20 November 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.
No doubt about it, The DJIA is going up. That is a fact I have to live with. I'm not being a sourpuss about it. It's just that I know how it's being accomplished, and that it's not sustainable. The Government is borrowing trillions of dollars it knows it can never pay back. But that's not enough. So they have Dr. Bernanke "Inject Liquidity" into the banking system that currently is using the Fed's "Liquidity" to buy more T-Bonds.
After Congress's housing fiasco, the Banks' old customers are for the most part ruined, as well as many banks that foolishly made loans to people, instead of buying US Government debt. So the American Banking system is now borrowing money from the Fed a less than 0.20%, which is then lend to the US Treasury for over 1.00%. No Bank ever got a nasty phone call from the Comptroller of the Currency or FBI for doing that! This business plan is a real Third-World-Banana-Republic Operation. But the current leadership in Congress, and President Obama himself, are actual admirers of Third-World-Banana Republics. They are all members in good standing of the "Private Property is a Public Crime" Club.
Just remember, when the day comes when you're cold and hungry, all this incredible waste and destruction was conceived and executed by the "Best and the Brightest" in Keynesian Economics. Whatever it costs to send a kid to college, the tuition fees are too much.
Be that as it may, as I say every week, as long as Volatility and Interest Rates behave, this Stock Market is going up, with occasional corrections along the way.
Let's take a peek at the US Long Bonds. How can anyone look at this chart and not laugh! Does anyone of any wealth use their own money to buy T-Bonds?
For the past 5 months, the Yield on this T-Bond has been trending down. We might see more of the same for the next 5 months too! Nothing surprises me anymore.
China is upset at the gross fiscal and monetary misconduct of their prime debtor: the US Congress and President of the US of A. So they struck back at President Obama on his visit to China this past week. They gave him a tour of the Forbidden City, while refusing access to reporters that would have made the visit a photo opportunity for this historic deadbeat. Personally, I wish China would do something effective. like selling $2 of their US Bond reserves for every $1 Obama and the Congress spends in excess of tax revenues. That would get Congress's attention!
Below is the DJIA Volatility's 5 Day M/A & BEV Chart
Two weeks ago, things were getting a little out of hand in the Stock Market, but the Guys got the situation under control again. As we can see below, the DJIA's 8-Count is back to Zero.
I have nothing bad to say about the Stock Market, from an investment perspective. I say this with the understanding that the Stock Market is rigged and will one day fall in a death spiral. But why mess with the Stock Market when Gold and Silver are in a true, valuation driven Bull Market?
Look at Gold and its Step Sum going back to 1975 - What a chart! You had better believe that the Full Force of the US Government is opposing the rising price of Gold. But as James Dines always said: "it's a game fish that swims upstream!"
I have much to say about Gold, Gold Mining Shares, and Bond Yields this week. But first, let's spend some time with an explanation of the Bear's Eye View" Plot, or BEV Charting, as I know some of my readers don't understand it yet. The BEV Plot really allows decades of data to tell us its story. And when we want to know about Gold and Interest rates, the BEV Plot really has quite a story to tell! The Bull Market in Gold, Silver, and the Mining companies that produce them, has not even started.
So please humor me, and take the time to read my tutorial on BEV Plotting Basics I've prepared below. You'll be glad you did.
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.
BEV Chart Basics Using Steel Stocks
As much of my work concerns data spanning decades, I frequently use a technique I call "The Bear's Eye View" or BEV Charting. I didn't invent this technique, but once saw a chart of it in a Richard Russell's Dow Theory Letter in the mid 1990s. I figured out how the chart was accomplished, and then spent a few years in libraries gleaming data from old issues of Barron's for a database to use in BEV Analysis.
The concept of BEV Plotting is very simple. Using MS Excel, I take a data series, and for each data point I divide it by the Last All-Time High of the series, and then subtract 1 from the results. The formula below explains how each data point in the series is processed.
(Data Point / Last All-Time High)-1
The actual formula used with Excel for BEV Charting the Steel Stocks below looks like this.
=AG3825/MAX(AG$103:AG3825)-1
"=AG3825" refers to the closing price from the Dow Jones Total Industry Steel Groups, which is found in my data file in Row 3825, Column AG.
I divided last Friday's data by "/MAX(AG$103:AG3825)-1." This Excel Function divides last Friday's data by the highest data point from the past 3722 issues of Barron's, which spans July 1938 to November 2009. I then subtract 1 from the quotient. This final step makes every New All-Time High equal to 0 instead of 1. Having All-time highs registering as either a 0 or a 1 is not a major point to me. But what is important, this final step converts every data point that * is not * an all time high - into a mathematically precise percentage * from * its last All-Time High. That is the whole point of a BEV Chart: to see if a data point is either a New All-Time High, or how far the data point has fallen from its Last All-Time High.
