Bear Market Race

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This is one boring market, but that's fine with me. I remember the excitement of last October when the DJIA became a BEV -40% market, and March's DJIA BEV -50% Bear Bottom. I could live very happily for the rest of my life if I never again saw days in the financial markets like those. The problem with life is that bad things are impossible to avoid.

The 8-Count is at Zero again, and 2% days are a rare, but are big deals events on CNBC when they happen. But then how many of us have ever seen the DJIA move up 10%, or more, in a single trading day in our lives? See, how we have forgotten last October? Let me refresh your memory on how the DJIA went * UP 11.08% * on 13 October 2008 and * UP 10.88% * only a few days later on 28 October. These hyper-up days occurred during the first DJIA BEV -40% plunge since 1974! Don't ever forget, bad markets see all the big up days! The Great Depression Bear saw days move UP over 15% from the previous day's close, as we see in the chart below.

In the chart above we are looking at the volatility from one day's closing price to the next, for every trading day on the NYSE from 02 January 1900 to 28 August 2008. That's 29,713 trading days; a large statistical sample on which to base my opinions upon.

I haven't analyzed every day that was up over 4% in the above chart, but if we were to make a bet that a specific +4% Day in the above chart occurred during a Bull or Bear Market, I'm taking the side of the Bear, because I'll have significantly better than house-odds on our wager!

So if the DJIA is moving up in little baby-steps, you should be content as a cow munching its "green shoots," because it's the best thing the stock market can do to make money for you! At least that has been the case since January 1900.

As the 8-Count is only the count of the 2% Days (Plus or Minus 2% Days makes no difference) in a moving eight day sample, and frequent 2% Days are not good, let's see how this worked out from 1980 to 2003.

Notice how the DJIA's 8-Count matches the corrections from 1980 to 87, and then went up to a huge 7 during the panic of 1987. This was the first 7 in the 8-Count since the 1930s! The Greenspan Bubble Market really started to take off just as the DJIA's 8-Count laid flat on the Zero line. The end of the 1990's Bull was near when it again saw counts in the 1 to 4 range, with counts above 4 occurring during the 2000-02 Bear Market.

So studying market history, with the DJIA's 8-Count, tells us that we should be Okay in the stock market until the 8-Count starts to rise again in the 3 - 4 levels. Volatility is the Calling Card of the Bear! But there is always the possibility that some non-linier event could occur that would break the "Policy Makers'" False Vacuum and we may see the American markets closing for lack of bids and excessive offers. I'm not predicting that, just saying that at some point some very bad things are going to happen when reality once again surfaces on Wall Street and Washington.

By the way, since 1900, there have been only two days that registered an 8 for their 8- Day Counts, both in October 1933. But from 1929 to 33, seeing 7-2% Days in the 8-Day Count was all too common in a Bear Market that took the DJIA down 89% before it was finished. As this market is being managed by the "Policy Makers," I suspect when their stock market price-fixing scheme falls apart we will see all too many 7s & 8s in the DJIA's 8-Count again.

The DJIA's Step Sum is rising, as is the DJIA itself. Nothing exciting I admit. The Dow is just going up, and that's good.

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 20th Century was hard on the English language. Words had precision in 1900 that facilitated communication. During the following one hundred years, English lost its sharp edge as "progressive intellectuals" began to dominate the Public's affairs in Government and Law. George Orwell's Ministry of Truth's slogan, "War is Peace" is not so far from our current international monetary situation, where Keynesians economists claim "US Treasury Debt is Money" - if it's on the Federal Reserve's balance sheet.

Money wasn't always Debt. It wasn't always possible to expand the American money supply (CinC Inflation) with a ledger entry. Colliers New Dictionary of the English Language had no entry for the word "Inflation" in its 1924 edition. But it did include an entry for Inflationist:

In 1900, the term "inflation" had yet to be popularized, but responsible people in public office understood the reckless expansion of the money supply would eventually have calamitous consequences. A book from this pre-WW1 era is still in print, and available on the internet, for free. It is worth your time to review it.

FIAT MONEY INFLATION IN FRANCE
How It Came, What It Brought, and How It Ended
By
Andrew Dickson White, LL.D., Ph.D., D.C.L.
Late President and Professor of History at Cornell University;
Sometime United States Minister to Russia and Ambassador to Germany

Unfortunately, academia has drifted far from Dr. White's days at Cornell; just how far can be seen in the chart below. Dr. White knew the reckless increases in the money supply (CinC Inflation) would have its effects seen in financial assets as well as in consumer goods. He documented these effects in the book he wrote on France's CinC Inflation of the 18th century.

Today's Keynesian economists would have us believe inflation is exclusively consumer price increases (CPI Inflation), that CPI Inflation is due to "excessive speculation," while Financial Asset Inflation is "Economic Growth", resulting from the "best and the brightest's" management of interest rates, credit and expanding banking reserves. Keynesian economists deny monetary inflation's cause and its negative effects, as monetary inflation is a career path for the Greenspans and Bernankes of the world. The consequences of their reckless inflation is not only placed upon the shoulders of others, but used as justification for further economic meddling (Bernanke's New Tools) by these self-styled "Policy Makers." The current "credit crisis" is only the most recent black eye the battered public has received from its abusive relationship with its government. With the current Congress and President Obama, we can expect more black eyes to come.

