29 January 2010
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 DJIA is turning down. Whether it's going down as a Bull Market Correction, or as the next leg down in a massive Bear Market we can't know. But if you haven't taken some profits yet, this is still a good time to do so.
Below is the DJIA Volatility's 5 Day M/A & BEV Chart
The market calmed down this week. The DJIA Volatility's 5-Day M/A dropped a full percentage point, from 1.45% to 0.47%. Yes, Bull Markets' Volatility Profile is more docile than a Bear's. But when Bulls correct, they typically go down sharply to shake off the "Weak Hands", and then Baby Step back upwards with fewer people aboard. Gold and Silver have been doing this for the last 10 years. I really don't like the Stock Market right now. It just feels like there is something wrong.
We currently have a 2 in our DJIA 8-Count. The 8-Count being the number of days the DJIA has move 2%, or more, from the previous day's closing price, in a running 8-Day Sum. Unless we get another 2% day by Thursday, the 8-Count will return to Zero. So, if "Stability" has returned to the Market, next week we'll see a Zero. If some excitement is coming our way, we will see something other than zero.
The DJIA's Step Sum During the Great Depression
Since 1885, the DJIA has seen Nine BEV -40% Bear Markets.
If you haven't read my Article on the DJIA -40% Bear Markets, linked at the end of each Report, you might not believe there are two BEV -40% Bears in that little Green Box. But trust me, there are.
This table sums them up nicely.
These BEV -40% DJIA Bear Markets, except for the current Bear, have all seen a Catastrophic Collapse in their Step Sum as their Bear Market approaches termination. In other words, the Step Sum finally surrenders to the Bear's Market Gravity, and goes down day after day until the Bear Market Terminates. This event is not necessarily a catastrophe to the DJIA itself, as usually most of the work Mr Bear has to in cleaning up the previous Bull Market is finished.
In my article on the Lundeen Bear Box and Step Sum, also linked at the bottom of every report, I have the charts for the -40% DJIA Bear Markets plotted with their Step Sums.
As this Report is a comparison of our current, and the 1929-32 DJIA Bear, let's take a side by side look at their Step Sums. Note: this chart is just the Step Sums for the two DJIA Bears, not the DJIA itself.
This is as good a time as any to bring this up, but there is a problem comparing these two DJIA Bear Markets. The NYSE traded on Saturdays during the Great Depression. The last NYSE's Saturday Trading Session was on 24 May 1952.
So during the Great Depression, the NYSE had 6 trading days per week, while our Current Bear has only 5 trading days per week. This means that for the DJIA Great Depression Bear, from Terminal Zero to Termination, it took 149 Weeks to cover the 844 Trading days. But with 844 Trading Days, and our 2010, 5-Day Trading Week, it works out to 169 Weeks.
This is not a big thing. Logically, as both Markets can be measured in Weeks, their durations should be measured in Weeks to stay true to the calendar. I'm only bringing this up because in 29 weeks' time, it will become apparent that there is a discrepancy in the Weekly and Daily Charts used in my reports. Now back to the Step Sum commentary.
One of the reasons I don't believe we've seen the Bottom in our Bear Market, is because of the DJIA's Step Sum hasn't collapsed yet! The Chart below shows the Great Depression DJIA, with its Step Sum. Like our Current Bear, the Great Depression Bear developed a Lundeen Bear Box early on. Only two Bear Markets to have done this, the 1929-32 & the 2007-10 Bears, and both saw a DJIA decline of 40% early in their Bear Markets.
Bear Boxes typically form at the End of a Bear Market. It seems the Bulls feel the end is near, and so they jump back into the market a bit early, causing the Step Sum to Rise as the DJIA continues its decline. Historically, after a BEV -40% drop in the DJIA, jumping back in the market is the correct thing to do. So a Bear Box is just an indicator that the end is near for the Bear, but the Bulls' timing for their market reentry was off.
But the 1929-32 Bear, as we see below, was a BEV -89% Bear Market. I understand the Bulls' confusion. The DJIA saw a Solid BEV 40% decline in November 1929, (the Sharp Down Spike around Day 60 below), and they decided to come back into the Stock Market. But the Bear Changed the Rules.
The Bulls couldn't believe what was happening until the DJIA fell well over 50%, some 376 Trading Days after the first BEV -40% line breach. As the Step Sum (the Red Plot) finally exited the Bear Box on Day 436 (27 February 1931), the DJIA's Step Sum once again fell in line with the primary trend of the DJIA itself, signaling the Bulls final surrender to The Bear.
