The spread between 1929 & 2007 is growing wider. This looks good, but the United States has so many internal economic problems from years of "policy abuse." I would not trust this correction to continue until Christmas.

In my "Axis of Evil", the Social & Political Science Departments" of Harvard, Princeton, and all the other institutions of "higher education" would headline the list. After an honest survey of the current political and economic situation in Washington, and seeing exactly who is doing this to us, and where they got their training from, I can't see where these privileged institutions having done anything beneficial for the average guy, or gal, who wakes up everyday to go to work for a living.

Recognizing the decades of dubious achievements of America's "Social and Political Scientists", the key to America's financial markets is now in the hands of our foreign creditors. If they got together and denied the rumors (when in fact there were no rumors) that they were going to start selling US T-Debt, the long bond's yield would rise by a full percentage point in a few days. God help us if they actually started to reduce their US Dollar reserves by only 10%.

In the last week, the US Treasury sold $235 billion dollars of new debt in the bond markets. I saw lots of reports how bad the auctions were, and maybe if you're a bond trader on the wrong side of the market last week's auctions were awful. But from Washington's perspective, the ¼ trillion dollar bond sale this week went pretty well, as we can see in the chart below.

For the Treasury, how bad of a week in the bond market could it be when this 30 Year T-Bond's yield was down, and its price was up? As long as the "policy makers" can get away with their bond market scam, I expect the DJIA to do pretty well.

So who was buying? Ask Treasury Secretary Geithner & Dr. Bernanke no questions, & they will tell you no lies!

The 8-Count looks Bullish. The following historical fact is undeniable: when the market experiences excessive 2% days (up or down, makes no difference) it's bad for the Bulls. So I'm not surprised to see a nice rise in the DJIA as its 8-Count falls.

Let's take a look at a chart I used to post weekly.

This chart plots the DJIA daily volatility's 40-&-200 Day Moving Average for the Great Depression and our current Bear Market. The 40-Day M/A is dropping fast. Remembering that Bear Markets are volatile markets, both of these plots of the 2007-09 Bear are still deep in bear territory. We may currently be enjoying an excellent little rise in the DJIA, but history shows us that Bear Markets have excellent bullish corrections to the bearish primary trend.

The number of 2% days in each 200-Day M/A data point is now falling.

Last year's rise (Red Plot) in 2% days is amazing. The Great Depression's rise (Blue Plot) pales in comparison. Remember, 2% volatility days are uncommon, except during Bear Markets. The starting points in the above plots marks the last 2% day during the Bull Market phase. The plots start the day after this Bull Market 2% day. Note that during the 2003-06 Bull Market, there was a period of 251 trading days, without a single 2% day.

The normal pattern for 2% days is as follows. They start to increase in frequency during the blow-off phase in the Bull Market. Note that the above plots show a rise in 2% days previous to their Terminal Zeros (last all time highs in the bull market), and then we see the big increase in 2% Days after the Bull Market has exhausted itself, and the Bear Market does its damage to stock valuations.

The question I have concerning the 2007-09 plot is whether our Bear got his 2% days out of the way early in the Bear Market, or if he is coming back for more. Remember, volatility is a Bear Market phenomena. With the pending problems in the credit and currency markets, I have a hard time believing this Bear's work is finished. But the market is going up. So for now, enjoy!

Since 07 July, the DJIA's Step Sum has been rising. It's nice to see the DJIA going along for the ride. But I can't see the next 17 trading days doing likewise. It's in the nature of markets to challenge a trend such as we've had since early July.

So, sometime in the next week or two, I'm expecting a significant downward correction in the Step Sum below. If the DJIA can keep most of its gains from last March, that's good. If the DJIA can keep above the 8500 level, as the Step Sum finishes its correction, and returns upwards, that is very good! If the Step Sum declines, and market volatility returns, (an increase in the 8-Count) I would be very careful and take some profits.

So, we should expect a decline in the Step Sum, and need to see how the DJIA responds to it.

It's a fact, but one that's hard to believe: the #2 DJIA Bear Market took the DJIA down 54% on only 25 net down days from 09 October 2007 to 09 March 2009.

