees inflation coming, and he likes oil, gold, Berkshire and Microsoft. Richards is bearish on the dollar and on bonds. A few paragraphs from the interview below --

When bonds were yielding 10% and 12% years ago, somebody referred to them as certificates of confiscation. At about 5% today, there is no real return in bonds and they might as well be certificates of confiscation. People like Bill Gross are bullish on bonds because they think the Fed will cut rates because housing is so weak. That's a possibility. If the Fed cuts rates, bond prices will go down because of the loss of international confidence in the dollar. I don't have a position in bonds.

Risk is not being paid for the way it should be at a time when everyone is under tremendous pressure to seek higher yields. The big municipal and state pension funds are underfunded, and can't make the 8% to 9% return assumptions in a 5% world. They're subject to the snake- oil salesmen coming out of Wall Street, and that's why there is a flood of money going into hedge funds and private-equity funds and derivative securities, under the assumption they will save them from raising taxes to fund the pensions at a time when people are desperate.

Question -- How does the geopolitical scene affect your scenario?

U.S. foreign policy is out of line with the economic situation the country is in, and it has been for the last few years. We are living on borrowed money, and we are living on imported oil.

We are living in a world today where people are increasingly angry at us, including our creditors and our oil suppliers. We don't give them any incentive to behave differently. President Hu Jintao of China comes to the United States, and he is not accorded the trappings of a full state visit. Talk about insulting your creditor! The administration goes to St. Petersburg and [Vice President Dick] Cheney makes a speech that basically insults the hell out of the Russians. He tells them how to run their country. This sort of bullying unilateralism is just nuts. The whole Arab world is angry at us because we sit on our hands and do nothing to prevent the Israeli destruction of Lebanon. Why should they buy dollars? Why should they buy U.S. assets?

Our behavior has been stupid and insulting and arrogant and, financially, these guys could say -- screw it.

Russia, for example, has $250 billion of reserves. This was a country that was bankrupt several years ago. Their finance people have concluded that they shouldn't hold so many dollars and need to diversify into euros and gold.

The Chinese are making noises about revaluing again because they have inflation problems. Wages and salaries in China are going up at a very rapid rate: The minimum wage in the south rose 17% recently. More seriously, the shortage of skilled workers, managers, accountants and financial people is extraordinary, and they have to bid for local workers. That means the cost of producing stuff in China will be rising. The cost to American consumers of exports coming out of China is definitely going to go up. There has been a huge margin squeeze there, and prices are now going to be pushed up.

Russell Comment -- Interesting interview, wouldn't you say?

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