With weekly closing price data, we see a bearish pattern of declining highs and lows since October 2008. The Bear and the "Policy Makers" are still in discussions over the DJIA's next big move. From the appearance of this chart, the Bear is winning.
In 1929, the bear allowed a nice 8 week bounce in the DJIA starting next week. This is what happens in bear markets, bullish rallies that fail, dashing the hope they bring until there is no hope at the bottom of the bear market. But this Bear is different. No bullish bounces, no hope dashing bear market counter attacks. The DJIA just sits there around the -40% line with a slightly bearish bias.
It has been four months now with nothing but bad economic news. Historically, this is exactly the situation where major Bull markets arise too! The bull markets starting in 1932 and 1982 rocketed from nowhere with nothing but bad news. See any signs of that happening? I don't. So we must assume it is still a bear market.
When this patter is broken, and it will be broken, the next move should be a big one. Whether it is up or down I don't know. But I see no reason to change my prediction that this Bear won't stop until it's at least #2 bear in the history books.
The weekly closing price BEV (Bear's Eye View) results for week 69 in the Dow Jones' 1929 & 2007 bear market's race to the Bottom are as follows:
1929/32: -57.62% from its weekly closing high price of 380.33
2007/09: -41.24% from its weekly closing high price of 14,093.08
Below is my volatility chart comparing 2007's 40 & 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.
Volatility is calming down, but as you can see above in the 1929/32 bear market, that does not mean the bear market is over.
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."
I thought we would finally see a week that didn't produce a 2% day. But then Mr Bear clawed the DJIA down below the 8000 level. You can see the "policy makers" responding with stinging blows on the Bear's paws with their monkey wrenches of "policy initiatives." It seems obvious that they want the DJIA above 8000. This is not the first time that a Dow below 8000 produced a sharp reaction from the "policy makers."
This is an abnormal market in its volatility. Normal volatility is below 1% from one day's closing price to the next. Seeing 2% days week after week is historic. This market's volatility will be something to tell your Grandchildren about when they ask you about the Greater Depression decades from now.
Let's look at a chart plotting the 200 Day M/A for DJIA volatility. This Bear is a REAL BIG UGLY BEAR. I don't think he is finished with us yet.
Don't confuse this chart with my chart showing the number of >2% day in each of the above 200 Day M/A data points. I last posted that chart in Wk 68. In the chart above, we are looking at the actual 200 Day M/A for the DJIA's closing price volatility. Bull markets have an increase in volatility. But the major Bear markets are the markets that cause the big spikes in the 200 Day M/A as people flee for their lives. This week's 200 Day M/A just hit a new high of 1.85!
This chart makes it evident that when the US broke the link between the dollar and gold, and then started to inflate the money supply, market volatility increased. We are still suffering from that "policy decision" to this day.
This DJIA BEV chart uses daily data points, unlike my Bear Market Race chart above. We can see that the DJIA can't get below the -45% line and won't go above the -35% line. The Step Sum is just sitting there doing nothing much but trending sideways.
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.
As noted in Wk 68, the Fed is draining reserves. In Wk 69 they have drain an additional 2.63%. This tremendous change in only 6 weeks should be a serious matter for the financial markets. But then, Ben has those new monkey wrenches for manipulating the markets so I can't say how this will affect the DJIA. It wasn't a good sign when Greenspan did this in 2000.
I doubt the Fed is intentionally attempting to crash the stock market. Still this is something to watch.
The DJIA has been a fixture on Wall Street since the 19th century. The Dow has always been priced in US dollars, but those dollars, thanks to "policy decisions" (counter to Constitutional law) have changed since 1885. How are we to understand the purchasing power of our current DJIA to the DJIA of the 1920/30s? I have found using automobile prices found in Barron's a useful, if not a perfect gauge, in measuring the loss of purchasing power for the US dollar.
Ford's Model T, the working man's car, could be bought for around $300 in the 1920s. A more upscale manufacturer, Studebaker, advertised their "Big Six Touring Car" for $1750. It had seating capacity for seven with a big six cylinder engine that "would not lose power on any hill." Studebaker's stripped down model went for $975.
