The 1929 & 2007 Bear Market Race to The Bottom
Week 64 of 149
International Gold Flows 1925 to 2008
The Mysterious 94 Million Ounces of Gold
Easy & Tight Money 1954 to 2008
The Big "Policy Challenge" I see Now
BEV Charts from 1938 to 2008
2 January 2009
Color Key to text below
Boiler Plate in Blue Grey
New Weekly Commentary in Black
Here is the BEV chart for the Bear Race.
The weekly closing price BEV (Bear's Eye View) results for week 64 in the Dow Jones' 1929 & 2007 bear market's race to the Bottom are as follows:
1929-32: -49.96% from its weekly closing high price of 380.33
2007-09: - 35.89% from its weekly closing high price of 14,093.08
Since 24 November 2008 to 31 December 2008, (27 trading days) here is the DJIA's trading range in daily basis BEV terms (from the October 2007 Terminal Zero):
Highest: -36.93% (08 Dec 2008)
Lowest: -42.47% (01 Dec 2008)
But then we got a big +2% day on 02 Jan 2009. That took us past the 08 December highs and up to -36.22%.
(note the BEV chart is on a weekly basis, this data is daily)
It's fair to say in BEV terms (between 0.00% and -100%) that at the end of 2008, the DJIA would not go below -45% but could not get above -35%. The first day of trading seems to be telling us someone wants this market going higher in January. I suspect we'll get a nice run up for a while.
It's time for a change. Starting on 08 Dec 2008, the DJIA pretty much stopped doing anything for the holiday season. We can see the results in the volatility chart below. It is doubtful this moment of calm in the 2007/09 Bear market will last much longer, and it looks like the first move will be up.
But I'm still thinking this market is heading for the #2 spot on the list of Historic Bear Markets. Expect a long, bumpy ride (up and down) along the way down past the -51.51 BEV line if I am correct.
Important Correction: Due to an editing error in Wk 62, that table contained bad information. Had you cut that table out as a reference for historic bear markets, as I suggested, please remove it and replace it with the above corrected table.
Below is my volatility chart comparing 2007's 200-day moving average closing price volatility with 1929 bear market volatility.
Note: 2007 values are actually positive. They were inverted so 1929 would fit on top and 2007 on the bottom. So for 2007, please forget the negative valuations and focus on the percentages.
1929, Wk 64 200 Day Moving Average Volatility: 1.15%
2007, Wk 64 200 Day Moving Average Volatility: 1.76%
The plots for the 40 & 200 day moving averages are heading down. But as we can see in the table below, this week's volatility had a big jump upwards.
(Remember, with the 2007 data up is down and down is up!)
Historically, daily 1% swings from the pervious day's closing price in the DJIA, while not uncommon, should not occur on an almost daily basis. The stock market is running a fever with its "Persistent, Extreme Volatility."
The Step Sum is heading higher and forming an upward channel. It made a good call on the DJIA this week and we can see that the DJIA has broken out of its downward channel.
Well, if we're to get a good bounce up, the DJIA must first breach the -35% line and then pierce the -32.31% resistance line made on 04 November 2008. I expect this to happen. Heck, a few bazooka blasts from Paulson can do it before he finishes his term as Sec of Treasury. But bull markets last years. I don't see this lasting more than a few months.
The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish the Step Sum will rise. When bearish it falls.
Think of the "Step Sum" as the sum total of all the up and down "steps" in a data series as prices change over time. An Advance - Decline Line for a data series derived from the data series itself. Logically, to have more up days than down days during a bull market makes sense as does having more down days than up days during a bear market. Understanding the Step Sum is no harder than that.
International Gold Flows 1925 to 2008
The chart below plots US Currency in Circulation (CinC) and the US Gold Reserves in US dollars. I've indexed both to 1.00 for 05 January 1925. This data for the most part (note gap in US Gold data during WW2) has been continuously published weekly in Barron's since 1925.
