Dow 1900 to 2008

The 1929 & 2007 Bear Market Race to The Bottom
Week 58 of 149

2007-08 Bears Advances up to #6 from #9.
The Bear is Out of His BOX!
New All Time High for 40Day M/A in Volatility
The US Treasury 20-Year Bond with 15.75% Coupon!
&
Electrical Power Consumption 1929 - 2008
DJIA -40% Bear Markets & the US Power Grid

Color Key to text below
Boiler Plate in Blue Grey
New Weekly Commentary in Black

The weekly closing price BEV (Bear's Eye View) results for week 58 in the Dow Jones' 1929 & 2007 bear market's race to the Bottom are as follows:

The 2007-08 Bear was sprinting ahead of the 1929-32 Champ as of Thursday 20 November, but then something happened late today. Yesterday's DJIA close of 7.552.29 would have pushed the 2007-08 Bear into #6 on the record books with a -46.41%. But late in today's trading, the market got a huge "liquidity injection" and pushed the DJIA up 494 points for the day.

In the BEV chart above the 2007-08 is still only #9 in the books as I am using weekly data for this chart. But on a daily basis, the 2007-08 went from #9 to #6 in the record books as of Thursday 20 November 2008's closing price. So anyone who now wants to call the 2007-08 the 6th worse DJIA bear market since 1885, they would be correct in doing so.

But this is a race of distance, not speed. The bear will be back. I suspect I will get a weekly closing price that will propel the 2007-08 Bear up in the rankings.

Below is my volatility chart comparing 2007's 200-day moving average closing price volatility with 1929 bear market volatility.

Note: 2007 values are actually positive. They were inverted so 1929 would fit on top and 2007 on the bottom. So for 2007, please forget the negative valuations and focus on the percentages.

1929, Wk 57 200 Day Moving Average Volatility: 1.12%
2007, Wk 57 200 Day Moving Average Volatility: 1.63%

Volatility is Persistently Extreme. As I have noted before, normal volatility is between 0.00% & 1.00%. In fact over 75% of daily closings since 1885 fall within 0.00% & 1.00%. In the 40 daily closing price used in computing this new record high, only 5 of those days were within these historical normal standards!

It is actually more intense now than it was in 1929.

As you can see in the chart above, after the 1929-32 Bear's 40 Day M/A peaked at 3.81% and then it came down significantly. With the majority of the bear market laying ahead in 1930-32, the market's volatility did calm down. But what if the 2007-08 bear doesn't calm down until the DJIA is at much lower levels? I would say that it is proof that the "dismal scientists" are over medicating their patient with "liquidity injections." When they stop the treatment, the withdrawal will not be pretty.

Today's closing was a 6.54% day. Wednesday and Thursday both were plus 5.00% moves. This market is having convulsions. If it were not for the "liquidity injections" this market would be much lower than just -42.91%.

(Remember, with the 2007 data up is down and down is up!)

Historically, daily 1% swings from the pervious day's closing price in the DJIA, while not uncommon, should not occur on an almost daily basis. The stock market is running a fever with its "Persistent, Extreme Volatility."

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 "steps" in a data series as prices change over time. An Advance - Decline Line for a data series derived from the data series itself. Logically, to have more up days than down days during a bull market makes sense as does having more down days than up days during a bear market. Understanding the Step Sum is no harder than that.

I think it is safe to say that the "Bear is out of his box." I gave it a chance to turn bullish again, but my leniency did nothing good for the DJIA. As we can see below, the Dow has taken a hard turn to the bear side of the market. Remember, the "Step Sum" is only the sum of all up + down days for the DJIA. So with the Step Sum heading down, we are seeing more down days than up days.

Here is my concern with this market. It has been over a year since the mortgage crisis started and the "policy makers" have done nothing to fix the old problems. I don't know what is coming our way, but being upfront and truthful with the public, like smoking cigarettes in front of a camera, is a vice central bankers, politicians, and regulators tend to avoid.

Alan Blinder is probably the best of a bad lot. He at least intends to tell the truth - even if it is at some unspecified point in the future. I'm looking foreword to his upcoming book I'm sure he will write someday.

Count on major surprises to hit the market in the next few months as well as the old mortgage issues resurfacing. I have no inside information, but I do understand the ways of "policy." What is to come will be followed by mind numbing congressional hearings and press conferences by bearded and bald-headed "policy makers" until you just say no-more and turn off CNBC.