Let's take a look at the Steel Stocks from July 1938 to November 2009.
First a quick note on the data. From 1938 to October 1988, the data is from the discontinued Barron's Stock Averages. From October 1988 to the present, I used the Dow Jones Total Market Groups.
The Steel Stocks is the one group from the old Barron's Averages that actually doesn't require a BEV Plot to see how it has performed since 1938. For decades, Steel, as an investment, has been dismal. But for that exact reason, the Steel Stocks are perfect for the example below.
Below we see the Steel Group data plotted as it was published in Barron's (As Published, Red Plot), with a BEV Plot (Bear's Eye View, Blue Plot) from 1938 to 2006. Compare the two plots for the first 20 years: 1938 to 1958.
In these 20 years, the As-Published Data's Y-Axis's scaling (right side of chart) had to expand by a factor of 8, as the Steel Group's Valuation moved from 43 in 1938 to over 380 twenty years later. If its scaling had not expanded, the Red Plot would have lifted off the plotting area shortly after 1950. But the BEV Plot (left side of chart) has a constant Y-Axis Scale of 0% to -100%. BEV 0% being a New All-Time High, while a BEV -100% is a total wipeout in valuation.
That is the key to the BEV Plot: Constant Scaling in its Y Axis from 0% to -100%.
Looking at the BEV's Blue Plot, in the first 20 years we see how every new All-Time High in the Steel Stocks was converted into a BEV 0% point. A BEV 0% is the only possible mathematical outcome. How far the new All-Time High is above the previous All-Time High is lost in a BEV Plot. But this is the Bear's Eye View, and the Bear doesn't care about how high the Bulls take an index up, only how far the Bear can drag the Bulls down from their lofty heights. The Bear is no fool; in an age of inflation, he gets paid on a percentage basis.
The BEV Plot displays amazing detail. Note the Bear's Eye View (BEV Blue Plot) shows how the Bear took the Bulls down by a precise 44% in 1942 from the Steel Stocks' Last All-Time High (Terminal Zero) of September 1939. Take a close look at the As-Published Data (Red Plot) from 1939 to 1942. Is it possible to see the 1942, 44% decline in Steel Stocks would not be exceeded until 1962? No, its not! The BEV Plot makes such observations jump off the chart.
The BEV Plot below ignores all advances above its first data point in July 1938 of 43.88, as the Bear only cares about Corrections within Bull Markets, and Bear Market Declines.
In the chart above, note how the BEV Plot falls precisely on the As-Published Plot from 1959 to 2006. That's because, for these 47 years the Steel Stocks made no new All-Time Highs, so the As-Published data's scaling on its Y-Axis stayed constant at 25-400. After all, the BEV Plot is only a percentage equivalent of the As Published Points data.
The Chart Below shows the Steel Stocks up to November 2009. Note how the As-Published Data's Y-Axis's expanded from 400 to 875, while the BEV Axis maintained its scaling of 0% to -90%. The Blue BEV Plot maintained its position in the plotting area, while the Red As-Published Plot was pushed downwards. And as always, after the Terminal Zero (the last all-time high of a Bull's Run), the BEV Plot falls on the As-Published Plot, and will continue to do so until the As-Published Data's Scaling rises above 875.
But, like I said, the Barron's Steel Stocks really don't need a BEV Plot to show its Bull and Bear Markets since 1938. But the Barron's Oil Majors Stocks below do. From 1938 - 80, the Red, As-Published Plot, lacks information on the Oil Majors' Bull and Bear Markets. But look at the precise information the BEV Plot displays. From 1938 - 80, the Oil shares fell by a BEV -40% in 1942, 1969 & 1974. From 1950 - 56, the Oil Shares were in a Bull Market. The BEV Plot doesn't tell us how high the Oil Shares rose up from 1950 - 56, but we can see that there was one BEV -20% Correction in 1953.
Without a Bear's Eye View of the markets, charts spanning decades are useless. This is the major reason we seldom see long-term charts of the stock market in the financial media, because charting data "As Published" tell us little or nothing of past decades. What's the point of publishing the above Red As-Published Plot from 1938? Hopefully, my efforts in popularizing this very simple technique will one day become more widely known and utilized. The BEV Chart would do much to expand the Public's knowledge of the financial markets' history.
