Wk 108 of the Great Depression Bear saw its first BEV -70% data point. For our Bear, Wk 108 is just another Baby Step in a long series since Wk 94 (last week in July). Still the DJIA gained 9.29% since July. But, since the end of July, Gold is up 14.83%. Silver is up 24.63% and the Barron's Gold Mining Index (BGMI) is up 22.26%. NO, Gold and Silver's prices are not over priced!

The DJIA Volatility's 5-Day M/A is coming back down again. In Wk 108, I can't say if we will continue to Baby Step up, (low volatility) or if we are entering into the terminal stage of the Bull Run that started in March. But note that since June, every time the Blue Plot above came back down, it fell below the 0.5% line. If this down move fails to do so, and we keep the 8-Count above 0 for the next month, we may see some excitement in the Stock Market for Christmas.

Here are two charts of the DJIA I haven't shown for a few weeks.

The chart below really shows how exciting the DJIA was a year ago. Most people have already forgotten.

The DJIA posted a 3 in its 8-Count this week. But I'm assuming it's only noise until we see something happen in the market. I'm also anticipating a good run up before the Bear brings the Fear of the Lord back to all the sinners in the White House and Congress. But then, maybe somewhere in the "Health Care" bill, Congress slipped in an amendment legalizing lying and thieving by public officials.

One thing for sure, since the beginning of March of 2007, we have seen an inordinate number of DJIA 2% days. Let's take a look at the 20- year period from January 1960 to December 1979.

DJIA 2% days are rare. In this 20 year period there were only 117 DJIA 2% days, and 75 of them occurred between January 1973 to December 1975. This was during the 9th worse DJIA Bear Market since 1885. But then, volatility is the Bear's Calling Card!

It interesting to note since March 2007 we've seen 130, DJIA 2% Days. That's a lot! I'm not surprise, as with such tremendous volatility we have also seen the #2 DJIA Bear Market since March 2007.

So where is the Bear? I really don't know! He's not at Dunkin Donuts and there is no sight of his truck in front of the NYSE. It's for darn sure the Financial Media doesn't see him either! But with all these DJIA 2% Days coming at us, we would be foolish to think he has gone away.

It's important to remember where we are in the market: a Bullish Correction within a Historic Bear Market. This Bear is not going away until Dr Bernanke publicly announces that the Fed has finally written off trillions of dollars in toxic assets it now holds as reserves for the US Dollar, and all the Gold in Fort Knox is property audited and its results published.

What that would do to the DJIA, and the US dollar, gives me a shudder when I think of it. The US Bullion Reserve has not been property audited since the 1950s. Considering who runs Washington, I'm coloring the Treasury's Gold Reserves G-O-N-E!

The Step Sum is now at zero. That means that we have exactly as many down days as up since the DJIA's Terminal Zero in October 2007. But note how the DJIA is still 4000 points below its last all-time high. I really think this market has more upside to it. It will be interesting to see how close to 14000 it gets, but I just don't think the "Policy Makers" can do it.

The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish, the Step Sum rises. 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.

Much was made last week in the financial media when the Department of Commerce reported GDP rose 3.5% in the 3rd Quarter. But how can this be possible when everything that should be going down is going up, and everything that should be going up is going down?

The following table is from Barron's indispensable "Pulse of the Economy." I used data from Barron's 02 Nov 2009 and compared it to data from a year ago, Barron's 03 Nov 2008 issue.

At the Department of Commerce, the US Economy experienced growth when production, consumption, sales, and orders were all negative. How is this possible? Simple; the Commence Department's GDP calculations chose to ignore production, consumption, sales and orders. Some people would call this 3.5% growth a lie. Others may call it a damn lie. But to the people who compile data at the Commerce Department, it's called keeping the boss happy.

But then the only truth the "Social Scientists", who control so much of American Domestic Policy, recognize is political truth. The above table is proof of their complicity in deceiving the public to further the interests of a corrupt political establishment. What other conclusion are we to come to when the only economic factors in the above table, higher than the Commerce Department's GDP statistic, is unemployment and personal consumption? This is a deliberate falsification of a government record.

Let's look at some charts.

I understand that GDP is much more than manufacturing, but Industrial Capacity (Blue Plot) is still far from where it was in October 2007 when the DJIA was over 14,000.

American manufacturing has been in a depression since 2001. This is to be expected, when politicians live only to tax, spend, and regulate our Economy's productive elements. Who can blame manufacturers for moving their plants and jobs overseas when their employees all too often vote for politicians who have committed themselves to bankrupt the companies they work for?

Steel production is up nicely from its lows of last March, but its still 10% below that of a year ago. Steel was once a major factor in America's economy and a source of high-paying jobs. Not anymore.