Now you can be forgiven for thinking that by Day 436, when the Bear Came out of his Box, that most of the Damage to Investors was done. After all, the DJIA had fallen from its Sept 1929 Terminal Zero of 381.17 to 190.34 on the close of 27 Feb 1931. This was a solid BEV-50% drop in a market that was ultimately to fall to its BEV -89% Line. Using this logic, the DJIA saw 50 of the 89 BEV Points it ultimately fell. So there are only 39 BEV Points to go; Right? This is true; but people went bankrupt with that math in February 1931!
The DJIA 1929-32 Bear terminated at 41.22 on 08 July 1932. Take the DJIA value when the Bear came out of his Box, 17 months earlier (190.34), and calculate the loss with the July 1932's low (41.22): a -78.34% loss! Okay, coming into the Stock Market in Feb 1931 was a bad idea. So let's wait a year and jump in the market in 28 Feb 1932 when the DJIA closed at 81.44. By February 1932, the DJIA had already dropped -78.63% from the DJIA's September 1929 last All-Time High. In February 1932, we are just 11 BEV Points above the Bear's ultimate bottom. But even after a 78% drop in the DJIA, investors coming into the market in February 1932 (five months before the July 1932 bottom), would still have taken a 49.38% loss before the DJIA hit its Terminal Bottom! That's just short of last March's Losses.
Oh yeah; when the Great Depression Bear came out of his Box, he was a Real Bastard to anyone who got in his way. And this is what really bugs me about our Bear Market: since 1885, the DJIA only once before has formed a Lundeen Bear Box * at the Beginning * of a Bear Market, during the 1929-32 Bear.
So what are the chances of seeing the 2007-2010 Bear seeing the extremes of 1929-32? Well I think it's one of those Better-than-House-Odds Situation, with the understanding that the only game being played by the Bear is Three Card Monty. This Bear is not just about the Financial Markets; the Politicians, and their Regulators are in the Bear's Crosshairs too! My expectations are that Enron, Worldcom, and Bernard Madoff will prove to be just the warm up acts for what is coming our way.
Since the end of the High Tech Bubble, Washington has had 10 years to get its house in order. But instead of doing the right thing, stepping back and allowing the Markets to find their natural levels, they started inflating other financial bubbles. Don't be surprised if the Bear cleans up their mess in the next 3 Years.
It will be interesting tracking the DJIA's Step Sum in 2010.
I spent some time below on Politically-Motivated Financial Losses and the importance of an Economy to be allowed to produce Profits. Read it, and consider what I have to offer. Personally, I believe that what the "Policy Makers" have done to the Financial Markets and to Personal Freedom, since the introduction of the Income Tax and the Federal Reserve, is all going to come back and haunt them, and us. The American People have allow too much power, to slip into the hands of too few people.
The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish, the Step Sum rises. When bearish, it falls.
Think of the "Step Sum" as the sum total of all the up and down price "steps" in a data series over time; an Advance - Decline Line for a data series derived from the data series itself. Logically, bull markets will have more net up days, while bear markets will have more net down days. Understanding the Step Sum is no harder than that.
The Fed's Balance Sheet - Again
The Fed's Balance Sheet is just one outrage after another. Their latest (Barron's 25 January Issue) was a $48.87 Billion purchase of US Bonds. That may not seem like much in a world that now thinks in terms of Trillions of dollars. But these weekly purchases add up. Think of this, the Fed's * Entire Portfolio * of US Bonds first reached $48 Billion dollars in December of 1967, just Three Months before the Closing of the London Gold Pool.
The Chart below shows the Fed's Open Market Committee's buying and selling of US Bonds, and their Portfolio of US Bonds for its "Reserves" during 1968. The Blue Plot is the weekly purchases and sales, the Red Plot is the Fed's US Bond Holdings.
Compare 1968's Chart to the Fed's Open Market Operations of the past year.
Why does the Fed do this? Because in 2010, the Credit System they've created has become a Monkey on their Back. And as we've seen since October 2008, what the Monkey wants, the Monkey gets. But it wasn't always this way. The Federal Reserve System was created to:
- Finance the Federal Government by purchasing US Debt with Inflationary Dollars;
- Facilitate Inflationary Booms and Mitigate Deflationary Busts;
- Provide the Ruling Elite with the wherewithal to have their way with the rest of us.