So which view of inflation is correct: price increases or increased money in circulation? Both are accurate views, with the understanding that CinC inflation flows not only into CPI Inflation, but also into Financial Asset valuations, but not at the same time.

Economists take great care in denying the impact of the Federal Reserveds's "liquidity injection's" on Financial Asset values from 1982 to 2007. But ten years ago, they would calm panicked investors with the assurance of a "Greenspan Put", and today, they credit Fed Chairman Bernanke for the 2009 Bounce from the market's March lows. With current economic theory, it appears one can now be just a little pregnant. The truth is, your Capital Gains are their CinC Inflation. However, while their monetary inflation may increase your "net worth," it also lowers your standard of living.

In Wk86, I focused on CinC Inflation's effects on CPI and Financial Asset Inflation, using the DJIA's Dividend Yield trends as a precursor to the shifting of the Fed's "Liquidity" flows between consumer prices and asset valuations from 1948 to 2009. It was obvious that Bear Markets in the DJIA & Barron's Stock Groups (Financial Assets) were Bull Markets in Commodities (CRB Indexes 1948 to 2009), and vice a versa. In other words, inflation and deflation have co-existed since 1948. It's entirely possible to have deflation in financial asset values while experiencing increases in CPI Inflation. It has happened before.

Unfortunately, the available CRB Indexes data started in 1948, so we missed WW2's massive CinC Inflation affect on CPI and Financial Asset Prices. Fortunately, from 1948 to 2009, the DJIA was closely coupled to Financial Asset Valuations, and the Barron's Gold Mining Index (BGMI) to Commodity Prices. (see tables in Wk86) So in Wk98 I will use the DJIA & the BGMI as proxies to examine the effects of CinC Inflation on Financial Assets and Commodity Price inflation from 1938 to 2009. This study does not use the DJIA Dividend Yield.

The BGMI is the sole survivor of the Barron's Stock Groups (BSG 1938 -88). It's an antique from a time before computers, when typeface was set by hand. The BSG used Thursday's closing prices, as the BGMI still does today.

No options are written on the BGMI and, with the exemption of Mark J. Lundeen, no financial articles are written on it either. That is unfortunate. The BGMI functioned from 1938 to 1971 much as the price of gold has since 1971: as an indicator of the global confidence in the US Dollar.

Why are old data series seldom used in studies for public consumption? Two reasons:

1) This is data recorded with ink on paper in a digital world. It's difficult finding sources and then compiling this data into a digital format from old ink on paper publications.

2) Monetary inflation has rendered decades of data useless. Look at the first 30 years in the above chart. After the data has been compiled, what good is it?

Happily, it's with long-term historical data that my Bear's Eye View (BEV) Charts show their real worth by examining a data series using a last all-time high perspective.

The chart below uses the same BGMI data seen above, but plotted in a BEV format. All data points on the 0% line are new all-time highs. How much higher any new high is from its previous all-time highs is something lost in a BEV Plot. Data points not on the 0% line are registered in negative percentages, from their last all-time high.

So we lose something in a BEV Chart, but the Bear's Eye View is a study of market declines, market recoveries between all-time highs and corrections within Bull Markets. When comparing these two charts of the BGMI, which chart displays more information? For a more detailed description of BEV Charting, see the link below for my article on DJIA -40% Bear Markets from 1885 to 2008.

The BGMI is remarkable in its volatility characteristics before and after 14 March 1968. Note the green dashed line. There is a reason for that. The US dollar, unfettered from a gold link, became a source of economic instability. We see the effect of this instability in the DJIA's volatility too.

Seldom remarked on today, but widely covered at the time, the Kennedy and Johnson administrations had a major gold problem. The price of gold was fixed by law at $35 an ounce, as a check on inflationary CinC creation. But Kennedy's "New Frontier" and Johnson's "Great Society" Policies were highly inflationary, resulting in the printing of more US Dollars than the US had in gold. How many additional dollars? The table below gives us the specifics.

The dashed green line, in the BGMI Chart above, marks 14 March 1968, the day the United Kingdom officially closed the "London Gold Pool's" (LGP) efforts to keep gold at $35 an ounce. The central bankers trying to maintain gold at $35 an ounce were exchanging their gold for dubious paper dollars. This situation was no secret; Barron's has published US Dollar's reserves data since the 1920s. In 1968, anyone could purchase a copy of Barron's for $0.50, and see where the US Government had issued $135 in CinC for every ounce of gold it held in its vaults. So the world was cashing in their over-priced paper dollars for under-priced gold. This trade was forbidden to American citizens as, under law, gold bullion ownership by Americans was prohibited.