The 1920's DJIA peaked on 03-September-1929 at 381.17. Ford stopped manufacturing their Model T in 1927, but I suspect that working class cars could have been purchased for what the Dow went for at its 1929 top. The same could be said for the DJIA on 09-October-2007's $14,146.
If one only looks at car prices, it would appear that the DJIA (without dividends) broke even after 80 years of inflation. But James Grant, an authority of credit of the 20th Century, would note that car loans for consumers were not common in the 1920s. In other words, most Model Ts were cash purchases from savings. This was not the case in October 2007. DJIA in 2007 could match the cash price of a modest car, but not the total cost when interest payments from car loans are included.
At best, the DJIA 2007 only broke even with monetary inflation since 1929. So looking at a chart of the Dow from 1900 to the present, we're really observing what the "policy makers" have done to our dollar. They have used it as a means of increasing debt levels in the economy.
Inflation is usually measured in CPI, calculated by the US Department of Labor. I prefer to use Currency in Circulation (CinC) as my inflation measurement. CPI measures price changes, but the US Dept of Labor has great freedom for which prices it chooses to include, and how much weight a chosen price change has in the index. CinC only looks at the increase of dollars in circulation.
Since 1920, 89 years ago, CinC has exceeded CPI by a factor of 18.1
Another way of looking at how inflation has affected the value of the DJIA is by "deflating" it. To deflate the DJIA, I first indexed CPI and CinC to 1.00 for January 1920. The DJIA is then divided by one of these indexed measurements of inflation for each week since January of 1920.
Deflating the DJIA by the Department of Labor's CPI, we see that the highs of 2000 actually were a bit higher than the highs of 2007. In purchasing power terms, I think this is the reality of it. Still, capital gains were due on these inflationary 3000 Dow points of profits all the same. Can you believe it, the politicians managed to tax investors on their loss of purchasing power! Washington loves their Federal Reserve and income tax.
CPI is a faulty metric for measuring inflation, but I think it holds up fairly well on a short term basis. The problem I have with deflating the DJIA with CPI over decades is that it suggests that the 1929 Model T owner who invested in the DJIA at the top of 1929 could finally afford that six cylinder Studebaker in 2000. That did not happen.
CinC, since 1920, has increased by a factor of 197.4. As money today is based upon people, business and government going into debt, this increase in CinC was a response to society going deeply into debt. The DJIA deflated with CinC really has the air sucked out of it. Well it should.
When purchasing anything in debt, there is also interest payments to be paid that frequently doubles the sticker price of the sale. But who cares when the monthly payments are so low.
After August 1971, if there were two things that every college student learnt with their $40,000 student loan (that cost them $60,000) those things were:
Years after graduation from college, they may have forgotten much, but these two points on money are never forgotten.
Often it seems these two points are all some student retained from their college education. I only have to cite the example of the many Wall Street bank CEOs standing in line for a bailout from Washington. If they want to keep their cash and get a TARP loan from the Treasury, they better know that gold and silver can't be money.
If I'm hard on the "social sciences" it's because they have worked long and hard to earn my contempt for them. This world we live in is their creation.
But back to deflating the DJIA.
On the Model T/ Studebaker standard, our 1929 Model T investor is walking to work for all the money he lost in the stock market. But I'll admit it, the stock market has not been that unkind since 1929.
So which deflated DJIA provides the most accurate look at the past 109 years of the stock market? I think the CinC deflated DJIA. But that is with the understanding that with President Roosevelt, the nature of the US dollar changed, and so did the Stock Market. The CinC deflated DJIA shows that something important changed after 1932. Also, seeing the DJIA CinC oscillated for 77 years between 25 and 100 seems about right. People buying stocks for the long term were expecting an increase in their purchasing power that never came. And that is what we see above.
I believe the best way to compare the DJIA over the decades would be with my BEV Chart. We should understand that a dollar's purchasing power, with or without inflation, will change from one generation to the next.
The BEV chart also provides a powerful timing tool for stock market investors. Remember, since 1885, having the DJIA fall -40% below its last all-time high (BEV Terminal Zero) is the most bullish thing to happen to the stock market, except in 1929. I expect the 2007/09 DJIA Bear Market will become the #2 exception to that rule.
