The 1929 & 2007 Bear Market Race to The Bottom
Week 83 of 149
The World's US Treasury Debt Problem
Growth in a "Non-Inflationary" Environment
Forget Prices, Think Stuff!
15 May 2009
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Boiler Plate in Blue Grey
New Weekly Commentary in Black
Here is the BEV chart for the Bear Race.
We can't call it a Bull Market until the DJIA clears that pesky BEV -40% line, and the DJIA failed on its first attempt to clear it. Don't read too much into this failure. As long as the DJIA stays closer to the BEV -40% than the BEV -50% line, this Bullish correction within the Bear Market is still intact. Is it still a Bear Market? I think so, but you may disagree.
The Chart above is based upon Weekly Closing Prices, the Chart below is charting daily moves.
In the past, I've used the metaphor of a horror movie directed by the Bear to describe this market. All horror movies work on a template. The first scene shows everyone happy and full of hope. That's the Bull Market's last all time high, or in BEV Charting, the Bull's Terminal Zero.
As the movie progresses, the horror of the situation is revealed in the following scenes, but not all at once. Good horror is not constant horror. In the movie, the director (the Bear) must offer false hope to the doomed to break the tension, or people start to leave the theatre.
When the DJIA broke below the BEV -40% line last October, there was more actual horror to it than when it broke the BEV -50% line in March. That was not only my gut feelings from watching CNBC, but from the NYSE's 52Wk Lows statistics.
I can't see into the future. The market is going to do what it is going to do. But it seems to me that the 88% spike should have happened during the DJIA's BEV -50% piercing, not the BEV -40% piercing.
Logic would tell a market technician that a market extreme, as we saw in October, should be a once in a decade time to buy. But in this horror movie it wasn't. If this is in fact a new Bull market, we would expect to see this plot laid low and flat on the 0% line for awhile, as it is now doing. But, if this is still a Bear Market, now is the time to go to the restroom and fill up your popcorn box. I think The Bear still has some exciting scenes coming our way before his movie is over.
For new readers, here's the table listing the nine -40% DJIA Bear Markets since 1885. Do I still think the current Bear Market will become a -60% Bear? I do. But I no longer believe it will happen by June.
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.
(Remember, with the 2007 data, up is down and down is up!)
1929/32, Wk 83 200 Day Moving Average Volatility: 1.53%
2007/09, Wk 83 200 Day Moving Average Volatility: 2.11%
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."
The frequency of 2% volatility days has decreased, but Wednesday was another -70% A-D Day, and we saw a +70% A-D Day last week. Since February 2007, (the last 27 months) 22% of these extreme breadth days we see below have occurred. Note that days of extreme breadth are unusual. Frequently they are spaced out by years.
Interestingly, where bull markets have developed, even in the 1930s, they occur with an amazing * lack * of +70% A-D Days. The only exemption is the first grouping of +70% days from April 1933 to December 1934. The DJIA advanced from 73.69 to 103.15, or 39% during this series of +70% Days. That's a good return during a 20 Month period.
The blank +70% A-D Day period was from 28 Dec 1934 to 6 July 1937. Without any +70% A-D Days, but with 12 -70% A-D Days, the DJIA advanced from 103.15 to 176.80, for a return of 71.40% in 2.5 years.
When we see the big positive breadth days returning in July 1937, to the end of my data in March 1939, the DJIA fell 13.5% while the NYSE saw 17 +70% A-D Days. This is all counterintuitive, but these are the facts documented in Barron's.
I wish I had Advancing, Declining AND Unchanged data from the 1939 to 1950. I realize that this chart is not a full picture of how +70% Days affected the market for the past 76 years. But examining the 66 years of data I do have, seeing a multitude of +70% Days is not bullish. But note how big breadth days do make the Bulls happy on CNBC. Maybe they shouldn't.
During Greenspan's Bull Market from 1987 to 2000 there were only two +70% A-D Days, one before and one after the crash of 1987. The next +70% Day occurred 20 years later on 17 August 2007, and we now know what happened after that! Many more +70% A-D Days and the second worst DJIA Bear Market since 1885!
To you Bulls out there - Good Luck. And I mean that. It's no fun being a Bear. It's no fun living in a time when vast amounts of wealth are being destroyed. If I'm wrong and the market takes off like a rocket and the people who kept the Bullish faith while adversity was starring them down finally make some great profits, I'm happy for you. Don't feel sorry for this Bear! But as I've said before, my weekly report * is not * an investment advisory letter. I make no money from my writings. I may change that in the future, but so far I haven't made a cent.
