17 July 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.
Looking at the Weekly Closing Data, this is the third time since Wk 82 the DJIA closed above its BEV -40% line. The two previous attempts saw the DJIA retreat back below.
Below is my 8-Count & DJIA BEV Chart
The 2% Days keep coming; this is not helpful. Note how the last 1.25 years of the past Bull Market, from March 2006 to July 2007, saw only one 2% day as the DJIA soared towards 14,000. Then Mr. Bear came along and started to rock the DJIA's boat, as is clearly seen above.
All five trading days this week were up days, with Monday and Wednesdays being 2% days. Wk 92 was a very strong performance for the Bull taking the DJIA up 7.33% for the week. Now we have to see if the Bull is willing to defend its gains in next week's trading.
If the DJIA stays above the BEV -40% line, then the 9000 line becomes a key level to watch. Since early November 2008, the DJIA at 9000 was a short lived event. So until the DJIA makes it past the 9000 line and successfully defends it from a Bear Attack, it's hard for me to be very bullish. If you Bulls say this market is going up 500 to 1000 points from these levels, the burden of proof is on you.
We saw a NYSE +70% A-D day on Wednesday.
div align="center">(A-D Shares / Total NYSE Shares Traded)
You might think this bullish or maybe no big deal. But historically, Bull Markets are almost devoid of NYSE +70% A-D days while big Bear Markets have too many of them.
Look at the gap of NYSE +70% A-D days in the 1930s. This 3 year gap covered 1934 to 1937. A good market, even with the excessive NYSE -70% A-D days! But as soon as NYSE +70% A-D days come on the plot, (First on 06 July 1937) it wasn't long before the DJIA started going downhill, and it didn't bottomed until 1942.
Alan Greenspan's term at the Fed had only two NYSE +70% A-D days, one in October 1987 during the mini crash, and again three months later in January 1988. We don't see another NYSE +70% A-D day until August 2007. That's 20 years between NYSE +70% A-D days * and * the gap closed just 35 trading days before the start of the 2007-09 DJIA BEV -50% Bear Market!
The Chart above gives a better view of the NYSE A-D activity of the past 3 years.
Markets have little to do with science, but that doesn't mean there aren't facts to gather or market patterns to be aware of. Below is a BEV Chart for the DJIA covering the same period as my NYSE A-D data. This BEV Chart's dates are exactly aligned with the dates for the 1933-2009 NYSE 70% A-D Chart.
Compare the charts side by side. I think you will agree that excessive NYSE +70% A-D days aren't a blessing from the gods of the market.
Wk 92 gave the Bulls a real shot in the arm. The Step Sum is up nicely and taking the DJIA with it. It would be nice to see these trends continue for awhile.
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.
Easy & Tight "Monetary Policy" 1954 to 2009
The Federal Reserve's monetary policy controls the expansion and contraction in the money supply, debt growth, and business activity by manipulating its Discount Rate & Fed Funds short term interest rates, above or below market-driven longer term interest rates such as long term US T-Bond Yields.
Decades ago, Fed Watchers studied the Fed Discount Rate (overnight loans to banks) for clues of the Fed's intensions with its "monetary policy." The old timers remember the "Three Steps and a Stumble" rule. This rule stated, when the Fed increased its Discount Rate three times, it was time to sell stocks as the Fed was tightening the money supply. Currently, the Discount Rate is not widely followed.
The current focus on the Fed's activities focuses on its Fed Fund Rate, a 30 day interest rate. The Volker Fed (1979 to 1987) made the Fed Fund Rate a primary focus, or more likely, made this interest rate known to the general public. Both the Fed's Discount and Fed Funds Rates are short term rates set by the Federal Reserve. These rates rise and fall as the Federal Reserve's Open Market Committee dictates.
In this report, the long term interest rate sample uses the US T-Bond's Yield. Theoretically, long bond yields are set by market forces in the bond market. I'm sure that was once true.
Times of easy or tight money are easily understood in the chart below. When the Fed sets its Fed Funds (Blue Plot) rate * below * the Yield of the US Long Bond (Red Plot), the Fed has an easy "monetary policy." How far below the long term rate, gives an indication of how loose "monetary policy" is. When the Fed Funds rate is * above * the US Long Bond Yield, the Fed has a tight "monetary policy." Again, how far above the long term rate gives an indication of how tight "monetary policy" is.
From 1954 to 1982, it was possible for the Fed to slam down hard on the monetary brakes without breaking the World's economy. See how the Blue (Fed Funds) Plot rises well above the Red (T-Bond Yield) Plot. The last Fed Chairman who could do this was Paul Volker; that was 30 years ago.
