4 December 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.
More of the same for the Stock Market: Baby Stepping to higher levels, at least for now.
This is one boring market. Maybe that is why I spent so much time on my focus section below.
Below is the DJIA Volatility's 5 Day M/A & BEV Chart
There is no Volatility in this market. On Wednesday, CNBC spent a lot of time reporting on how consumers were staying home for the Christmas shopping season. Retailers can't have a good year unless they have a good Christmas. So what happens to the Retailing Stocks?
They declined only 0.54% for the week. Well what do you expect when the market is being valued on the Inflationary Expectation Model? These Retailing Stocks don't need no stinking earnings! If the Fed and US Treasury want these stocks to go up, there are going up, until bond yields start to rise.
A BEV -60% decline in the DJIA? I think it's still coming.
The Step Sum looks positive, even if it's pausing now. I expect the Step Sum's and the DJIA's next move to be up, but nothing dramatic.
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.
Dubai's Credit Problems
While serving on the USS Kansas City, I spent the summer of 1993 in Dubai, UAE. The Kansas City, being a fleet oiler, spent more time in port than at sea, so I had ample opportunity to see Dubai. Sixteen years ago, Dubai was a charming little city, and very friendly to the US Navy. I very much admired the rulers of the UAE. It was obvious they were very much concerned about the welfare of their citizens.
To the best of my memory, Dubai's tallest buildings were housing projects. Its hotels, while high quality, were more in line with what could be found in Minneapolis, not Las Vegas. How things have changed. From the videos I see on CNBC and elsewhere, I'm sure Dubai is a new, completely different city from the one I was familiar with, plus now Dubai is apparently bankrupt.
What happened? Well it wasn't only one thing. But at the core of Dubai's problems is America's post Bretton Wood's "Monetary Policy."
In August of 1971, the US officially, unilaterally and illegally eliminated Gold as the anchor to the world's monetary standard. With pen to a piece of paper, President Nixon's executive order breached a major clause in an international treaty, ratified by the US Senate. This executive order was a violation of the American legal system's body of laws. But actually, Bretton Woods is still operating. Bretton Woods created the IMF and the World Bank, as well as made the US dollar the world's reserve currency. With the removal of the Bretton Woods dollar to gold peg, and the resulting Floating Rate Currency Regime, Governments and Banks, worldwide, have pillaged the wealth of businesses and individuals.
The table below proves the US Government had never taken the Bretton Wood's dollar peg to Gold seriously, and how it loves to inflate the money supply.
As Gold is in limited supply, Gold restricted the creation of credit and currency. All politicians resent funding limits on their economic policies; no banking system appreciates restrictions on their ability to make loans: so the $35 Gold Peg had to go. So since August 1971, expansion in currency and bank credit has run wild in the world's economy, including Dubai's.
Let's take a look at the United Arab Emirate's Dirham exchange rate. The Dirham, as is typical of an oil producer, doesn't fluctuate. It has maintained a constant 3.67 to 1 ratio to the US Dollar for 23 years. Before August 1971, all currencies had fixed exchange rates, except for those currencies issued by the perpetual bad boys of monetary inflation. Perversely in 2009, seeing a currency maintain a peg to the US Dollar is a sign of being an inflationary bad boy.
Why is this? Because this peg can only occur if the nation's central bank is inflating its money supply at the same rate as the US Federal Government. And since 1971, Washington has inflated its money supply recklessly, as has the UAE, to maintain a 3.67 Dirham to 1 US Dollar Peg.
But in defense of the UAE, the inflation they created was also a sign of being an excellent ally to the United States, isolating the price of oil from the consequences of Washington's inflationary follies."
The chart above shows the expansion in the Federal Reserve's balance sheet and the US's CinC. Here is the source of all our booms and busts in commodities, consumer prices, real estate and the stock market since 1971. Don't misunderstand me, I fully understand that prior to 1971, booms and bust occurred. But before the world sees the bottom of our current economic problems, we will see hardships unknown to an economic system, whose political and banking systems were checked by a Gold Standard.
My data for the UAE's Dirham only goes back to 1986. But seeing their Dirham staying neck to neck with the US Treasury and Federal Reserve's inflationary excesses for the past 23 years, is all one has to know why Downtown Dubai looks like Las Vegas, and is having the exact same problems.
Dubai is not alone in their debt problems. Currently, their major problem is they can't hide their financial difficulties any longer. If they were the United States, they could just write a check, drawn on the account of the US Treasury and that would be that. As the Bretton Wood's Gold link is gone, what's to stop the issuer of the World's reserve currency from doing so? But the UAE's Dirham is not the world's reserve currency, so they can't. But by no means is Dubai's current difficulty unique in our world of increasingly worthless money.
Let's examine again a table I published in October. It has to do with valuing the DJIA in different currencies from the March 2009 lows. By looking at how the DJIA is valued in different currencies, we can also see how these currencies' Central Banks are managing their currencies.
I highlighted how the DJIA has done in US Dollars and UAE Dirhams. They are identical.
Let's take a look at how different currencies have appreciated in Silver. Note: the ranking are different from the DJIA as the Metals bottomed during last year's credit crisis, not last March. If a currency's performance in Silver is not equal to that of the DJIA above, it's due to currency exchange rates changes from last October to March 2009.
We might as well look at gold too.
Like I've said, for most people Silver is a better investment than is Gold.
Consider the following. One ounce of gold will currently purchase 63 ounces of silver. That's 3.93 Pounds of Silver for an ounce of Gold. At the top of the last Precious Metal's Bull Market (1980), an ounce of Gold could buy only 14 ounces of Silver, less than a pound (16 ounces = 1 pound).
