The 1929 & 2007 Bear Market Race to The Bottom
Week 76 of 149
Federal Reserve Balance Sheet Charts
27 March 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.
DJIA correction? So far, so good. The DJIA is having a nice bounce here. It's now above the BEV -45% line. But just by a hair. The DJIA is showing lots of strength in the Step Sum Chart below.
We might see the DJIA go over the BEV-40% line. If you recall, from Wk52 to Wk65, the BEV -40% line was the "policy makers' line in the sand. For 13 weeks, the Bear was turned back every time he tried to go below it. For this reason, I think the BEV -40% line will now be difficult for the "policy makers" to go above. We will have to wait to see how this correction plays out.
Below is my volatility chart comparing 2007's 40 & 200-day moving average closing price volatility with 1929 bear market volatility.
Our historic volatility continues. And volatility is the calling card of the Bear. The 40 Day M/A came around hard to starboard. It is now on an interception course with the 200 Day M/A. With these high levels of volatility, the current bounce can end without notice.
Bear markets are where volatility extremes are found. Typically, bull markets see rising volatility. Then the Bear comes along and pushes the cycle's volatility to its extreme point. The 1995 to 2003 bull/bear cycle is a good example of what I'm saying. But the 2007 DJIA Bull Market top was different.
When the DJIA was at its Terminal Zero, (all-time high of October 2007) the 200 Day M/A was only 0.58%. Now take a look at the 200 Day M/A for 1929 and 1999. Both these historic Bull Markets top out at around 1.00% in their 200 Day M/A. In the chart above, there is a big difference between 0.58% and 1.00%. The big spike up from October 2007 is all the Bear's doing.
That should tell us something. But exactly what, I don't know. Maybe the "policy makers" were ramping up prices in the stock market. Could be, because from a volatility perspective, the 2007 Terminal Zero is somewhere on the 200 Day M/A plot it doesn't belong. And it seemed to have made the Bear really angry.
As we know, the 2007/09 DJIA is now #2 on the list of historic bear markets. The chart suggests (to me) that this bear has his eyes on the #1 spot. That's not a prediction on my part. This volatility chart shows the 2007/09 Bear is not a typical bear market. But then we are not living in typical times.
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.
(Remember, with the 2007 data up is down and down is up!)
1929/32, Wk 76 200 Day Moving Average Volatility: 1.44%
2007/09, Wk 76 200 Day Moving Average Volatility: 2.05%
Monday 23 March 2009 Saw +75.79% Advancing Share Day
Historically, daily 1% swings from the previous 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'm a big bad bear. I believe we have not seen the worse. But looking at the Step Sum, I'm struggling to find something bad to say about the DJIA after this week's trading. I would not be surprised to see another good week or two coming our way in April.
But I still think of this market as a horror movie directed by the Bear. I'm expecting that we'll see a few good weeks. Everyone will become comfortable and optimistic about the future. And then it's back down into the basement where the guys with the chainsaws have their way with our wealth. This Bear is not done by a long shot.
Treasury Secretary Geithner said this week that he is open to the idea of dropping the US Dollar as the unit for international trade. George Soros said that commercial real estate will decline 30% and cause more credit problems. There is still talk of US deficits of $1,000,000,000,000 (TRILLION!). One day The Congress is dressing down Wall Street on Barney Frank's dog and pony show, live in the Capital, the next they are giving these bums a few tens of billions with no questions asked.
So stocks went up this week as gold and silver go down?
Yes, things like this happen in horror movies. And in this particular horror movie, we are all stars in it!
But for the record, I'm not going down that basement with you guys!
Gold and silver are looking pretty good right now.
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 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.
Federal Reserve Balance Sheet Charts
I haven't posted the Fed's Balance Sheet items since Wk69 (06 Feb 2009). There have been some notable changes in the past 7 weeks.
The Chart below shows that the US Government is pursuing a hyper-inflationary monetary policy.
Only ignorance would allow someone to view this chart and not be alarmed. It's not possible to see these wild swings in the US Dollar's "reserves" and not realize that the dollar is a problem currency. If Washington's wrecking crew holds true to their promise for further "economic stimulus," then these increases will be seen as small potatoes in the years to come. The US Congress's actions are destroying the dollar's ability to function as an economic asset for foreign and domestic commerce. This is frightening.
Below are Total Fed Credit BEV Charts showing the Fed's management of their balance sheet since 1948 to the present. Remember, BEV Charts have a fixed Y-Axis, ranging from 0% to -100%. Every new all-time high is clamped at the 0% line. Any data point, not a new all-time high, is registered as a negative percentage from its last all-time high.