In July 2009, if the Fed were to raise their Fed Funds rate 3% above the US Long Bond's Yield (Fed Funds @ 7.5%) and keep it there for the next six months, as they did in 1969 & 1974, life as we know it on Planet Earth would cease to exist by February 2010. Such an increase in short term rates would send shock waves through the financial markets, causing hundreds of trillions in OTC Derivatives to default, annihilating banks, pension funds, insurance companies and central banks balance sheets the world over.
The above chart is interesting. We see interest rates climbing from 1954 to 1982, in response to the US Government's flagrant disregard of the 1945 Bretton Woods Monetary Agreement. In Wk 87, I covered US Dollar Inflation and Gold Flows.
The era of rising interest rates (1954-1982) was a very different world from the post 1982 era. From 1954 to 1971, the world was concerned with the quality of money (money that maintained its purchasing power over time) and the ability of the US Treasury to maintain its $35 Paper dollar for 1 ounce of US Treasury gold peg. After 1971, the gold peg was gone. Until 1982, "liquidity injections" from the Fed resulted in CPI inflation, rising gold and commodity prices. Bond yields in the late 1970s and early 80s soared to levels unthinkable in 1954. There was a 20 Year US T-Bond with a 15% coupon! Look at the current US Treasury Bond Table. There are still US T-Bonds trading in the bond market with double digit coupons issued from this period.
When interest rates peaked in 1982, the credit standing of the US Treasury was so poor, the US Long T-Bond's Yield was 100 basis points * above * Barron's Best Grade US Corporate Bond's Yields. In 2009, not many people are aware there was a time when Exxon and IBM had a higher credit standing in the bond market than the US Treasury.
After 1982, the world learned to love inflation as the Fed's "liquidity" poured into financial-asset valuations - that and CPI inflation became subdued. From 1981 to 2009, the yields on US T-Bonds fell from 15% to 3%. Capital gains from US Treasury Bonds were excellent! But that is now history. With the Obama Administration, Congress and Bernanke Fed's fiscal, social & monetary policies, investors should anticipate a round trip in US T-Bond Yields back to 15% - and then some. But last time bond yields rose to 15%, it took 27 years, (1954 to 1981). I don't think it will take 27 years this time.
The Chart below shows how far the Fed Funds Rate has swung above and below the US T-Bond's Yield since 1954. Since 1990, the Federal Reserve has found it impossible to invert the yield curve as it once could.
(Note: at the 0 Line, Fed Funds and US T-Bond Yields are equal.)
Three times since 1990, the Fed attempted to invert the yield curve to quell speculation in the financial markets. Three times the Fed made a hasty retreat. The difference between the two periods (1954-82 & 1982 - 2009) was where the Fed's "Liquidity" was flowing. Before 1982, "Liquidity" was flowing into CPI Inflation. The Fed was willing to steeply invert the yield curve to check consumer-price increases. After 1982, the Fed's "liquidity" flowed into financial-asset valuations. To steeply invert the yield curve now, would devastate US and foreign financial-assets.
Viewing this chart, it's apparent that the US Treasury and Fed must also surreptitiously manage the US Treasury's Long Bond Price & Yield. Given the determination of the Fed to maintain its 20 basis point Fed Funds Rate (0.20%) for the foreseeable future, and seeing the US Long Bond Yield only 4.35% above the Fed Funds Rate, and knowing the US Government is committed to spend and borrow further unknown trillions, a Fed Funds - US T-Bond Yield spread of only 4.35% is absurd. The possibility that the US "policy makers" have engineered a False Vacuum in financial asset prices should not be dismissed out of hand.
"The possibility that we are living in a false vacuum has never been a cheering one to contemplate. - - - However, one could always draw stoic comfort from the possibility that perhaps in the course of time the new vacuum would sustain, if not life as we know it, at least some structures capable of knowing joy."
-S.Coleman & F. De luccia
By the way, False Vacuums are a Quantum Mechanics' concept of a universal apocalyptic readjustment where the all laws of physics change. In other words; after the False Vacuum breaks, what was once before, can no longer be. That seems an appropriate analogue on how I see the current market situation resolving itself.
Financial trends don't last forever. We have once again entered the inflationary cycle where "liquidity injections" want to flow into CPI Inflation, while financial assets want to deflate. Thanks to derivatives, it is possible to have inflation concurrent with deflation. There are good reasons for expecting the world's assets to deflate as its liabilities inflate.
Think of it this way. The financial assets individuals and institutions were depending on, will significantly depreciate, as taxes and living expenses rise to extremes that will bankrupt the private sector, and local and state governments. This will leave the Federal Government, with its dollar printing press, the last man standing, and Washington can play the role of Superman coming to the rescue. This is what is going to happen.