But it was a smart trade for those who could make it. Think of what $35 in paper, and what $35 in gold (1 oz of gold) could purchase in 1965. Thanks to the LGP, about the same. But since then, how much purchasing power have those $35 paper dollars lost, and how much additional purchasing power 1 oz of gold has gained in the past 44 years! The loss in purchasing power of the US dollar since 1965 is scandalous.

The existence of the LGP was reported in the financial press of the 1960s, as was the LGP's intention of punishing "gold speculators" trying to "break the $35-to-1oz-of-gold link." What I never saw published was a table, such as the one above, proving that it was not "speculators" that broke the dollar's link to gold, but the US Government's dishonest & illegal "monetary policy."

President Nixon is blamed for "closing the gold window." But the loss of the Bretton Wood's gold-fix actually started with the Eisenhower Administration. The table above proves the US Government never took the $35 / 1 Ounce of US Gold seriously. Most of our current economic, and, yes, even our social problems are only replays (in slow motion) of the 18th century French inflation Dr. White examined in his book. There's nothing new under the sun, just different fools getting sun burnt in the same old way.

With that as a back ground for the following charts plotting the DJIA & the BGMI, let's look at the charts. The first spans 1938 to 1969.

One thing that must be kept in mind with monetary inflation; it takes time for its effects on prices to manifest themselves. From 1938 to 1942, CinC increased drastically as both Financial Assets and Commodity prices fell, then from 1942 to 1946, both the DJIA and BGMI increased over 100%. But after 1946 we see that the Fed's "Liquidity" flowing into the DJIA (Financial Assets), as the BGMI deflated. This is precisely what happened In Wk86's table. Bull Markets in Financial Assets are Bear Markets in CPI Inflation.

One thing to note in these charts: when the DJIA or BGMI plot touches the CinC plot in these charts, their Bull Market's days are numbered!

Notice how after the DJIA touched the CinC plot in the 1960s, then the CinC plot accelerated upwards leaving the DJIA behind. But note how CinC inflation started to flow into the BGMI from 1968 to 1980. This chart's timeline also shows the beginning of the 1982 to 2007 DJIA Bull Market. Note the Bearish action in the BGMI after its 1980 peak.

Look at the DJIA in 2000. As in the 1960s, seeing the DJIA touch (came darn close anyways) the CinC Plot was a bad omen of things to come. Not long after the DJIA touched the CinC Plot, the BGMI bottomed and reversed it Bearish Trend.

The 71 years of market history shown in the above three charts, strongly suggest that the DJIA (Financial Assets) have entered a period of deflation, while the BGMI (CPI Inflation) is now benefiting from the inflationary flows from the Federal Reserve. If history is a guide to our future, sometime in the next 10 years, the BGMI will once again touch the CinC Plot. As the CinC Plot never goes down, but only accelerates upwards, I expect the BGMI, and CPI to rise to levels currently not thought possible by most market commentators, while Financial Assets deflate.

How much higher can the BGMI rise? If history is any guide, future BGMI valuations and Consumer Prices will depend upon on how much the "Policy Makers" inflate CinC. History also strongly suggests the "Policy Makers" current attempts to reflate Financial Asset Valuations, and suppressing CPI Inflation will be futile - but they will try none the less.

Seeking Alpha and ETF Trends have published articles on the CFTC's ruling to limit the trading positions of Deutsche Bank's grain and energy ETFs. Why? After reading these articles, the authors seem to lack a specific reason for the logic of this action by the CFTC. After reviewing the 71 year history of the DJIA, BGMI and CinC Inflation above, you may have come to the same conclusion for this action as I have: the CFTC is erecting a levee to prevent a "liquidity" spill over from Financial Assets into commodities, hoping to contain CPI Inflation. This action, allegedly to prevent "excessive speculation" in the grain and energy markets, is yet another government price-fixing scheme. Sometime in the future, we will see US Farmers in distress if the "Policy Makers" continue to suppress grain prices.

CinC has increased by 9.73% in the past year. The "Policy Makers" intend to keep their inflation flowing into Financial Assets. Unfortunately, the companies listed in the stock market are fewer than there were ten years ago, and the ability of these companies to soak up additional inflation is limited. After all, how much additional money can flow into deeply indebted companies that are not profitable? The earnings in the S&P500 are horrible.

Greenspan's finger prints are clearly apparent in the chart above, and below. The NASDAQ is no longer the hot market it was a decade ago.

The selection of companies, and the reasons for money to enter the general stock market, are both becoming smaller; while commodities, metals and the companies procure, process and market them seem more than able to soak up the Fed's "Liquidity."

All things considered, I expect the next ten years to see significantly higher prices in commodities, and lower valuations for financial assets. The transition will be traumatic to all in the US Dollar economy. The "Policy Makers" can place blame for the increase in CPI Inflation on "speculators," but in fact, base-line levels in assets valuations and consumer prices are ultimately set by the "Policy Makers'" own inflation.

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."

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.