(Data Point / Last All-Time High Data Point)-1
So the Total Fed Credit's BEV Chart below gives no indication of the huge rise since April of 2008 that is so obvious in the chart above. But in return, we see in precise percentages terms, the Federal Reserve's actual management of the monetary reserves backing the US money supply from 1948 to the present.
The above BEV Chart is a study of the pathology of our credit-addicted economy from the early Bretton Woods era to 2009. The analogue of drug addiction for the Post WW2 monetary system's abuse of credit creation is an exact one.
Phase 1: Heroin addiction, typically, starts with occasional recreational usage by the drug abuser. Obtaining the drug is not yet the driving force in the life of the user.
Phase 2: The heroin addict is hooked. Still, the pretense of normalcy can be maintained as the addict goes about his daily routine, which now includes ever more frequent "liquidity injections."
Phase 3: The monkey on the heroin addict's back is in full view by all. "Liquidity injections" become the sole reason of the addict's existence.
Phase 4: The death of the addict.
From their first to their last injection, the addiction progressively modifies the behavior of the addict. The sequencing, from phase to phase, of addiction is evident in the BEV Chart above. We see above that the Fed has lost its freedom to reduce the dollar's reserves over the decades. Over time, it has taken ever larger "liquidity injections" to produce the desired effects. And we have now come to the point where massive "liquidity injections" returns no desirable results at all. But in 2009, the thought of tighter money conditions and higher interest rates brings panic to deeply indebted private and public debtors.
Phase 1: Washington's "Policy Makers" Occasional Credit Abuse
Below I've plotted Total Fed Credit with its BEV Plot from 1947 to 1960. There was significant economic growth during this period. Think how much the United States had changed from the end of WW2 to the inauguration of Kennedy as President. IBM Mainframe Computers, Bowing 707 jet airliners, an interstate road system packed with cars manufactured in Detroit. If one can believe large ads in Barron's by AT&T, many American homes in the late 1940s were still not connected to the phone system. By 1960, (13 years later) virtually every home in America had phone service. Americans lived in the wealthiest society in the history of the world.
But note that Total Fed Credit expanded by less than 7 billion dollars from 1947 to 1960! This expansion in Fed Credit had nothing to do with the amazing economic growth during this period. This credit was created by a pliant central bank enabling Washington's political class to spend beyond their tax income.
So the wealth created during this period was accomplished not because of this seven billion dollar "monetary liquidity injection" but in spite of it. Also, this increase in Fed Credit was done in violation to the Bretton Woods Monetary Agreement. In this international monetary treaty, ratified by the US Senate and made the law of the land, the United States committed itself to issue only $35 for every ounce it held in its bullion reserve.
This table was compiled from data obtained from old issues of Barron's, as they recorded data published by the US Government.
If breaking laws makes one a criminal, then why isn't the Federal Government issuing dollars in excess of its gold reserves a criminal act? As far as I know, Bretton Woods is still in the law books. But since 1945, the Congress, and the President, haven't cared if it was or wasn't.
Bretton Woods was officially killed in August 1971 by President Nixon. The Congress, and the Supreme Court did nothing to stop him from abrogating a major international monetary treaty with an executive order. But we should not pin all the blame on President Nixon. As we see below, it was during the Kennedy Administration that America became hooked to cheap credit.
Phase 2: Daily Injections Required, but the Appearance of Normalcy is Maintained
Note that Phase 1 took 13 years for Total Fed Credit to increase 7 billion dollars. Phase 2 lasted 14 years and saw an increase in Total Fed Credit of 50 billion. Prices were rising after 1960, and the working class was beginning to feel squeezed by 1974.
Much of that money went into "urban renewal" and funded a "war on poverty." These government programs (managed by academia's social scientists) have been a total waste of money and a burden on civil society. I suspect that if we were to overlay a map of where the Federal Government spends it funds, and where high crime areas are found in American's cities, the two maps would closely match each other.
This increase in the money supply from 1960 to 1974 only made Americans poorer. In 1960, most married women were housewives. By 1974, women went to work to help pay the family's bills. This massive infusion of "capital" only resulted in family debt levels increasing. Working class families now needed two incomes to service their debts. The hook was set.
Phase 3: Now Everyone Sees the Monkey.
During Phase 3, America was transformed from a manufacturing giant into Dr Greenspan's "service economy." By 2006, AAA Rated Debt became one of America's leading exports, to the regret of many in 2007/9.
This transformation of the American economy made perfect sense to leading economists in academia, Wall Street and government service. In this new "service economy," economists became indispensable. Without it, they would be unemployed.
So now, as the debt bubble, and the US dollars this debt represents, teeters on the edge of the abyss, we see these same economists give testimony before lawyers holding elected office in a dog and pony show televised daily. And what is their solution to cure what ails the economy? The Congress, on the advice of Dr Bernanke, will give another good bleeding of the productive elements of society with even more debt and another layer of government regulations.
