12 June 2009
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Boiler Plate in Blue Grey
New Weekly Commentary in Black
Here is the BEV chart for the Bear Race.
Wk87 for the 1929 Bear Market marked the point when it became a DJIA -60% Bear. Wk87 for our current Bear is a different story. This isn't a good market. Yes the DJIA is up 34.40% since 09 March, but who purchased stocks on 09 March?
Retail investors, on the whole, didn't come back into the market until maybe 07 April. That's a guess on my part. And since 07 April, the DJIA is up only 12.97%. Not a bad annual return. But coming off the lows of the second worst DJIA Bear Market in history, I would have thought returns, 90 days after the bottom, to have been better. Remember the late 1990s? When the DJIA hit a bottom, it bounced right back up, and kept going! Things have changed ten years later.
I know that I've often said that Bulls do better with lower volatility, but Volatility in a Bull Market, like blood pressure, can't be zero either. Six of the past 9 trading days were up days. These 6 up day only put 59 points on the DJIA. The last 9 trading days had an average daily volatility of only 0.33%. Does this sound bullish to you? Not to me. I'll tell you what's missing; this Bull lacks ambition.
The Bull needs to start moving upwards with authority. Bull markets are not supposed to be boring markets, and this market is a real snoozer. Remember, stocks have to do one of two things to attract investment demand:
- Pay a Good Dividend
- Go Up in Price
The Dividend Yield for the DJIA is 3.40%; the S&P500's is 2.40%. Do these returns seem attractive to you? They don't to me when I consider the risks involved. So investors in the main are expecting capital gains when purchasing stocks.
The last 2 weeks have seen unusually low volatility. When things pick up again, we will have to see which way the DJIA goes: up or down. That is not much help, but my crystal ball's calibration sticker expired long ago. So I'm waiting, like everyone else, to see what is going to happen.
Below is my 8-Count & DJIA BEV Chart
This is one boring market! Yes I'm a bear. But I take no joy in the damage done to people's dreams when asset prices fall. I do miss the excitement of seeing the markets move up or down in large bold strokes. This Bear has been denied his due from the "Policy Makers." After the monetary madness of the 1990s and first half of the 2000s, there are still many unresolved issues that have yet to see the light of day. Believing this is why I'm still a Bear. Still the 8-Count is again at zero with no volatility in sight. Let's see what the next week brings.
The Step Sum only cares if the DJIA goes up, or down. How much the DJIA goes up or down every day is no concern to the Step Sum. But the DJIA is walking with tiny baby steps. It's hard to believe that this will last for another month. But if the DJIA keeps walking up that hill with baby steps, and a lots of naps in between, the DJIA 9000 line is a long ways off, but not impossible.
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.
A Brief History of US Dollar Inflation
The use of gold, silver and debt as money is an extensive topic. Below is a brief review of money since 1873. Omissions of important details should be expected. For anyone desiring a superb account of money from the American Civil War to the 1980s, I recommend James Grant's: Money of the Mind.
Silver Demonetized
After the "Crime of 1873", silver was demonetized. Gold alone became money in the United States. Silver's fall from grace resulted from huge deposits of silver discovered in Virginia City, Nevada. These deposits upset the monetary ratio of Silver to Gold of 20:1. American silver coinage became inflationary. Nineteenth century Europe dominated the world of money and industrial production. Europe's gold standard did not accept payments in silver. So silver coinage, from mines in Virginia City, Nevada created a run on US Gold. With no gold, international trade would become impossible for the United States. Silver was demonetized and gold became the standard in 1873. It didn't last long.
WW1 Killed the Gold Standard
World War 1 killed the gold standard, as warring nations paid their bills with paper money. At the Genoa Monetary Conference of 1922, gold was still money, but the US dollar and British pound became money too. At this time, the dollar and pound could be converted into gold coin. This could have worked, but it failed for the same reason silver coinage did; paper money became inflationary to satisfy the domestic political needs of the United Kingdom and United States.
In the chart above, we see President Hoover printing money in excess of gold reserves in a failed attempt to end the depression in 1931.
The large jump in gold dollars (Red Plot) resulted from FDR's devaluing the US dollar from $20.67 to $35 an ounce of gold.
Prior to WW2, European gold flooded into the Federal Reserve. We see the beginnings of a massive inflow of gold in the above chart. Europeans and European CBs deposited their gold in NY, then took paper dollars back to Europe, or deposited their dollars in a US bank account. After seven decades it would be interesting to know exactly whose gold flooded into the Federal Reserve.
Democratic and Republican Parties Kill Bretton Woods
After the Roaring 20s, the Great Depression and World War 2, Genoa was in tatters. A new international monetary agreement was required. The Bretton Woods Monetary Accords (BWA) became law in 1945. The BWA brought into being:
- The World Bank
- The International Monetary Fund.
- The US dollar as the global "reserve currency."