The story of the United States was largely a story of Steel and the NY Banks that financed it. However, since the 1950s, American "Industrial Policy" & Union Demands have been very hostile to basic industry. The Steel Industry in particular has suffered greatly. During the 1970s, the Steel Industry along the Great Lakes was dubbed "the Rust Belt." Today the American Steel industry is largely ignored. For the most part, iron ore from Minnesota is sent somewhere else for processing. It's a sad commentary of our time that currently Wall Street does little to finance basic industry.

The chart below is for domestic oil refining. The down spikes in the 2000s show what happens to America's oil refining output when hurricanes hit the Gulf Coast. It drops 45%, since the majority of America's refining capacity is located on the Gulf's Coast.

I don't know exactly why there has been a reduction in refining output in the past 5 years. But there hasn't been a major refinery built in the US for decades because of "Environmental Concerns." So the old infrastructure is not what it once was. Steel pipes and physical plant have a limited service life. Most of our current refineries are many years past their designed service life. These refineries (built 40 or more year ago) will stay in operation until disaster and loss of life really does strike the Gulf Coast, with or without a hurricane.

If America's production of refined oil products is falling, then our importation of refined oil products must be rising. This is not good for our international trade balance, or domestic employment. I've sailed in the Persian Gulf a few times; it has a white sandy bottom that gives the waters of the Gulf the appearance of a swimming pool. But it's not. It's alive with sea snakes and fishes. Remarkably, the entire Gulf is surrounded by the largest oil refineries and petrochemicals plants in the world, most of which were designed by American companies. I've never seen an oil slick on its surface, and the white sandy beaches I've seen are pristine.

If the environmentalists were really concerned about ecology, they would urge the scrapping of old refineries, and push for modern, efficient oil refineries to be built near the source of the oil's demand, in New England, away from Hurricane Alley. But even the thought of doing so is offensive to the ears of Lear-Jet Liberals, so forget I even mentioned it.

There was a time when "Capital Investments" were largely financed by people deferring current consumption for the sake of future returns. In other words: savings. Capital investment, when a gold standard is in effect, results in more actual goods and services becoming available with a stable money supply. So over time, money actually increases its purchasing power as more goods and services become available for the fixed money supply to purchase.

This is no longer true. The "Growth" in these indexes is pure inflation via the assumption of debt. Our current "Monetary System" actually decreases actual economic productivity. The Green Plot for "Residential Investments" shows the inflationary consequences when debt burdens become overwhelming. In due time, all of these inflationary "investments" will follow the Green Plot down.

This chart of Electrical Power (EP) and Currency in Circulation (CinC) is a superb illustration of the problem the American Economy now labors under. Since August 1971, when the US went off the Gold Standard, the money supply has increased faster than the goods and services, such as EP. This inflation has resulted in increased debt loading on our economy, and a decrease in the ability of our economy to service this debt.

Inflationary increases in prices (and asset valuations) since 1971 are easy to see. But this inflation has a more insidious effect upon the economy, and the lives of people who must make their living in it. Money is no longer gold, but debt; borrowed money that must be paid back by wages, profits and taxes. The above increase in CinC is now actually strangling true economic growth. In other words, as heroin injections destroy an addict's body, the dollars the banking system and Washington injects into America's, and the world's economy has become toxic and is destroying the global economy.

From 2000-07, too many people took part in the Real Estate Bull Market. At a typical house closing, a check was passed from the purchaser to the seller of the house. The purchaser didn't use savings from their wages to make the purchase; they used a loan from a bank. The source of the Bank's funds for the check was not from their depositor's savings, it came from the Federal Reserve. Thanks to Congress, the Fed can create as many dollars as the banking system asks for. Prices for houses were not limited by the ability of people to save, but were set by the expansion of the American money supply.

In my house closing example above, the bank asked for, and received from the Fed, $300,000 to fund the deal between the purchaser and seller in the house closing. Unknown to the participants sitting around the table, as the deal closed, CinC just increased by $300,000. Everyone was happy, and nothing seemed wrong when the bank adroitly sold the mortgage to Fannie Mae, who packaged it as AAA debt, and then sold it to the purchaser's pension fund in 2005.

The $300,000 mortgage turned toxic as the loan was to large, relative to the ability of the purchaser's to service its monthly payments. (See my CinC and EP chart above to see this problem on a national scale.) It took 40% of the purchaser's wages to service the $300,000 mortgage. Along with the credit card, auto, and school loans, all made possible by the Federal Reserve, the purchaser was in great difficulty even before he became unemployed in 2007, when he stopped servicing all of these debts.

The purchaser thought he was free and clear of his debts with his successful bankruptcy filing. After all, his pension fund was protected in the bankruptcy proceedings. But his pension fund invested in Fannie Mae AAA Securitized debt. After the waves of debt defaults since 2006, much of his pension fund's AAA-Rated Fannie Mae assets, (sold to them by Bear Sterns), became worthless.