As I have not yet turned off CNBC, I've noticed that money managers everywhere, have become a stampeding herd of bewilder beasts heading for "the safety" of AAA Rated, US Treasury debt. I have been following markets since the late 1970s. If there is one thing I've learnt over the years, it's that when everyone is doing it, especially when professional money managers are * all doing it *, it is something I don't want to be doing!

I hope my readers realize that my advice is worth no more than what they are paying for, like nothing. But it's alarming anytime money managers (using other people's money) pile into something because it is perceived as a sure thing. I believe that the current US Treasury Debt market will one day prove to be the rotten inner core of the US debt bubble. Why is that?

Look at what the Fed is doing to its balance sheet!
This is quite a "Policy Statement!"

Every economist working for the Federal Reserve and the US Government is ethically compromised. When they teach students in academia, they pretend that the laws in their discipline are as binding upon the visible universe as are the law of the natural sciences. But deep down inside what they actually believe in is that their genius transcends the laws of economics.

When given the chance to enacting "monetary policy" everything they taught to others is forgotten as they become willing hired guns riding shotgun over their own law of supply and demand. How someone like Dr. Bernanke can tell anyone that the US dollar is a viable economic asset when he expands the Fed's balance sheet like he has is proof positive of his mendaciousness. But maybe I am being unkind. It could be that he is just stupid. I don't mean to get personal here but look at what he has done! Lives will be ruined for what these people do with our money.

I wrote a two piece article on interest rates and gold in 2007. The thesis of the articles is that the price of gold leads the yields of the US Bond Market. Or, as gold goes up, bonds go down. Gold is a leading indicator for future long term interest trends. I have charts going back to 1968 to prove my point. Take a quick look at the end of Part 2 to see them. Since 2000, gold and US bond yields have decoupled from a 30 year relationship.

When I saw the historical relationship between US long bond yields and gold, I found that there is plenty of reason to believe that the price of gold and silver is as manipulated today as the price of anything else.

Paulson has 700 billion for his bazooka! With something like that taking aim at the markets you just have to figure that someone is going to get hurt. Market manipulation? We are up to the eyeballs in it.

So keeping gold and silver prices' from rising is essential if they are to maintain the US dollar's reserve asset status as they monetize sub-prime mortgages at the Federal Reserve. It is logical that they want to keep the old monetary metals depressed. What is illogical is to see gold and silver fall every time there is a financial crisis.

Oh, the US Treasury 20 Year Bond with the 15.75% coupon? It was issued in 1981. Twenty seven years ago was a time when US Treasury 20 Year Bonds had to offer 15.75% coupons.

Because of inflation, US Bonds were called "certificates of confiscation." If you take a quick look at Barron's bond tables this weekend you will still see +10% coupon US Treasury bonds from this era being traded. But before you do that, take another quick look at my chart showing what Total Fed Credit has become just in the past 8 months.

So my prediction for Week 58 is this: One day gold and silver will take off for the moon and treasury yields will follow. If US Long Bond's yields were to return to 1981 levels which way do you think the bewilder beasts would run next? The dollar is quickly becoming a political fiction. God help us all when it is not just me saying that!

I don't care to put a date on it, but I think gold, silver and the mining shares are a buy. There are some exploration companies that are a buy of a life's time. But with higher than usual gains comes the higher than usual risks. However, when these shares have fallen almost as far as some financial companies, much of the risk is priced out of the purchase.

DJIA -40% Bears and US Electrical Power Consumption

Barron's has published US Electrical Power Consumption since their 05 August 1929 issue. As nothing much happens without electrical power, power consumption is an excellent, hard data measurement of economic activity. In fact I would say that electrical power consumption is actually a better measurement of real economic activity than is GDP. Due to "policy decisions," the year to year valuation the US dollar that GDP is measured in has changed greatly, while a Kilo-Watt from 1929 is the precisely the same Kilo-Watt value in 2008 So what can we learn about the US Economy from 1929-2008 by looking at power consumption?

To smooth-out the seasonal variations I took a 52 Wk M/A on the weekly values. I noted above that the peak months are July/August. Tellingly that has only been true since 1966. Before 1966 the peak months are from November - January. This is logical. After 1966 air-conditioning became an ever increasing load on the power grid. Before 1966, the hot summer months may have caused suspension of production during a hot weather spell. But that is only a logical assumption on my part.