I'm making my personal market research available to the public as I know most investors are limited to Wall Street marketing for investment information, and that seems a bit unfair. Also, I would like to write a report for profit someday, and making myself known to the wider world by giving it away for free during this Bear Market seems a good marketing plan. That should tell you what I know about marketing! I'll let my future free reports tell you what I know about the market. And then I may quit. This is alot of work!
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.
The World's US Treasury Debt Problem
In February 2009, the media reported the Bank of China "hated you guys." That was an attention grabber!
"We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys (The US "policy makers") but there is nothing much we can do."
- Luo Ping, a director-general at the China Banking Regulatory Commission , 11 February 2009
The attention span of a graduate from an American School of Journalism is one news cycle. So after 12 February, this strange headline, originating from the largest holder of US Treasury Debt became a dead story to the "main stream media." The press would rather cover President Obama's new programs for global peace and domestic tranquility. But trust me, this story on China is not going away. A single chart will prove my point.
Since 2005, due to the inflationary policies of Washington, the Bank of China has lost 18% of the value of its US$ "currency reserves."
What happened in 2005? The Chinese took the advice of American "policy makers" and allowed the yuan to float in the foreign exchange markets. They stopped buying US Treasury Debt for yuan reserves at a rate necessary to maintain a fixed exchange rate to the US. In other words, they stopped inflating the yuan at the same rate as Washington was inflating the dollar, and allowed the US dollar to sink faster than the yuan.
President Obama likes his domestic audience to believe he's attuned to the injustices the political left perceives George W. Bush has done to the world. He went on a global extravaganza, apologizing for perceived wrongs done since Ronald Reagan was president. But did he apologize to China for the American "policy makers" use of the world's reserve currency as a slush fund for its domestic political programs? The United States has been doing this since Franklin D. Roosevelt was president. President Obama didn't, and he won't!
His "domestic policies" (estimated to cost trillions) can only be funded by stealing the purchasing power of US Treasury Debt, now owned by foreigners. It's as easy as having Doctor Bernanke "inject liquidity" into the global economy. As this theft proceeds, the "main stream media" will present economists from around the world (but "educated" in the US University system) praising the Federal Reserve for "growth" and "economic stimulus." The coming "injections of liquidity" Doctor Bernanke intends to administer to the global economy, will impoverish current holders of US Treasury Debt, and erode the purchasing power of paper money worldwide. But what is that to a Harvard man like Obama?
The Japanese and Europeans are in his crosshairs too.
The Bank of Japan's US$ Currency Reserves fell by 14%.
Europe's Central Banks still hold US Treasury debt for reserves and they took a 22% loss on these dubious US$ assets.
The value of US Treasury Debt and the US Dollar are going to plummet during the Obama Administration. That is why Mr. Luo Ping of the Bank of China said he hates "you guys." Most American journalists thought Mr. Luo Ping was funny. But the elite media is profoundly ignorant of the underpinnings of American private and public finance, and that is not funny!
The eroding asset value of US Treasury Bonds is not just a problem for the world's central banks. American Treasury Debt is a prime asset for insurance companies, pension funds and personal investment accounts the world over. American "monetary policy" will show no pity to the global private sector. A bond is a bond, and we've seen how President Obama treated Chrysler and General Motors' bond holders! To reward his union supporters, he confiscated billions of dollars in assets and gifted them to the United Auto Workers. The rule of law in the United States has been subverted by the political needs of President Obama and the Democratic party.
If you were a director for the Bank of China, a manager for a life insurance company in Tokyo, or a wealthy individual in the Middle East, after seeing how the current American administration treated American bond holders, would you want to purchase more US Debt? Or would you reduce your exposure to the world's largest credit risk?
"Growth" in a "Non-Inflationary" Environment
"NEW YORK, May 8, 2009 (Reuters) - U.S. inflation pressures rose slightly in April after hitting a 51-year low in March, indicating policymakers should continue to focus on economic growth, a research group said on Friday. - - -"
Financial stories like the one above are pathetic. Reporters in the main are a shallow, gullible lot. When hired government economists use the CPI index as an inflation metric, journalists just pass it along for the public's consumption. What "research group" is REUTERS referring to? The Federal Reserve? Clink the link and watch the Video.