How else are we to understand the haste with which President Obama and Congress have pushed the financial stimulus, the "cap & trade" carbon tax and healthcare "reform" bills? These massive, 1000 page legislation bills, designed to reorganize society, costing unknown trillions, must have been written long ago. The Democrats have been talking about a carbon tax and healthcare for over 20 years. Yet these huge legislations were submitted to the floor for a vote by the "Congressional Leadership" without giving members of Congress, or the public, an opportunity to read the specific contents contained in them.
To see more and more power, slipping into fewer and fewer hands, farther and farther away, is an act of political thuggery. This has been done before.
"With the introduction of the Five-Year Plans, the state budget was centralized on Moscow at the expense of the non-Russian republics and regions. The centre accounted for an average of 55-60% of the state budget in the 1920s; in 1930 the figure was 74% and by the end of the dictatorship [Stalin's] almost 80%."
- The Dictators, by Richard Overy, Page 557
Washington has declared war on the private sector's wealth, and the ability of local government to function as independent agencies. In this respect, the Bear may be our friend. Count on him attacking the legitimacy of Washington itself. This Bear will not go away until financial assets, and commodities are again marked to reality, a reality the current Washington political regime may not survive as their finger prints are everywhere. Our Ursa Major still has much to do before he fades away.
But, I was talking about the Fed's "monetary policy."
I've prepared tables on the Fed's handling of "monetary policy" from 1954 to 2009. Personally, I believe the bankers and academics controlling the Fed have mangled "monetary policy" from day one in 1913. But I understand why employees of Goldman Sacks may disagree. Since 1954, the tables show how the "policy makers" have favored easy over tight money by a significant margin.
The next is a table spans 1954 to 2009.
We should remember; it was the Social Scientists of Harvard, Princeton and other elite institutions of "higher education" who trained the world's politicians, bankers, central bankers and market regulators in the ways of the post Bretton Wood's economics. These privileged institutions' Keynesian professors, and their graduates, have drenched the world's balance sheets in red ink and have reorganized society to depend on the corrupt Federal Government. Until this fact is generally recognized by society, we will not be able to work our way out of the hole we now find ourselves in.
A Look at Total Fed Credit
Total Fed Credit contains the monetary assets backing the US dollar. Once the monetary reserves backing the dollar was gold, then US Treasury Debt, and since late 2008, the toxic waste from Washington's affordable housing policy - defaulted single family mortgages.
How any "policy maker" could publicly claim a "strong dollar policy", or how anyone familiar with the current situation in the financial market, could believe that US Long T-Bond could have a yield of less than 4.50%, without government intervention, is beyond me.
Let's look at the below BEV Chart of the above data.
The BEV Chart below uses the same data as above, but is processed by my BEV Formula:
(Data Point / Last All-Time High)-1
Or as Written on my Excel Sheet
=K4995/MAX(K$988:K4995)-1
New all-time highs are recorded as zeros in a BEV Chart. The last zero of a bull market, (the last new all-time high of a bull market) is called the "Terminal Zero." All other data points, not new all-time highs, are register as a negative percentage below their last all-time high. The BEV Chart strips away decades of monetary inflation, uncovering much useful information.
See how a BEV Chart adjusted the data so last year's huge rise in Total Fed Credit is seen in perspective with data from 1948? These are important details missing from the chart above.
The above chart is a record of decaying standards. From 1948 to 1960 we frequently see long periods between new all-time highs in Total Fed Credit. By today's standard this would be very respectable. But the monetary standard from 1945 to 1971 was $35 paper dollar for each one ounce of gold in the US Treasury. As you can see in the table below, from 1945 to 1971, Washington just couldn't comply with its own laws.
After 1971, US dollar "policy" really didn't operate under a standard. The post 1971 dollar is best understood as a global bad habit that funded Washington's political machine and spun off bonus money to Wall Street banks. Call the dollar a "reserve currency" if you want to. However, it's a pernicious piece of paper all the same. But as I've said before, if you're employed by Goldman Sacks, I understand why you would disagree.
If you were to check the DJIA anytime the above chart's plot fell below the BEV -7.5% line, you would notice that the stock market was having some difficulties. However, the 2007-09 Bear began without asking permission from Dr. Bernanke. Most irregular! The 2007's Bull's Terminal Zero occurred at the start of the sub-prime mortgage crisis. In the old days, Dr Greenspan controlled events. Today it seems events are controlling Dr Bernanke.
You may want to visit these websites, or even write a letter to Congress supporting an Audit of the Fed and the US Gold Reserves. In my opinion, there is no better way to end the political madness in Washington than to force it to account for the Fed's balance sheet and perform an independent audit of the US Treasury's gold reserves. Like Bernard Madoff, these people have taken great liberties with other people's assets. Like Madoff, a good audit will bring them down.
17 July 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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