Monetary Seismology and the BGMI
Before Congress created the Federal Reserve in 1913, Currency-in-Circulation (CinC) could expand only if someone found a gold mine, as in a Gold Standard, gold is money. In a Gold Standard, paper money is a debt payable in gold coin. When a bank or government printed paper money in excess of its gold coins, and paper no longer had sufficient gold to back its circulation, a run on the currency could occur, and the issuer's paper became worthless, thereby ceasing to circulating in the economy. But the gold coins were always good.
So, by necessity, as Congress's Engine of Inflation (The Fed) started jamming the gears of the general economy with its relentless expansion of inflationary dollars, the miners of gold (and silver) had to be marginalized as lowly "Commodity Producers", and precious metals became useful only for jewelry. Speaking of Money and Gold in the same sentence; or favorable mentioning a limited money supply, became impolite in Washington's and New York's elite societies.
However, since 1913, there have been four times when gold mining shares looked suspiciously as if the Gold Miners were once again mining money:
- 1929 - 37 (my estimate)
- 1958 - 68
- 1970 - 80
- 2000 - ??
1. 1929-37:
Today, when we read of the Great Depression, we read a tale of "Deflation." It can't be denied that Financial Assets, Consumer and Commodity prices declined during the Great Crash of 1929-32. But in 2009, what is left untold is a story of the Inflation of the 1920s & 30s.
Barron's started publishing only 7 years after the creation of the Federal Reserve, and all during the 1920s & 30s, Barron's was staffed by Hard Money Men, people who knew the value of Gold as money, and the symptoms and dangers of Inflation. During the 1920s we find stories of how Gold Coins were being pulled from circulation, as one would expect from Gresham's Law of bad money driving good money out of circulation. Clarence Barron, publisher of Barron's, condemned the Federal Reserve for blowing a bubble in the Florida Real Estate Market in the 1920s.
What was the problem during the 1920s? It wasn't Paper Money, but Bank Credit expansion. The Chart below is from my article Swimming against a Rip Tide of Their own Making. We see how CinC stayed stable during the Roaring 20s. But Bank Credit (Blue Plot) expansion fueled the 1920s Bull Market in stocks (Red Plot). The 1920s was also the first era of consumer credit. The Singer Sewing Machine company coined the now famous phrase: "Buy Now, Pay Later", during the 1920s, thanks to ample "Liquidity" in the banking system, from the new Federal Reserve.
About 99.99% of my data is compiled from old issues of Barron's; the Chart's Plots below are from the actual issues of Barron's published in the 1920s & 30s. So you're looking at the same numbers as the people who lived through the Roaring 20s and Great Depression saw.
Following the Blue Plot below (NYSE Margin Debt), it's apparent how the Federal Reserve made possible the Roaring 20s, and the Depressing 30s. The creation of ill-advised bank loans in the 1920s made the 20s "Roar." Just as the writing off of non-payable bank loans made the 1930s Depressing. Thousands of Banks failed in the early 1930s because people bought in the 1920s, but couldn't pay back in the 1930s. The 1920s & 30s Boom / Bust bankrupted many famous people, Winston Churchill and Groucho Marx included. I expect many of our current "Young, Rich and Fabulous" Celebrities will be devastated in the next decade before our current Bust Cycle bottoms.
For all the havoc created in the 1920s, I was surprised to see what a small role CinC had played in the fiasco. Paper money inflation did not occur until the administration of President Hoover (1929-32), as we can see below.
The difference between inflation by bank loans and inflation by government paper money is important.
During the 1920s, the banks took on the risks of increasing their loans in non-traditional areas of banking. The Fed was the source of this "Liquidity." As banks' instruments of credit also functioned as money for savings and stock market investments (as they still do today), this placed at risk the health of the economy, but * not * the US dollar itself, when the banking system's house of cards came down in the 1930s.
So at the start of the Great Depression, funds based on bank credit were at risk, like people's bank savings accounts or their "Investment Trust Fund" (Mutual Funds of the 1920's). But, if you had a stack of $20 bills, there was never a risk of not being able to redeem them for an equal number of $20 US Double Eagle gold coins. At least the statistical data in Barron's suggests there was no risk. But that changed when Herbert Hoover became President.
What we see in the chart below is President Hoover placing at risk the credit standing of the US dollar itself, with the expansion in circulation of paper US dollars. Well, after all, in the 20th & 21st Centuries, the main function of Government is to save the Banks when they get in trouble. And that is what you're seeing below when the Blue CinC Plot rises above the Red US dollars in Gold Plot.