There was a significant inflow of monetary gold into the US from 1934 to WW2 that people today, unfamiliar with a gold standard, would not understand. Previous to 1934, any US paper dollar holder, including US citizens, could exchange their US paper dollars for US gold coins. It worked the other way around too. For reasons of convenience, people would often exchange their gold coin for US paper dollars. Heavy gold coins would ruin pockets in people's clothes. Then FDR criminalized gold ownership for American citizens. After 1934, if an American went to a bank to exchange a $20 gold coin for $35 US paper dollars, they might go to jail! But "policy" had a sweet spot for foreign central banks (FCB). They could continue converting US paper dollars into US gold until August 1971.
So, as World War Two approached we see a huge increase in US Gold Reserves. The 1930s are now known for its deflation. However Barron's columnists of the 1930s were very concerned about impending price inflation. The basis for their fear was this huge rise in US gold which increased the US money supply.
Financial journalism in the 1930s was very pro-gold standard, but the gold standard had its own unique problems too. We see one of the gold standard's problems below. War fears brought a flood of gold (money) into the US financial system.
Barron's columnist (75 years ago) saw inflation as an increase in "circulating medium" or more dollars in circulation whatever the source. In their minds, to have a huge increase in US dollars while factories were shutting down in the United States could only result in price inflation.
I recall from skimming over the old issues of Barron's, as I frequently did when compiling my data, the source of this gold flowing into the US balances sheet was from European central banks. This makes sense as Hitler made no secret of his desire for war. So European monetary gold was converted into US paper dollars, which to foreign central banks was as good as gold. These dollars then went back to Europe for monetary reserves. Hitler was denied much gold in his looting of Europe because of what we see above.
So understand that after 1934, the huge increase in gold reserves (red plot, read off the right hand scale!) represents other nation's gold on deposit in the US Federal Reserve Banking System. The paper dollars they accepted in return for * their gold * was their receipt from the Federal Reserve Banking System for gold held on deposit in their account within the United States. This is classic gold standard stuff.
Barron's stopped publishing data on US gold reserves during WW2. I suspect this is because this data was not published by the US Treasury during the war. The war made a total mess of the world's economy and I doubt the US Government redeemed any US paper money for US gold from 1942 to 1948.
From 1948 to 1958, the world's central banks seemed content with leaving its gold, (and it was their gold) in the NY Federal Reserve's basement bullion vault. To this day this is still true. However, in 1958, (thirteen years after the end of WW2) we can see that the FCBs started to withdraw their gold from the US banking system. Anyone who subscribed to Barron's from 1950 to 1958 could understand why. Every week the US government was issuing paper money in excess of gold held in its reserves.
This was a concern to FCBs. According to the Bretton Woods Accords, gold was no longer a monetary reserve. In gold's place was the US dollar. But nations still had the option of holding actual gold in their own account or holding dollars that the US government claimed was as good as gold. In 1958, confidence in the US government's commitment of the $35 to an ounce of US gold was weakened to the point were FCBs where exchanging their paper US dollars for ounces of US gold.
However, it is most likely that the US gold in question actually came to the US money supply from the capital flight of pre-Nazi Europe.
Remember, Europe in 1934/39 deposited an ounce of gold in America and they received in return $35 paper dollars. From 1958 to 1971 the process was reversed. The run on the US Treasury gold reserves (that most likely belong to other people) was on.
The chart below is from data compiled from the actual issues of Barron's published decades ago. This is the same data the FCBs were following. We see below how they responded to the American "monetary policy" of unlimited CinC creation fixed with a limited supply of someone else's gold.
The table below gives dates as well as paper to gold ratios for key events from the beginning to the end of the Bretton Wood's monetary era. It is undeniable, the United States continued to issue paper dollars in excess to its gold reserves until the dollar's link to gold was broken.
A ratio of 1:1 would guarantee the $35 for 1 ounce of US Treasury gold. By the time Lyndon Johnson was inaugurated in 1965, $35 paper dollars were backed by only 0.39 ounces of gold. If in 1965 the US Treasury had to mark to market their paper dollar to gold, the fair market value of the US's monetary gold would have been $89.25 an ounce. (note: appreciating gold = depreciating dollar) The Bretton Woods Monetary Accords were abandoned by the US long before Nixon became president in 1968. But that is not how it's taught in college.