The Federal Reserve, and the Government that created it, has Totalitarian Proclivities. Well what do you expect from people who lust for more money and power than they have a moral right to possess? I expect them to use that money and power to no good end.
Issues of who should be rewarded, and who should be punished, motivates many Politicians, and Academics in "Government Service" to get out of bed in the morning. And funding by the Federal Reserve enables the people who control government, to be free of any concern of whether a particular pet program, or its administration costs, is a total waste of money. Had the Fed not existed, would the Federal Government's Post-World-War-2 "Social Engineers" have had the means for "Detroit's Urban Renewal?"
But after 98 Years of Monetary Inflation, things are changing for the Keynesians, and the Economy they've managed. The US Dollar, they've abused so scandalously, will in the lifetime of most of the people reading this report, be rejected as a Global Monetary Unit. And as the US Dollar goes, so goes the Keynesian School of Economics and their Central Banking System. In time, American's Inner-Cities, and the Small Businesses that once thrived there, may recover from the Political abuses made possible by the Fed's Inflationary Funding of Inner-City Rot. But first will come Social Chaos and Economic Collapse. Inflation always ends badly.
"Such were the sources of that flood of paper money which, ever since, has alternatively accelerated and threatened the economic life of the world."
-William Durant: Our Oriental Heritage, (1935) pg 780
If you understand our current situation, you know whether Doctor Bernanke stays or goes makes no difference. The problem festering in the Global Economy remains. The Credit Monkey on the Back of the American Economy wants his "Injections" of "Liquidity." So now Congress is investigating the AIG Bailout, and is shocked at what happened. They will no doubt make a big show of how they will take steps to prevent further financial outrages. We can watch the proceedings on CNBC and C-Span.
But what addict doesn't delude himself of quitting Cold Turkey when flush with their last fix. The Monkey is quiet, all is well, so why not stop? Nothing could be more logical. But what ever Congress does to prevent future outrageous financial bailouts, when the Monkey starts chewing on their ears, there is only one way to stop the beast, call the Doctor, and make the Monkey happy. For the profoundly addicted, quitting Cold Turkey is simply not an option when writhing in withdrawal. Was Congress asking about AIG last March as the DJIA approached its BEV -50% line? They couldn't!
Let's look at some more Charts. My next shows, as a percentage, how much the Fed's Portfolio of US Bonds has increased from the Previous Week's Report. A zero% indicates the Fed had no change in it holdings of US Bonds; negative values are reductions. In Barron's 23 March 2009's Issue, when the Stock Market was still Staggering from the lows of 09 March, we see that the Fed increased its "Reserves" of US Treasury Bonds by 27.84% from the previous week! In percentage terms, that was the largest "Injection" the Fed has ever gave the US Economy since 1938. That made the Monkey happy!
I've only done this analysis this week. Had I done so last March, I wonder if I would have become a screaming Bull. Maybe. But then I might not have been. One of these days these Old Tricks of the Fed's will fail, resulting in Economic Disaster. But since 1971, and before, you always have to look at what the Fed is doing. It's interesting that the DJIA has stagnated since last October, but then as we see above, Doctor Bernanke's "Injections" are not what they once were either.
This chart is worthwhile keeping an eye on.
Next, we see the Fed's "Total Fed Credit" Account.
Looking at the data, and remembering what Bernanke told Congress in October 2008, and how bad Congress wanted Dr Bernanke to restore "Stability" to the Markets, it seems the Fed first bailed out Wall Street in 2008 with their Fed Credit Account below, by buying their Toxic Waste at par-value, and then goosed the Market in 2009 with purchases of US Bonds above.
This is precisely the type of "Market Regulation" the Bear is going to stop before this Bear Market is over. And the Bear doesn't care about Congress's Monkey. At the bottom, the "Policy Makers" will see the wisdom of Honesty being the Best Policy, and "Transparence" will become a virtue, not a slogan. At least I hope that is what happens.
Below we see the changes in the Fed's Balance Sheet in the past 3 Years. No mystery here. Too much ill-advised debt supporting a Global Currency without much of a Future. It really sad to say this, but it's true.
Losses are always Taken By Someone
President Obama, the Congressional Progressive Caucus and "Social Scientists" everywhere, have the Marxist World View that Private Profits are Public Crimes. The very thought that a "Public Good" is not feasible, if it's not "Profitable", is hateful to them. When someone takes this view of the World to heart, they must by necessity come to the conclusion that but for Profits; the World would have no Problems.