The "reserve currency" feature in the BWA made the US dollar gold's replacement for monetary reserves internationally, and the unit of account for settlement of international trade imbalances. To protect the system from inflation, the US Treasury was not to issue more than $35 paper dollars for every ounce of gold held in its gold reserves. Unfortunately, no one has more disrespect for Federal Law than Washington's "policy makers." Ten years after the ink dried on Bretton Woods, we see in the chart below how Washington started printing paper money in excess of its gold reserves.
After WW2, much of "America's gold" actually belonged to European banks. Their gold was brought to America during the 1930s for safe keeping from Hitler. They had no problem depositing their gold in the NY Fed's vaults, * until * Washington began printing paper dollars in excess of their gold reserves. For the second time since 1913, the paper dollar became inflationary.
"Policy Makers" Demonetized Gold 98 Years
After they Demonetized Silver
The Kennedy and Johnson Administration were hard on the US dollar. There were "New Frontiers" and "Great Societies", wars, a space race, and a growing Federal Government creeping into the lives of American citizens. All of this was paid for in paper dollars. In effect, Washington was laying a tax upon dollar holders worldwide. The drain on "US Gold Reserves" (much of which belonged to Europe) increased.
August 1971 was the breaking point. The US Treasury refused future redemptions of US paper dollars for gold held in the US Treasury's bullion vaults. Using the data published in Barron's from the 1930s to 70s, I estimate that 94 million ounces of European gold was confiscated by the US Treasury in August 1971. I may be wrong, but I don't think so. All too frequently in the 20th Century, American domestic political necessity trumped the rule of law in the United States.
President Kennedy joked how the Soviet Union's position on contentious issues was: "What's ours is ours, what is yours is negotiable." In 2009, Washington's understanding of "ours and yours" is just as morally confused, as the bond holders of Chrysler and General Motors have discovered.
Here is a table for US dollar per ounce of US gold from 1945 to 2009.
And one more chart of paper dollars and gold dollars to complete the series.
Global Central Bank's US Treasury Reserves
Global Central Bank (CB) Reserves are always a popular topic to spark discussion at family reunions, so why not spend some time on them in Wk 87?
We see below how much of the US National Debt is held by Foreign CBs for monetary reserves at the NY Fed. Where do these banks get their money to purchase these Treasury Bonds? Same "old fashioned way" the Fed does; they print it.
"We make money the old fashioned way. We print it."
- Art Rolnick, Chief Economist for the Minneapolis Federal Reserve Bank
The chart below shows the world's CBs hold more US Treasury debt for monetary reserves than does the Federal Reserve. Since May of 2002, the World's CBs have increased their US Debt Reserves by 208%. As these CB bank reserves are used for their domestic banking system's loans, and many of the US's trading partners had a real estate bubble from 2002 to 2007, I think it's accurate to say this chart shows how the post-Bretton Woods "monetary policy" has destabilized the world's economy. Bad things come from bad money. Inflation's only promise is misery.
Central Banks are staffed by intelligent people who really do understand the mechanics and consequences of inflation. So why are they doing this? I can't say for certain, but I suspect most "global policy makers" have attended Harvard, Yale, Princeton, Berkeley or some other elite US university to learn their craft. Since 1913, corrupting money has become a career path for university professors when they serve in government.
My next chart shows the year over year changes in foreign CB's US Treasury Reserves. Note that decreases in the plot are not always reductions in reserves. The plot has to fall below the 0% line for an actual reduction to occur. The last time we saw a year over year decrease in CB reserves was during the "Asian Contagion" of 1997-98. Since 1998, the only global authority selling US Treasury debt in the bond market has been the US Treasury. Foreign CBs only buy US T-Bonds. China is now complaining in 2009, but the Ivy League Alumni staffing the World's banking system are still cooperating fully. On 11 June 2009, CNBC's Rick Santelli reported foreign central banks purchased a large portion of the 11 June's 30 Year T-Bond auction.
The world will experience horrible inflation in the next few years. How could it not? Banking reserves world-wide have expanded over 15% a year since 2002. Doctor Bernanke has assured us that inflationary pressures are "contained." Contained how? As inflation is no longer measured as an increase in the money supply (as was the case in 1873 when silver was demonetized), but by prices (CPI & PPI), and as Doctor Bernanke asked for and got "new tools" from Congress to fight the current crisis last October, I suspect most of the Fed's efforts in 2009 are dedicated to manipulating asset prices higher and commodity prices lower. This is likely true for most CBs too. This will end badly.
My chart above examines CB reserves on a year to year basis. On a year over year basis, there have been no net reductions of CB reserves since 1998. But from week to week, we frequently see actual sales of US Treasury Bonds by the world's CBs.