For foreign central banks who deposited their ounces of gold in the Federal Reserve System at the rate of $35 an ounce, it became apparent that holding paper US dollars as a proxy for monetary gold was becoming a game of musical chairs.
Below is a chart with weekly data points for the paper dollar to gold dollar ratio from 1925 to 2008.
The Mysterious 94 Million Ounces of Gold
All of my data comes from Barron's. So please understand I am not privy to any information concerning official communications or agreements between central banks and the Federal Reserve. I also have no information concerning how much gold the US government purchased for its own account from 1934 to 1971.
I am only noting that after 1934, when FDR confiscated the American people's gold and then revalued it from $20.67 to $35.00 an ounce, the US reported, via Barron's, that it had $7.04 billion in gold reserves. I'm assuming this is 100% American gold. At $35 dollars an ounce, that is a total of 201.14 million ounces of monetary gold.
Using Barron's as my source, it seems that Foreign Central Banks (FCB) sent 447.43 million ounces of gold to the US from 1934 to 1949. But apparently, these FCBs only withdrew 353.43 million ounces from 1949 to 1971. Comparing the 1934-1971 flows of gold coming in and going out of the American banking system, there seems to be 94 million ounces of monetary gold that did not return from where it came from.
When Nixon closed the gold window in August of 1971, the US government reported it had $10.33 billion in gold reserves @ $35 dollars an ounce. This is a net increase of $3.29 billion in gold dollars from 1934 to 1971. At $35 per ounce, this is also a net increase of 94 million ounces of gold in the account of the US government from 1934 to 1971.
So who owned that gold? Except noting the in and outflows of gold reported in Barron's, I really don't know who owned what. My first instinct is the US Treasury did it to someone - again. But then maybe not.
Remember, the US was paying for the Cold War from 1949 to 1971, and did great service for Europe & Asia with the Marshall Plan. Remember too what the US did for Europe during WW2 with its blood and money. Then consider the history of geo-political hegemony. What other hegemon offered the world it dominated with anything like to Disney Land and Hollywood? But then Disney Land and Hollywood are not part of the US government as say Fannie Mae or Freddie Mac would be, at least not as of January 2009.
If the day comes when the story of monetary gold in the 20th century is finally told, we may find that the "policy makers" on both sides of the Atlantic and Pacific Oceans, in 1971, just decided in a backroom agreement to let the US keep those 94 million ounces for services rendered. Considering everything from 1934 to 1971, this would have been a justifiable consideration for American's allies to have rendered. But then with the Cold War on, the US was in a position to make an offer its allies couldn't refuse.
I'm sure to get e-mail from those who disagree with me on this. In any case, to the best of my knowledge, I am the first to ask about this mysterious 94 million ounces of monetary gold.
Easy & Tight Money 1954 to 2008
Ok Mr. Lundeen, what is the point of all this?
Well from 1934 to 1981, it wasn't just "gold-bugs" who were interested in gold and excessive CinC inflation. By 1954, the US Treasury Bond Market was more than just a little upset about the slip-shod "monetary policy" coming from Washington. As we can see in the chart below, the bond market was demanding higher interest rates for money loaned to the US government.
Just because the US government informed the world that gold was no longer money, the world in 1971 did not necessarily agree.
To get a feeling of the financial market's confidence in American "policy makers" after "Nixon closed the gold window", this quote from Barron's will do nicely.
"To serve as a central banker, as BARRON'S again reminded its readers early last year when G. William Miller took over at the Fed, one needn't be a flim-flam man, but it helps."
- Robert M. Bleiberg: Barron's Managing Editor,
11 June 1979
Robert M. Bleiberg was a very influential figure in the financial media. He was the man who provided ample ink and news print for commentators such as Richard Russell, James Dines, Harry Schultz, Elliot Janeway and other pro gold proponents in the pages of Barron's from the 1950s to the 1980s. Pro-gold events were always covered with several pages of new print to see what the dastardly Federal Reserve was doing. When interest rates started to rise in the 1950s, Barron's readers were just as knowledgeable on the major details as were foreign central bankers. Washington was trashing the US dollar. Read all about it in those old issues of Barron's.