To many Committed Progressives, Inner-City Drug Addiction is not an issue of the moral shortcoming of the Addicts, but a damning indictment of Capitalism. Understanding this explains why "Progressives" everywhere take such Joy in Legislating Laws, Punishing Private-for-Profit Achievement.
Progressives hate Gold and Silver Monetary Systems. They may believe, as Marx did, that on some Glorious Future Day, due to "Historical Inevitability" the need for Money, and Government, may disappear. But they realize that day is not here. Until then, they need money for the Economic Activities they desire. Their problem with using Gold and Silver for money, is that Gold and Silver Monetary Systems fail when Profits are not the Primary Economic Goal of an Economy.
Why is this? Because the virtue in Gold and Silver Money is found in its limited availability. Without finding Profitable uses for Gold and Silver money, the Money, being limited in its circulation, is spent and lost to its previous owner. To a Political System that scorns Profits, such as Progressives promote, the Government spends the Nation's Money on Political Projects that produce no Profits, hence the Progressives see no "Return" * of * their Money. These foolish Government Officials soon discover "Their Money" now circulates outside their impoverished Political (and Tax) Boundaries, doing good services where their Gold and Silver money was allowed to make a Profit.
To the American Progressives, The Federal Reserve, issuing a Global Reserve Currency, was the solution to this Purely Political Problem. Profits were no longer an issue when money is based upon debt, because the more losses a Progressive Economy makes, the more debt it produces; and the more debt produced, the more money they have to spend. And Debt is no longer a problem when the Economic Activity needed to service it, comes from a printing press under Political Control. Taxes at the Federal Level are only needed to "Make the Rich Suffer!"
The Losses incurred in the United States have been Astronomical since Gold and Silver have been replaced by the Debt Backed Dollar. We need only look at the US National Debt to gain an insight of the damage done by "Progressives." Note that the US Government has assumed the liabilities of Fannie Mae and Freddie Mac. So how much additional Debt needs to be included in the chart below?
Every dollar we see in the National Debt is an Economic Loss assumed in the name of the American People. This is the Key in Understanding what we see in the Chart Above. These are losses assumed by the US Government in its Ever-Expanding, Unprofitable Activities, backed by the Ever-Shrinking Productive Capability of the American Economy.
But these losses have yet to be recognized; they have only been rolled over for the past Seven Decades. But eventually, all Economic Losses must be taken by someone, and recognized for what they are: Investments in Economic Activities that didn't return one's Money with a Profit. Financial Fiduciaries holding US Treasury Debt for their Reserves, and the people whose wealth is measured in US Debt, will be standing on Ground Zero when the Debt Bubble detonates.
So what has the US Government, with its "Progressive Intentions" been doing with the Money the World has lent to it? In the 1950s & 60s they called it "Social Engineering", and "Urban Renewal." Barron's covered these "Projects" in-depth a half century ago. They predicted disaster, and they were right. But how it would play out five decades later would have amazed the Old Crew of Barron's.
American Administrations from Truman to Johnson built "Housing Projects" in major US Cities. The Federal Government muscled out the For-Profit Real Estate Developers in the Inner-City Market. With Washington's funding coming from the Fed, who issues the World's Reserve Currency, profit was not a factor the "Social Scientists" had to concern themselves with. So significant areas of American Inner-Cities have become Profit-Free Zones, and they look it! Real Estate Developers could not compete with Government Housing Programs designed to lose money, and local small businesses found staying in business impossible in an Economic Zone where Profits are frowned upon by officials.
Under the supervision of the State-Funded "Social Workers" these Inner-City Housing Projects became a hell-on-this Earth. Many of these "Projects" were demolished in the 1990s, about the same time "Progressive Politicians" started promoting "The American Dream" of "Home Ownership." The Housing Bubble was yet another Politically inspired Not-for-Profit Scheme from Washington. But as we see in the You Tube Clip above, its losses came as a surprise to even Barney Frank.
However, since the Housing Bubble popped, Washington's Progressives have moved on to Healthcare and Global Warming issues. Both issues, if allowed to run their course, have the potential of producing losses as massive as Congress's Sub-Prime Mortgage Program. This is to be expected, as Washington with its Federal Reserve and Income Tax, will never willingly live within the limits, that the necessity of profits impose upon everyone else.
29 January 2010
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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