The chart below shows the CPI Index's 51 year low in "inflation" mentioned above.
But CPI is only a sample of certain goods and services within the economy. CPI doesn't include income taxes or financial assets in the "basket", and it should! Measuring inflation through selected prices is useful, but CPI misses the point that broad-spectrum inflationary price increases ultimately come from the Federal Reserve's Open Market Operations where "liquidity is injected" into the banking system.
CPI fosters belief that inflation is caused by price changes made by the producers of actual goods and services, while "economic growth" is accomplished by increasing the money supply. If this were true, and it's not, then providers of economic goods and services are responsible for inflation, while "policy makers" provide manna from Heaven via cheap-credit creation stored on computer hard drives. This idea that CPI inflation is separate from CinC inflation is the greatest financial fraud ever perpetrated upon the public. A fraud devised by central bankers, academics and politicians.
When comparing the CPI & the CinC in the chart below, note that CinC inflation trends to front-run actual CPI inflation.
Monetary inflation has been chronic since the Fed was created by Congress in 1913. Here is a quote from a 1951 Barron's editorial.
Further Shrinkage in the Dollar
"From the standpoint of the creditor, the buyer of Savings bonds, the pensioner, the insurance beneficiary, the school teacher with lagging pay, the experience during and since World War II has been disheartening. Inflation is a concealed type of tax and these are the people who took the brunt of it."
- Barron's Editorial, 31 Dec 1951
Inflation, correctly defined as the expansion of the money supply, (CinC) is again at 10% in April 2009. If the "policy makers" are unsuccessful in channeling their inflationary flows back into financial assets, rising prices in essential goods and services will follow as night after day.
What $1,000 Will Buy
When we think of the effects of monetary inflation, the popular perception is always of rising prices. That is how the "policy makers" would have their victims understand what is happening to their money. This misconception allows "policy makers" to avoid all responsibility for their "policy" as inflation will now be blamed upon the greed of private commercial interests. But rising prices is the wrong way to think of inflation, as that is not an accurate description of what is actually happening.
Let's examine a $1,000 in 1933. In 1933, a $1,000 annual income wouldn't finance a lavish lifestyle, but would have been looked on with envy by many. Gangster movies from the 1930's show midday lunches went for $0.25 in a "swell joint." So with $1,000 in 1933, one might expect lunch everyday for 4,000 days, or 10.95 years. But that didn't happen!
Roosevelt inflated CinC and CPI started to rise. (see above chart) With this action, the government actually gave most of those 4,000 lunches to others to eat. The price of lunch may have risen, and you may have blamed your lost lunches on the "swell joint"s' management's greed, but what actually happened was Roosevelt gave half of your lunches away to people whose names you would never know. So, if you're a fiduciary of a foreign financial firm, or even an American charity with US Treasury assets for reserves, President Obama and Doctor Bernanke have plans for your beneficiarys' "lunches."
Forget prices, Think Stuff!
In the table below, the net differences in the "stuff" $1,000 bought from 1983 to 2009 was a direct transfer of wealth from individuals, and businesses WORLDWIDE to the US Treasury and Federal Reserve. Actually, the Federal Income Tax is largely a cover for the wealth the Federal Reserve's Open Market Committee brings into Washington. When President Bush wanted a trillion dollars last Autumn, did he go to the Internal Revenue Service (income tax) or the Federal Reserve (monetary inflation) for it? This chart of the Fed's balance sheet answers that question!
And note, academics managing the world's central banks are the dirty moneychangers who make this unspoken theft possible.
"Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money."
- Daniel Webster
The table below shows how much stuff a $1000 purchased in October 1983 & May 2009. The difference is what the US Government stole from you.
I included the DJIA and the S&P500 in the table as the financial markets are just another tributary that the rivers of "liquidity" flow into, and out of.
The entire concept of what a bond is has been turned around by the inflationary policies of Washington and the Federal Reserve. People purchase a Treasury Bond thinking that Washington owes them. Washington sells you a bond thinking that the loan you gave the US Treasury is only the first, of many transfers of stuff flowing from the holders of its Treasury's bonds and Federal Reserve Notes to the US Treasury.
The bottom line of this report is, if you want to keep your stuff, don't keep it in dollars. I like gold & silver coins and bars. But before this is all over, the Government will most likely want to steal that too.
15 May 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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