So why did the Step Sum faithfully track the DJIA from 1995 to 2007, only to get hung up on something during a massive Bear Market? The Federal Government got involved. Dr. Bernanke has been talking about "injecting liquidity" into declining markets since 2002.

"…there are several measures that the Fed (or any central bank) can take to reduce the risk of falling into deflation. … the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost." - Ben Bernanke: Federal Reserve Governor: November, 2002 at the National Economists Club, Washington, D.C.

With "monetary policy" managed by academics of the caliber of Dr. Bernanke, the day is coming when the dollar will purchase as much as it costs the Fed to create it: nothing. You can be sure the failure of the US Dollar will be top of the fold, front page news, but only after the fact. Don't be surprised. Journalists attend the same colleges as economists do. You really should have few weeks of canned food in the house, a few thousand dollars in cash, and some gold and silver coins and bars.

Currently, Bernanke's "injections" are having their desired effects on the DJIA, and that is making most people happy. Just don't think this will go on forever. I suspect we have not seen this Bear's terminal selling climax in the above DJIA's Step Sum. When our Bear comes into his prime, and we see his terminal selling climax, you will not need me to tell you it's happening.

The chart below is one I follow each week. I think it's that important!

When the Fed is forced to raise interest rates, it will be pure poison for the DJIA. They will hurt the real estate market and the OTC derivative market, raise the unemployment rate, and kill profitability for America's heavily indebted businesses. So if we can find some way of gauging the pressure on the Fed to raise interest rates that would be a very good thing to have in timing this market. I think the above chart gives us the interest rate pressure gauge the Fed must be watching.

Currently, the spread between Fed Funds and the US Treasury's Long Bond is near record lows. When we see this spread reach the -5% line, we know something big is up, something approaching that the Fed can't control. Currently Dr Bernanke has vowed not to raise Fed Funds or his Discount Rate for a "very long time." So to see this spread increase can only mean that long term interest rates are rising. In other words, the bond market has more sellers than buyers.

Somewhere below -5% in the above chart, the Fed must start to raise its short term Fed Fund and Discount rate or risk hyperinflation. I expect when this chart falls below -5% we may see a break down in the DJIA as well as its Step Sum.

You may want to cut this chart out and keep it on your desk, or somewhere handy. Here is where I get the data to update this chart every week. Using my chart for a historical reference, a weekly update for personal use will prove handy.

For Fed Funds
http://online.barrons.com/public/page/9_0210-moneyrates.html

For US Treasury Long Term Interest Rates I use the 20 Year T-Bond's Yield
http://online.barrons.com/public/page/9_0210-adjmortbaserates.html

By the way, the data used in the chart above are from last week's Barron's. So you may want to see what this week's Barron's has to say.

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.

People think in herds. Once an idea becomes accepted dogma of the masses, one loses friends if he argues against it. One dogmatic perception that really bothers me is, when someone signs on the dotted line at a home closing they become a "homeowner." Unless the new house was purchased with cash, this is not true. What usually occurs at a home closing is someone takes on a mortgage that allows them to occupy the collateral, as long as they make the payments to the bank. People usually don't know what they are actually purchasing when they sign on the bottom line: money, at a certain rate, for so many years, with the house as collateral.

In my mind, there is a big difference between a homeowner and someone who has the right of occupation by servicing a mortgage. This distinction is becoming widely recognized by many former "homeowners" who "purchased" their houses from 2000-07.

The unspoken truth of the real estate market is it's actually a market of mortgages. The practical differences are huge. In any market, other than the real estate market, the market functions as a price discovery mechanism for that market's producers and consumers. However, in the real estate market, the actual price of a house is only a secondary consideration. The prime consideration in the mortgage market is the ability of the "homeowner" to make monthly payments for 30 years.

The chart below shows the history of US mortgage rates from 1964 to 2009. Interest rates have a huge effect upon the valuation of real estate.

To see interest rates' impact upon housing valuations, I've created a "what if" table below, using a constant monthly payment, at the peak and bottom mortgage rates in the chart above. It's very informative to see the effects of interest rates on the size of the mortgage.