It's different these days. The financial media still comment on Washington devaluing our dollar. But missing today is a sense of true outrage. For all the actual information people get on CNBC or the financial media in general, today's story line might just as well be poised as a struggle between the greatest minds on this side of the galaxy, wrestling with an extraterrestrial deflationary force whose source is not of this world.
"We 'policy makers' were doing nothing but minding our own business. Then suddenly, and with no warning, from outer-space these death rays of deflation were pointed at Wall Street. To save Earth's financial system from this alien attack, we must respond with extreme measures!"
- Secretary of the Treasury Paulson: congressional testimony 2008.
So if gold has been up every year since the 2000 stock market bust, so what? It's not surprising that gold has not gotten the coverage it should have when the financial media has focused upon the post Greenspan alien assault on our credit markets.
OK, back to business.
I was pointing out that the chart above showing the Fed Funds and US Treasury long bond yields from 1954 to 2008 was proof that from 1954 up to 1981, the world's markets were having problems with Washington's "monetary policy."
Within the context of addictive behavior, from 1954 to 1981, the Fed's "liquidity injections" were having a toxic side effect in the credit markets. In 1981 the toxicity of Washington's "monetary policy" reached its peak when the US Treasury was forced to offer a 15% coupon for its 20 year bond. This extraordinary interest rate on an AAA rated US Treasury bond occurred when gold was selling at prices inconceivable before 1971.
The problem "monetary policy makers" were having from 1954 to 1981 was their "liquidity was flowing into CPI, consumer cost of living price inflation. Paul Volker changed all that when he raised Fed Funds to 21%, 6% higher than the US long bond yield of 15% and held it there for nine months.
As you can see in the above chart, Paul Volker did not stop CinC inflation. He did however divert his river of CinC inflation from flowing into consumer prices into financial assets. The bull markets returns in financial assets from 1982 to 2007 were mostly inflation.
So from 1954 to 1981, CinC inflation went into food and rent increases while wages lagged behind inflation. By 1981 people were ready to rebel. From 1982 to 2007, with few exceptions, IRAs and 401K's appreciation exceeded wage gains year after year. People loved it, and they loved their pusher, Alan Greenspan. Dr. Greenspan medicated the financial markets as often as the addicts demanded it!
In 2000, the stock market went into monetary toxic shock, Greenspan, with the full support of the US Congress and NY Banking establishment, put an inflationary I.V. drip into mortgage financing that today is still confused as a bull market in real estate. Few people actually purchased a house. What "consumers" actually did was to lease a few hundred thousand dollars for 30 years at foolish interest rates.
My next chart's plot is made by subtracting the US long bond yield from the Fed Funds Rate. This chart should be looked at with my chart plotting the Fed Funds Rate with the US long bond yield from 1954 to 2008. The two charts are derived from the same data but offer two different views of 1954 to 2008 "monetary policy."
Times of tight money have the above plot positive, easy money is shown by negative values.
CPI inflationary pressures increased from 1954 to 1981, but during the Johnson administration the "policy makers" started to invert the yield curve (positive data point values in the above chart) to control "inflation." "Inflation" being defined by economists as rising consumer prices.
When Paul Volker raised the Fed Funds 8% points above the US Treasury's long bond yield, and kept the yield curve steeply inverted for nine months, everything changed. Using my addiction analogy, before Volker, "liquidity" was making everyone sick, after Volker "liquidity" became the party's drug of choice.
Examine the chart above closely. Before Volker the financial markets could take a steeply inverted yield curve, (1966, 69, 73-75, 79-82). After the stock market crash of 2000, Greenspan found it impossible to have the yield curve inverted even by 2% and Bernanke feared to invert it by even a pathetic 1%! Bernanke has even lowered the Fed Funds rate to an effective 0%. The best way to understand the "policy makers" macro-economic predicament is to see how the financial industry is upchucking on the Fed's "liquidity."