Below is a chart of US housing permits and starts. Unfortunately I have some holes in my data for starts.
Notable on the chart below is the long and accelerating building boom from 1991 to 2006. As with so many statistical series, Dr. Greenspan left his mark on history. Notable also is the decline in construction starting in March 2006, 15 months before Bear Sterns reported problems with its subprime mortgage assets in the summer of 2007.
New home construction is currently at its lowest since 1969.
One thing to remember, finance and economics are not science. Mix air with gasoline in a 10:1 ratio, add a spark and instantly it blows up sending you and your car down the road. The academics of the Unholy Trinity falsely believe the outcomes of their economic machines are as predictable as Detroit's. They are not. Their engine of inflation, the Federal Reserve, pours forth its "liquidity" but where it goes depends upon how fickle people spend it. Currently people are not spending the Fed's "liquidity" at all.
Let's look at the Dow Jones Total Market Industry Group's Home Construction Index plotted with housing permits from 1989 to 2009.
One would think that a prolonged increase in building activity would have had a close correlation to share prices of the home builders for most of the building phase. But look below.
From January 1991 to January 2000, building permits increased by 114% while the DJ Home Construction Index increased by 90%. That's fairly close. However, during home construction's mania phase of 2000/06, an increase of only 25% in permits caused an explosion of 627% in the Home Construction Index! From the market top in 2006 to February 2009, both permits and the Home Construction Index declined approximately the same.
As much of our current problems arose from financing home construction, examining the home builders with permit data is interesting all by itself. However the general market principal that this is not science is also on display above; that a market's reaction to its underlying fundamentals is not always instantaneous.
The data on permits and homebuilder stocks is only a recent example of a market's slow reaction to a firmly established fundamental trend. It took time, but when the market finally realized the housing permit trend, valuation in the home construction companies quickly surge upward to an overvalued state. Bull markets are emotional markets, but Mr Bear is more inclined to look at the facts. It's interesting to see the turn of both permits and the DJ Index in 2006. They fell together step by step.
With today's Treasury bond, gold and silver markets, we are seeing a similar delayed reaction to fundamental factors. The US, in February 2009, is drowning in toxic debt. Instead of allowing defaults and deflation to clean out toxic consumptive debt, current "policy" is to postpone the consequences of past errors in consumption and government programs with still more of the same. Currently in Washington, poor judgment has center stage in government affairs.
The market's reaction to the current horrors of "monetary & fiscal policy" is to drive long-term Treasury debt yields down to levels not seen since 1956! Yes I know the US T-Bond market is managed. The "policy makers" want low T Bond yields for mortgage resets due in 2009/11. But the friends of "policy" are not the only buyers of these AAA-rated stink bombs.
Within a year, I expect to see T-bond yields approaching 10% as the financial reality of the dollar becomes undeniable. I also expect T-Bond yields to ultimately exceed the highs of 1981 in the next few years.
As with all of my predictions, these are not particularly brave or brilliant insights few could see. Daily we hear of trillions of dollars needed for new bailouts for the financial system. Don't forget local and state government, as well as pension funds will need a few trillions of inflation too. But these are new needs only gold bugs would have expected a few years ago. What about problems in Social Security and Medicare obligations that have been festering for decades? They will be coming due for payment in the next 10 years. There was talk of a 20 trillion dollar shortfall in Medicare financing 5 years ago.
Washington's political class is delusional. They really do think all this can be funded with a printing press. I expect them to print money until the world upchucks dollars. If you think that T-Bond yields will be under 5% a year from now and the DJIA will be above 8000, shame on you! We could still get a nice dead-cat bounce in the DJIA by summer. I expect to see a few nice rallies on the way down to the final bear market bottom. But the long term trend for financial assets is down.
Gold and silver's valuation are not scientifically derived either. If they were, holders of these old monetary metals would refuse to exchange their metal for Washington's dollars. But markets are as fickled as the people who trade in them. So Gold and silver are still below their all time highs. This too shall pass.
I've written on gold and interest rate trends in the past. Gold is clearly a leading indicator of future interest rates. I expect to see gold and silver move up sharply just before we see the US bond market fall into a profound bear market.
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.