Again, these numbers are taken directly from old issues of Barron's, and the old crew at Barron's commented on what was happening.
Obviously, in reaction to the Great Depression, President Hoover allowed the monetary printing presses to exceed the supply of US Gold Coins in the chart above. We can see how President Hoover devalued the US Dollar from $20 to $35 to one ounce of gold by 1934. Although it was President Roosevelt who made the dirty deed official, as seen in the Red Plot's vertical spike up in 1934. It now took $35 paper dollars to purchase a $20 Gold Double Eagle. And possession of Gold by US Citizens was made a criminal act.
This devaluing of the US dollar stopped the run on US Gold that Hoover started. And then, amazingly, Gold started to flow toward the US Government, a government that just defaulted on its currency obligations. The 1934 increase in the US Gold Dollar Plot was due to Hitler winning the election for Germany's Chancellor. Yes, Hitler was voted into power. The smart money from Europe took their gold and sent it to the US, and deposited it in American's banking system at $35 an ounce. Between the banks and government, the 1930s were a miserable decade for all concerned.
It's not surprising seeing Homestake Mining (Gold Miner) appreciate from $72 in 1929 to $373 in 1933. My source for Homestake's appreciation is Wigmore's: "The Crash and Its Aftermath", but that only covers 1929-33. However I recall from reading Barron's that the Gold Miners did well up to about 1937. With the Fed's reckless "Monetary Policies", and the Federal Government's "Tax and Spend" Fiscal Policies, Gold and the miners of Gold start to look pretty good after a certain point.
2. 1958 - 68
Europe sent its Gold to the US for protection against Hitler's predations, but since May of 1945 the Nazi peril had passed. Not surprisingly, after 1945, with the Bretton Woods Monetary Accords requirement of the US Treasury not to issue more than 35 paper dollars for every 1 ounce of gold in its Gold Reserves, European Central Banks and wealthy individuals decided to keep their gold in US$. European & Asian manufacturing and industry was to suffer from the aftermath of war for years to come, so American manufactured goods had a global monopoly for almost a decade. US paper dollars were in great demand, worldwide.
But in the second half of the 1950s, Europe decided to withdraw their Gold from the US Gold Reserves. There was a good reason to do so. The US Treasury was issuing paper dollars in excess of 35 per ounce of Gold held in Fort Knox. There was a real concern by Foreign Central Banks that they could lose their gold. And it was their gold, even if today's financial historian always phrases the 1950 -71 US Treasury gold drawdown as if the Federal Government was losing "its Gold." In fact, it was Foreign Central Banks that lost 94 Million Ounces of their Gold when Nixon Closed the Gold Window.
The above two charts record a mid-20th Century US$ currency crisis, as does the BEV Chart of the Barron's Gold Mining Index (BGMI) below, when the BGMI rose to New All-Time Highs (BEV 0%) from the 1950s to 1968.
I need to make two vital points about the BGMI's Chart below.
1. When the BGMI is in a Bull Market (BEV 0%s), the Global Financial Community is having second thoughts about the suitability of the US dollar as a Global Reserve Currency.
2. With the 1968 termination of the London Gold Pool, volatility in interest, and currency exchange rates, as well as price volatility for financial assets and commodities, increased dramatically. We see this volatility recorded in the BGMI. Previous to 1968, all the risks that the current OTC Derivative Market now hedges (by the Hundreds of $Trillions), were not present in the global market when the US$ maintained a link to Gold. As is so often the case, unethical behavior is good business for the big banks. Wall Street Banks have made a fortune selling "risk hedging derivatives" for decades, risks that Washington's fiscal and monetary policies made inevitable. It's no wonder "high finance" fears Gold, like Dracula fears Holy Water.
In the BGMI's BEV Chart below, we can observe when these unnecessary financial risks entered our lives by observing the behavior of the BEV Plot on the right and left side of the vertical dashed line. With the 1968 closing of the London Gold Pool, the World changed dramatically.
3. 1970 - 80
In the early 1970s When Presidents Nixon & Ford were struggling to contain Consumer Price Inflation and support a falling dollar with wage and price controls, the BGMI was once again making BEV 0%s (new all-time highs) in 1973-74. But unlike volatility in the BGMI from 1938-68, its volatility became frenzied. It's obvious that the termination of the London Gold Pool changed the world of finance.
When President Carter selected Paul Volcker to Chair the Federal Reserve, to save the US dollar's reserve currency status with double digit interest rates, the BGMI was again making BEV 0%s (new all-time highs).