It's a point of interest that both the purchaser of the $92.5K & the purchaser of the $300K home (possibly the same house, 28 years later) paid about the same for their mortgage when interest payments are taken into consideration. But then both mortgages have their "homeowners" pay $1400 a month for 30 years, so this is not surprising. But people don't think of details like this, even if bankers do. This does not make bankers evil, but illustrates the poor quality of practical economic education Americans receive from their high schools and colleges.

We all understand there are many variables bankers and their clients have to deal with that my little "what if" table completely ignores. Still, the table reveals truths about the real estate market.

One truth concerning the real estate market is the past bull market was primarily a function of the decline in interest rates from 1981 to 2009. But exactly what kind of bull market was it? In the table above, did the house's valuation rise from $92.5K to $300K? Or did interest rates falling from 18% down to 4% that qualify a client, with the ability to make a $1,400 a monthly payment, for a larger mortgage? I think the answer to that question is very obvious; the real estate market's rise in valuation was the result of a bull market in debt from 1980 to 2009. And what the debt market gave "home owners", the debt market will take away when interest rates once again rise. Yes, I'm talking about home valuations.

Can we use my "what if" table to predict future home valuations in an increasing interest rate environment? Due to the formerly mentioned "many variables bankers and their clients have to deal with, I think not.

An unfortunate fact the real estate market's participants must deal with in the future is that Congress expanded the Federal Government's involvement in the real estate market in 1999. That is never a good thing. The Federal Government's mandate of lowering of credit standards not only resulted in the financial ruin of many of the intended beneficiaries of "affordable housing", but created a financial False Vacuum in the mortgage market that broke in 2007.

For your information, False Vacuums are a Quantum Mechanics' concept of a universal-apocalyptic readjustment where all the laws of physics change. In other words; after the False Vacuum breaks, what was once before can no longer be.

The False Vacuum (an impossible-to-sustain situation) was created by legislation forcing the banking system to loan billions of dollars, at government subsidized rates, in 30 year mortgages, to America's habitual credit deadbeats. Congress then had Fanny Mae, Freddy Mac, as well as Wall Street, bundle these mortgages for sale to fiduciaries of other people's money worldwide. From 1999 to 2006, the False Vacuum held, as the world of high finance fell in love with "AAA-Rated, US Agency Debt." But the False Vacuum broke in 2007, when "AAA-rated Agency Paper" became synonymous with loosing all of your money. The world has lost its faith in the American Debt markets. So for the US mortgage market, what was once before in 2007, can no longer be.

The consequences of Congress's breaking its False Vacuum in the mortgage market will have profound future implications in America's real estate market. One of the results of the fallout from the credit crisis is the shrinking pool of qualified buyers. With an expanding volume of homes being placed in the market due to mortgage defaults, great downward pressure on home valuation is applied to the housing market. A growing number of mortgage defaulters are former good credits whose only fault is becoming unemployed in a bad economy. But, as the current credit standards have it, these unfortunate bankrupts are now disqualified for mortgage financing for many years to come.

Another consequence of the False Vacuum's breaking is, the international market in US Agency Debt has lost much of its liquidity. This will greatly reduce the ability of Fannie and Freddie to purchase mortgages from mortgage originators, as their ability to sell them is now greatly limited. Recent experiences with American mortgagers have traumatized fiduciaries worldwide. This creates a situation where banks in the future will have to use the mortgages they write for their own reserves, as they will not be able to sell them as in the past.

But banks have never liked holding long term mortgage paper, which is why FDR created Fannie Mae and the Savings and Loan industry in the 1930s. Congress can force banks to do ill-conceived things in the credit markets. But Congressman Frank writing another chapter in the tale of woe, he and other American politicians inflicted upon the free markets in past decades, will not rekindle the bubble psychology in the housing market.

The future of the government-subsidized 30-year mortgage is grim when one considers:

1) the inevitability of rising interest rates

2) the damage done to individual credit standings of a broad segment of society by the recent housing bubble

3) today's huge inventory of unsold homes, as well as homes held by banks in foreclosure proceedings

4) the impairment of the mortgage financing network

I expect housing valuation to deflate to levels not believable today. It's a case of rising interest rates, a shrinking pool of qualified purchasers, to many houses for sale, and a greatly impaired financing system. It will be this way for many years to come.

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.