Phase 1&2 took 27 years to increase Total Fed Credit by 72.78 billion dollars. By 2009, Total Fed Credit had expanded so grotesquely that $72 billion is now a rounding error!
Two things to note about this chart on Phase 3:
1). Greenspan drained 12.5% of Total Fed Credit in January 2000. This action resulted in the -30% DJIA bear of 2000/02. The panic resulting from the stock market crash forced Dr Greenspan to resume his regimen of "liquidity injections" into the banking system. This resulted in a new bull phase in the stock market and a massive real estate bubble.
2). Our current -40% DJIA Bear Market * and * the Greenspan / Bernanke real estate bubbles were not triggered by the Fed draining bank reserves. They fell under their own weight. This proves that Dr Bernanke was wrong about "a determined government's" ability to inflate asset values to infinity, and that the US Government would not "print money and distribute it willy-nilly."
"By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services. We (Who is "We?") conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. Of course, the U.S. government is not going to print money and distribute it willy-nilly……."
- Benjamin S. Bernanke, Federal Reserve Board Governor, November 21, 2002.
This is one Princeton man's view on "monetary policy." Here's another.
"The last duty of a central banker is to tell the public the truth."
- Alan Blinder, Vice Chairman of the Federal Reserve
Blinder said this on PBS's Nightly Business Report when he was appointed Vice Chair of the Fed.
As this is a DJIA Bear Market Report, let's see how the Dow has responded to "monetary policy" in the past few years. The chart below is from the same data as the first chart in this update of Total Fed Credit, but for only the past 4 years.
The Red, Green & Blue Fed Balance Sheet plots stayed on their courses set in the 1960s, until 2007 when the Fed was overwhelmed by the events in the sub-prime mortgage market. We can see the DJIA's Terminal Zero (Vertical Black Line) occurred in October 2007, as reports of a credit crisis surfaced in the general media. Unlike 2000, when Greenspan drained Total Fed Credit by 12%, the Fed did not start this bear market.
Here is what we are seeing above.
- As the DJIA was at its BEV -5% line, (December 2007) Dr Bernanke initiated a program for swapping its US Treasury Reserves with Wall Street's AAA rated toxic mortgage assets until it swapped 40% of its Treasury reserves. The swap programs had no effect on Total Fed Credit levels, or the declining DJIA.
- Late September 2008, the Fed goes into full panic mode. It starts to purchase Toxic Waste from unnamed, favored financial institutions. (most likely AIG, Goldman Sachs & JP Morgan) The DJIA from its BEV -20% line (late September 2008) plunges into a 20% freefall in the next two weeks.
- The Fed purchased a TRILLION DOLLARS of TOXIC MORTGAGE WASTE in the next THREE MONTHS! The DJIA stabilizes.
- In January 2009, the Fed drains 18.78% of its now toxic reserves. The 2007/09 -40% DJIA Bear Market become the third -50% DJIA since 1885.
- The Fed ceases draining Total Fed Credit and resumes accumulating AAA RATED MORTGAGE TOXIC WASTE from unnamed, favored financial institutions. The DJIA goes into its first significant Bear market correction since October 2007.
The DJIA is now enjoying a good Bear market rally. The question we should now ask is how much higher will it go before the Bear returns? The answer is more than I think possible, but less than you might expect. This Bear Market has the makings of being historic. It is only prudent to take some profits and enjoy the market as a spectator sport for awhile.
I want to emphasize is how disrespectful this Bear Market has been to Dr Bernanke's "policies" in the past. It started without his permission, and its largest decline occurred while Dr. Bernanke was injecting massive doses of "liquidity" into the financial system.
Look at the above chart! Wow!!
This Bear is to be respected, best from a distance, until some things change.
We may think of our current Bear as a stock market Bear. But I suspect that history will show that in fact, this Bear is really going after the "policy makers" themselves. If this is correct, that means the Bear is not going to stop until it humbles the lawyers and social scientists who've usurped the American Constitution and seized control over the economy.
DJIA at the BEV -60% level by June? I'm still thinking it. Don't forget, in October 2008 the DJIA fell 20% in two weeks.
Phase 4: Death of a Reserve Currency
With the massive taxes, spending and borrowing the current Congress is planning, it's not too early to plan your escape from the US Dollar. Treasury Secretary Timothy Geithner already has.
Shortly before, at the dog and pony show hosted by Barney Frank, Geithner, while under oath, told Congresswoman Michele Bachmann, (R-MN) that just this thing was not being considered. He lied. Our Secretary of the Treasury is a tax cheat and a perjurer.
27 March 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.
Email this Article to a Friend 
Printer Friendly Version