Pending Liquidity Crisis in the US T-Bond Market
No better way to show this than with a BEV Chart. This chart is a bit alarming as it indicates the CBs are losing their freedom of action. It's now impossible for these large holders of US Bonds to sell their US Bond assets, in significant amounts, in the open bond market.
Barron's only started publishing this series in May of 1995, but these 14 years tell a story. Before 2000, it was possible for CBs to sell 15% of their US debt reserves without causing the end of the world. But typically, as a group, CBs would sell down to 3% in the normal course of business.
From 2000 to September 2007, CBs reduced sales of US T-Bonds to 1.5%. After September 2007, the largest weekly reduction in US Treasury Reserves was only 0.56%, and in most weeks the CBs increased their positions in US Debt.
What is happening? This indicates a massive loss of liquidity in the US T-Bond market for CBs managing their currencies. This is incredible if true, and I think it is true. Every resent auction for new Treasury Debt has "experts" on CNBC asking who will buy the new bonds? Such questions were just not asked, previous to the Obama Administration. So I ask myself, if there is room for a foreign CB to sell a measly few hundred billion of their T-Bonds in today's market? Unless the selling CB was prepared to see a significant reduction in the price of the bonds being sold, (and those remaining in their portfolio) the answer seems to be no. By definition, that is an illiquid market. But the current situation in the T-Bond Market has yet to developed into a liquidity crisis. Washington is scheduling huge T-Bond auctions in the next 4 years - something is going to break.
Liquidity crises bring about financial panics and bank runs. Remember when Bear Sterns had a liquidity crisis in 2007? Its assets became worthless in a matter of weeks. But this isn't Bear Sterns! No, it's the Federal Government, whose lawyers and economists have been pushing *our luck* for decades. Like all gamblers, the day will come when our luck runs out.
How will this play out? Nothing good! When a general acknowledgement of liquidity problems develops, at the very least, we will see historically high interest rates in a matter of months. With interest rates surpassing the 15% Long T-Bond yield of Sept 1981, the mortgage and derivative crisis will come back in a hurry. Internationally, the dollar will become a pariah. The Euro may fare better, but not for long. European economists went to the same schools as did those managing the American dollar. Bureaucratic bungling at the CB level will lose its current appeal in the money and debt markets. However, gold and silver will see prices not believable today. If gold should rise to $10,000 an ounce, my advice would be to keep the gold and pass on the $10,000. But these events may not happen for years to come.
Manipulation of Gold and Silver on the COMEX
Let's see how Doctor Bernanke is "containing" inflation in the gold and silver markets. The blue plot is a simple Step Sum of net Long - Short position of the Commercials. Net long +1, net short -1. Then add up all the +&- 1s and plot the series.
In the commercial category for the gold futures, they have been net short since Feb 2001. That is over 8 years. I read on the internet that gold is being transferred from COMEX warehouses. When we examined my charts of paper dollars and gold dollars above, we saw that withdrawals of gold from the NY Fed in the late 1950's was an early indication of coming trouble. Has the COMEX been selling other people's gold on deposit to third parties? It seems that the people transferring their gold from COMEX storage believe this may be so. The unusual shorting activity by the gold market's commercials seen in the chart below would support this belief.
The silver commercials are something else! How can they be net short for every CFTC reporting period since 1986? I'm also reading about significant withdrawals of silver from the COMEX. But in truth I've been reading this for years about gold and silver.
With the CFTC staffed by the old boy network, I don't have faith in the metals market. Metal prices have become political issues, the lower gold and silver prices are; the better Washington likes it. If metal prices were to pierce a "policy" threshold, and real metal was needed for sale in the spot market, I would not be surprised if the COMEX would make available the necessary good delivery bars as an unofficial, off book loan. Such loans sometimes don't get paid back.
After seeing how the Federal Government protected the assets of Chrysler's and GM's bond holders, the old Soviet credo of "what's ours is ours, and what's yours is negotiable" seems to be the order of the day. So until the CFTC and COMEX officials provided transparency in the metals markets, there is a possibility that owners of gold and silver stored in the COMEX vaults could get stiffed as the owners of European gold did in 1971.
What is so secret about specifics such as who is classified as a commercial trader and what their positions were six months after any trades expired? Unless things are happening that these guys don't want in the media, who cares about fossilized data? The actual wrong to be done is a Federal Regulator like the CFTC allowing rumors like these to exist for years. The gold and silver bugs have been complaining for over a decade. So who is being hurt by letting the public see the gold and silver trades and traders from 1995 to 2007?
But the CFTC will not do this. They will say it's against the law. But face it, congress writes the laws as the CFTC tells them to. So it's the CFTC who is not for transparency. That is suspicious.
I think the gold and silver bugs are on to something. Looking at my chart above, if I were a CFTC commissar, I would be embarrassed to tell the financial media that the silver market was not manipulated, and leave it at that. My only comfort would be in knowing that the official media would take any thing I said as fact.
12 June 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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