Note on the charts below. From 1938 to 1988, data is from the discontinued Barron's Stock Groups. From 1988 to 2008, data is from the DJ Total Market Industry Groups (DJTM). The DJTM has several insurance indexes. I used the "Full Line Insurance" index for my insurance company data from 1988 to 2008.
Note how the Banking stocks have increased their volatility since the US Closed their gold window and took the world off the gold standard in 1971.
I will admit that this chart is basically AIG's downfall. But AIG was huge in the unregulated OTC derivatives markets.
It should be noted that in the late 1990s, Alan Greenspan and Robert Rubin testified before congress on the need to keep the OTC derivative markets "unregulated." Both testified that this unregulated market made the 1930s era Glass Steagall Act obsolete. It was televised on C-SPAN.
C-SPAN is public theatre, the real show is offstage. The block-heads in congress were most likely told that if they wanted to make home mortgages available to the unemployed, they better not ask any questions on how the sociopaths on Wall Street were going to make that happen.
I don't recall seeing CFTC testifying in 1999 before congress on the OTC derivatives. The CFTC's website used to state that one of their missions was to ensure that all contracts under their supervision were required to be standard contracts (each contract the same) and traded in liquid markets. Contracts in the unregulated OTC derivative market are non-standard (each contract is unique) and these contracts have been known to be illiquid, and so un-tradable in any market at the time of the 1999 congressional testimony. SEC, CFTC, and I suspect many others in the alphabet-soup of government regulation are all managed by the usual suspects from academia and Wall Street.
I really get upset when I hear journalists (trained in their craft at schools of journalism at major universities, where else?) question the viability of the "free-markets." The world lost its free markets with the creation of the Federal Reserve. That and politicians now use the financial markets as a prop for reelection every two years.
The Big "Policy Challenge" I see Now.
In 1981, Paul Volker diverted CinC inflation from CPI consumer inflation into financial asset inflation. Starting a few years ago, CinC inflation decided, on its own, to flow back into CPI consumer price inflation as financial assets are saturated with "liquidity." Look at the BEV charts above for the banks and insurance companies, the mortgage market is still having convulsions, the Fed's "liquidity" is killing the credit markets. These markets are dying from * excess * "liquidity." Their ability to absorb additional CinC inflation is very limited. But the "policy makers" urge to increase the money supply is pathological! When the financial markets crumble, the endless rivers of "liquidity" will find their way into CPI inflation.
That is not good for the stock market. But it will be good for gold, silver, copper, food items. Companies that produce metals and food stuffs in geographical regions where the political classes keep their hand out of other people pockets should "out perform the market" by a good measure.
Below are a few more BEV charts from 1938 to present. I love the way a BEV chart can put decades' of bull and bear markets into perspective.
Gad-zooks!
If I were to go asleep for 20 years, like Rip Van Winkle, I think the safest place to put my money would be in the major oil companies.
Office equipment from the 1930s was the home of IBM and other high tech stocks. So from 1988 to 2008 I used the DJTM, Technology Index data to bring it up to-date.
This looks terrible, but I can't help thinking that CinC inflation has copper in its cross hairs. On the theory of "buying them when they are cheap" the copper producers have not been this cheap since 1938. But beware that in a global depression, demand for copper will decline.
I like gold and silver mining. As long as the politicians who control the geographic region where the gold mines are located don't nationalize the company's assets, these companies will do well in the next decade. Think of gold and silver as the ultimate sponges for sopping up the Fed's "liquidity.
It will be hard to do business in the United States for a few decades. Poor GM.
2 January 2009
Dow Jones -40% Declines From 1885 to 2008 is the article that inspired this race of 1929 & 2007 Bear Markets. You may want to read that article to understand my "BEV Chart."
Dow Jones Industrials Average Market Volatility is the source for my volatility studies.
The Lundeen Bear Box and Step Sum is the source for my Lundeen Bear Box and Step Sum Chart
Note For the Record: Mark Lundeen does not want a devastating bear market in the next two years. However, in full view of Congressional Market Oversight Committees and under the supervision of Government Regulatory Agencies, things were done that I believe will make a historic bear market inevitable. If you have a problem with this bear market, contact Washington, not Mark Lundeen.
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