Charting any data series that has greatly expanded its scaling over the decades poses problems. US power consumption's 52Wk M/A from 1929 to 2008 has increased by 78 times in the past seventy nine years. This makes a 10% change in 1929 invisible on the above chart while a 10% change in 2008 is easily seen. It is difficult equalizing percentage changes from one decade to the next.

To overcome this problem of comparing weekly changes from 1929 to 2008, I divided each weekly figure by its 52Wk M/A, then subtract 1 from the result. After doing this we can now compare the highs and lows of power consumption from 1929 to 2008 by a standardized measurement, its 52Wk M/A.

The chart below shows the eight decade evolution of the American economy as see by the power lines that span our country side.

The key to the chart above is the light blue 52Wk M/A line that is fixed at 0.0%. The first data point (August 1930) is at 1.76 billion kilo-watts and the last (November 2008) is 78.04 billion kilo-watts. The dark blue plot is the actual power consumption value as published weekly in Barron's "Pulse of the Economy" section. So what is actually displayed above is the weekly US power consumption moving above and below its 52Wk M/A in percentage terms. To see absolute values you must look to my first chart on electrical power consumption.

When we examine the above chart we see that over time, the relationships between these two plots have changed as the economy of the United States has changed over the decades.

During the 1930s & 40s there are extended periods when the weekly data never fell below or raised above the 52Wk M/A for over a year. We see the Great Depression and World War Two's effects upon electrical demand. These swings in electrical demand are huge and this pattern has not repeated since 1946. In 1945-46 demand dropped by 8.21% as factories shutdown to retool from war to peace time production.

The post war economy is also on display above. Again note how the weekly data points are mostly above the 52Wk M/A line. Think of a boat floating high in the water when looking at 1946 to 1974. This floating boat appearance suggests increasing demand for electrical power from 1946 to 1974. As the peak months before 1966 were in the winter months, I suspect that the increased demand was for industrial purposes.

Now on to the DJIA -40% bear markets from 1929-2008 effects upon the electrical demand.

The red vertical lines fix the locations of the four DJIA -40% bear markets. I've also included a BEV plot of the 52Wk M/A to allow us to observed any drop in the 52 Wk M/A in percentage terms from a last all time high. The 1929-32 & 1937-38 DJIA -40% bears saw a significant reduction in power consumption. This must have been due to factory reducing production and cutting power consumption. That is not good for factory workers.

The 1973-74 DJIA -40% bear had little effect on US electrical consumption. If GDP went down significantly in 1974, we don't see it as a reduction in electrical power. I suspect in 1973-74, the stock market's problems did not include a credit crisis as was the case in 1929-32 and 1936-38 DJIA -40% bear markets.

However, look at the above green BEV plot's 4.0% drop around 1982. We see no -40% DJIA bear, but there was a credit contraction. Fed Chairman Paul Volker raised the discount rate interest rate to 14% and the US prime rate peaked at 21%. There was a US Treasury 20 Year Bond with a 15.75% coupon! Still today there are a few US long bonds with double digit coupons to be seen in the bond tables in Barron's that date back to this period. The effects of these high interest rates caused the largest decline in Electrical consumption since 1946.

Lets take a Bear's Eye View of the 52 Wk M/A without the weekly data clutter. Is there is any connection between the electrical power consumption and our DJIA -41% Bear Markets?

I see no connection between DJIA -40% bear markets and power consumption. The 1973-74 bear market, and the 1983 decline in power consumption proves that to me. However, when a * credit contraction * in the financial markets is sufficient to drive the DJIA down by -40%, this contraction in credit also effects the actual economy's demand for electrical power.

That is why the DJIA Bear of 1973-74 saw no fall in electrical demand, but the 4.12% fall in electrical demand in 1983 took place without a DJIA -40% bear market. Since 1929, credits contractions have been the key to reductions in power consumptions - and most major DJIA bear markets. What happens to electrical demand if the "Big Three" domestic auto manufacturing companies shut down due to credit problems? If they stop their production, we should see it in the American electrical power consumption data published in Barron's.

If US power consumption's 52Wk M/A drops more than 2.50% we may want to take a weekly look at power consumption. But as you can see, we are not there yet.

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.