America is about to relearn one of history's hard economic lessons: a country that forgives its debts as easily as it created them is on the road to ruin.

The chart above plotting CinC and EP tells us not only how money dramatically increased faster than economic growth since 1971, but also illustrates the predatorily nature of the relationship government, and the elites in academia and the banking system have with American citizens. Their management of our monetary system has caused our dollar to become toxic to pension funds, insurance companies, and eventually even to the US Government and Foreign Central Banks.

Since antiquity, inflation is an historic destroyer of prosperity. The quote below concerns China's first experiment with paper money in the 10th Century:

"Such were the sources of that flood of paper money which, ever since, has alternatively accelerated and threatened the economic life of the world."
-William Durant: Our Oriental Heritage, (1935) pg 780

Above is EP's actual plot in KWs without CinC. The chart above is not indexed. Each year has two peaks in demand. Winter's demand peaks in January or February; Summer's demand peaks six months later in July or August. America's power grid suggests "Global Warning" has cooled considerably since 2006.

As a measurement of Economic activity, I really like EP, as everything runs on electricity.

I ignore EP's down spike in 1946. American industry's retooling from war to peace time production resulting in an 8.21% decline. But the greatly anticipated great WW2 recession never happened in the United States.

We see our current decline in EP exceeding the lows of the early 1980s, so, the next record we look to is the 1938 decline. The 6.58% reduction in 1938 EP marks an extreme decrease in the economy, and rise in unemployment. The 1930s was a decade of economic hardship. With the current happenings in Washington, I expect our economic decline to ultimately fall below the lows of 1938. But will we reach the Great Depression's lows of 1933?

Rising interest rates affect the economy, and EP. Comparing the Prime Rate with EP's BEV Plot below, note how interest rates spiked to 21% in 1981, and EP's reaction.

Double-digit interest rates kill economic growth. But note how our demand for EP has declined below the early 1980s, even with our low interest rates! If interest rates should rise again, EP's decline will accelerate. But must interest rates rise?

During the 1930s economic depression, interest rates declined dramatically, but during the downturn of the early 1980s they soared to historic highs. Why the difference?

Paper money inflation changes the risk profile for a sovereign credit. As the perception of credit risk increases, so do interest rates. Roosevelt was a great proponent of inflation as a cure to the depression, but, as we see below, during the Great Depression, the US never let the monetary printing presses run riot.

That all changed after WW2. As paper money circulation increased from the 1950s to the 80s, so did US Dollar interest rates. It's true that interest rates fell from 1981 to present. But it's also true that the political influence of Keynesian Economists peaked from 1981 to present.

However, recently the benefits of an exponentially-expanding money supply have come into question by the international community.

"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 but there is nothing much we can do."
- Luo Ping, a director-general at the China Banking Regulatory Commission , 11 February 2009

If the increase in paper-money circulation from 1952 to 1981 caused double digit interest rates in 1981, what will interest rates rise to when the Bond Market begins factoring the CinC increases since 1981?

I expect yields for the US Long Bond to greatly exceed its old record highs of 1981. This will cause a further downturn in housing activity. Housing prices will collapse in the years to come as US interest rates rise above 20%.

The mortgage market will vanish, in real time, before the eyes watching CNBC. After Mr. Bear is done cleaning up Congress's "Affordable Housing" fiasco, I expect real-estate transactions, at some unknown future time, to be conducted on a cash only basis. Mortgages will become reviled by both creditors who hold the debt, and the debtors who can't make good on their debts.

Many Unions in the building trades will become extinct when rates increase, as rates must. But there is some justice to this, as Unions are solid supporters of Big-Spending-Political Parties who have purchased elections for decades with subsidized loans to the laboring masses. One economic activity I know will be in a Bull Market for a long time is Un-Employment.

In November of 2009, there is no economic activity free from political interference, if only because of tax policies by the Federal, State, County and City Governments. If you're in business, government has its hooks deep in you. One consequence of diverting businesses from generating Profits to dispensing Social Justice is the massive rise in Jobless Claims.

I wish I could be more optimistic about our future. If I'm wrong, and the "policy makers" are successful in containing, and then resolving the problems I've addressed these past few years, I would be the first to thank them for a job well done. But our multi-trillion-dollar problems are of a scale unknown in history. I don't think the "Policy Makers" will succeed in pull off a soft landing, as their solution to our problem is the problem: monetary inflation.

The Bear will have his day, and you had better prepare for it with a few pounds of silver in your hand.

"To look is one thing, to see what you look at is another, to understand what you see is a third, to learn from what you understand is still something else, but to act on what you learn is all that really matters."
- Author Unknown

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.