None of these periods of Market History, where the BGMI's BEV Plot is recording BEV 0%, were kind to investors in US Financial Assets. But as interest rates dropped in 1982, the world fell in love with US Financial Assets for the next 18 years. The BGMI fell for 20 years, until it found itself below its BEV -80% line in November of 2000. Ten years ago, it seemed that central banking, managed by a genius like Alan Greenspan, was in for the long haul; while Gold, that "Barbaric Relic" of the past, was O-U-T for good!
4. 2000 - ????
But since November of 2000, the BGMI rides again! And we also see something never before seen in the 72 years of this data. The BGMI, from March to November of 2008 (8 months), went from a BEV 0% to a BEV -70%. That by itself is remarkable. But to see the BGMI rise up from a BEV -70% decline to its BEV -20% line, one year later is fantastic: Wow!
If the BGMI should start making new BEV 0% before March of 2010, this 2-year BEV roundtrip from 0% to -70% and back to 0% in the BGMI's BEV Plot, would not be a positive "macro-economic indicator!" A volcano stirs below the surface of this market.
A Time When Sellers of Bonds, were Buyers of Gold
Let's take a look at the BGMI and Barron's Best Grade Bond Yields (BBGBY). The plots below are a 20Wk M/A of the Year over Year Change of the BGMI & BBGBY. Note the differences in scale for the two plots' Y-Axes. The BGMI has always been more volatile than the BBGBY, but that is not apparent in the chart below. What is apparent is the increase in volatility for the BGMI after the 1968 termination of the London Gold Pool.
I have placed a Green Oval over the 1974 BGMI Peak as something unusual happened here. We see 4 times, from 1956, when the BBGBY saw a 20% rise. But the 1974 peak in bond yields also corresponded with the peaking of the BGMI's volatility.
When we examine the chart below, it's obvious that from 1971 to 1982, bond yields and gold shares were like a couple of young Love Birds, whose hearts "beat as one" for 10 years. But these were not just any 10 years, but the first 10 years after the link to the US dollar and gold was broken.
Worldwide, wealth was flowing toward hard assets, away from US Financial Assets. This pattern of bond yields and the BGMI volatility rising and falling together can only mean that money was sloshing back and forth between the bond and gold markets.
We see three dashed green ovals above, two during the 1971-81 rise in gold and BGMI. The third occurred in 1987 when Treasury Secretary James Baker announced that the US was going to devalue the US Dollar. Mr. Baker's indiscretion set up the Stock Market Crash of 1987, and for a short time, made gold buyers out of bond sellers.
Since 1987, these two plots, for the most part have decoupled. It's not hard to understand why. For the past 2 decades, people who buy and sell bonds for a living are of the opinion that people who buy and sell gold for a living are "nutty conspiracy theorists." As is all too frequent the case with "educated opinion" today, the "Best and the Brightest" refuse to deal with their opponents' reasoning, choosing instead to defend their positions by marginalizing and stigmatizing people who disagree with them. Beneath the surface of today's ruling elite; there beats a totalitarian heart.
But being a partisan for Gold that doesn't mean I believe CNBC is beaming microwaves at my brain as I watch their ticker. They might be, but I don't think so. But even Dr. Bernanke and Greenspan would have to agree with me, that if I should ever feel the need for an aluminum foil hat, the last 10 years in the gold market, has provided the Gold Bugs with the means necessary to do so.
Look at the above chart. For the past 10 years, Gold has been a top performer in the markets. Silver is not far behind! Yet, this ignorant- elitist attitude towards the Gold Market, a market that has been in a bull market for a decade, is precisely the opinion "educated" people have of people who buy Gold as an economic asset. This is to be expected of college educated people, when the likes of Dr. Bernanke, formerly a professor of economics at Princeton University, teach economics.
Since 1987, we have not seen the BGMI, gold prices and bond yields rising and falling as one, because bond buyers of the 21st Century are not as smart as Dr. Bernanke would have them believe. And we will know exactly when they smarted up, when once again the hearts of the Gold Market and Bond Yields beat as one. That is a sure sign that the sellers of bonds are again buyers of Gold.
When the US Treasury Long Bond Yield breaks above its 1981 highs, Gold Silver, and the BGMI will be at prices even I dare not predict. There are so many dollars in the Bond Market, and so little Gold for it to buy. But I still like Silver better than gold for retail investors. It's just a better deal.
Publishing note. Unless something interesting happens next week, I'll be taking a week off for Thanksgivings. I'll see you in Wk 112.
20 November 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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