I believe Silver will perform even better this time around. But even if it just matches the 1980 value of 14:1 Silver to Gold ratio again, with Gold at $5000, Gold would see an increase of 5:1 from today's prices. But assuming a 14:1 ratio, silver would be at $357 an ounce for an increase of 19:1 from today's prices. You want exposure to Silver!
Silver is traditionally highly leveraged to Gold in Precious metals Bull Markets. I believe the Precious Metals Bull will go to highs not believable today, and we will see Silver trade below 10:1 to Gold before the Financial Markets see their lows. These are only assumptions on my part as I can't see into the future, but we have a way better than a "house odds" situation for this to happen.
But back to Dubai.
As I've said before, Capital Gains, and Losses are only Inflation and Deflation from a Central Bank's "Monetary Policy." But as American "home buyers" and the financial ministers of the UAE are discovering, inflationary gains are transient events. But the bank loans that produced the sweet memories of past capital gains, hang like a mill-stone around a man's neck until they are made good or until defaulted upon. The above tables show there are many Dubais in the making. In due time, many other countries' debt problems will also have their 15 Minutes of fame as CNBC's "Experts" wonder what went wrong.
Consumer Debt & Personal Income
In the past I've condemned Alan Greenspan for his monetary excesses. Don't expect me to stop now as we are still suffering from the work of this Inflationary Super Star, no matter what you read or see in the financial media. My case in point for Wk 112: Consumer Debt and Personal Income.
In defense of Doctor Greenspan, charlatans and snake-oil salesmen have always schemed to defraud people. But our culture and educational system once stood in the way of these predators. In generations past, preachers would give their congregations lessons to live by, chapter and verse from the Bible of the ills of debt and inflation. The same was true of our educational system before the Federal Government took a large role in classroom curriculum. But that was a long time ago.
Since then, our educational system has become infected with Keynesian and Socialist economic theory, and the Baby-Boomers, and their children have learnt their lessons well. Especially that bit from Economics 101 where it is foolish to spend your own money when a bank loan is available. I never believed that one! But as we can see in the chart above, many did.
And speaking of "education", the school loan program is especially cruel. These kids have to take on significant levels of debt to get "educated", allegedly to improve their income prospects in the years to come. But they're paying top dollar to be "educated" by the same people who are destroying the private sector's ability to employ these students.
Anyways, the current economic hard-times are a result of over leveraging the public and private finances with unserviceable debts. And when debt levels are egregious, debtors default rather than make good their obligations. They have no choice.
That our hard times have dragged on now for over 2 years is because the "Policy Makers" refuse to write off bad debt from the nation's balance sheets. Until the above Blue Plot falls substantially below the above Red Plot, the bad times will just drag on and on.
The DJIA and Gold's Bull Markets first 454 Weeks
In Week 101 I published a chart comparing the first 443 weeks of the 1982-2000 DJIA Bull, and our current 2001-201? Gold Bull Market. That was back in September, when the experts were warning retail investors of the bubble forming in the Gold and Silver markets. Eleven weeks and 20% appreciation in Gold later, the "Experts" are singing the same old tired song.
I've been a serious student of the market for over 30 years. I remember the financial media's reports on the DJIA in the early 1990s. Unlike Gold today, there wasn't a constant drum beat of Bubble, Bubble, Bubble in the financial media's reporting of the DJIA, when it was only at 2920.79 in its Bull's 454th Week in April of 1991.
So why does the financial media have a grudge against Gold's Bull Market?
Number #1:
Reporters are required to have a college degree. Higher education should be a good thing, but not when the curriculum is tainted with collectivist theories that have been thoroughly discredited in the last century, and these collectivist theories scorns any role gold and silver may provide as a unit of value. It's the old argument of: if you were on a desert island, what good would a ton of Gold be? To which the proper reply is: if I were on a desert island I would want a ton of $100 Federal Reserve Notes as they would be useful for building a fire.
Number #2:
The financial media's world is one dominated by an industry which sells counterparty risks by the tens of trillions of dollars. You must understand the financial industry is very aware that rising valuation in an asset class with no counterparty risk is a failing grade for what they offer the world. Also reporting is very much about personal relationships. Good people are affected when a long-time acquaintance is in distress, even if it's a government regulator or an officer in a large Wall Street bank.
How many * hard questions * on "monetary policy", naked short positions at the Comex, or in the rising price of Gold have * not been * asked due to personal consideration? I suspect quite a few. Financial reporters' sympathies, like all people, lean towards their social circle, which is Wall Street, not the faceless consumers of their financial news.
There is also the issue of scale. In dollar terms, the entire precious metals mining industry is tiny in comparison to the operations of even a single large Wall Street bank. As long as paper money is the standard, how newsworthy is a story of a small exploration company developing a significant sized ore reserve? That plus the people involved in mining are located far away from New York. Other than the abominably-hedged-Gold Miners, like Barrick or Anglo Gold, who Wall Street has turned into their derivative zombies, financial reporters have very few, or more likely, no contacts with the gold and silver mining industry. So when someone high in the Canadian Rockies cries out "Eureka" No one is listening in New York.
That is the lay of the land. I don't like it, but I must accept it. But who cares what is reported as long as what we've invested in goes up in price? Let's take a look at a few items, for reasons of their own, CNBC will never report on.
Item 1. Had it not been for the Bull Market in IPOs during the 1990s, how much higher would the DJIA and NASDAQ have gone?
Below we see the combined companies trading on the NYSE and NASDAQ from 1978 to 2009. The 1990s had a Bull Market in IPOs!
The addition of the NASDAQ's to the NYSE's listings in the chart above, distorts what happened in the NYSE. This chart is very similar to what the NASDAQ's chart looks like. So it's good to show the NYSE's listings alone. As the Chart below goes back to 1938, it adds a historical context to the subject.
Yep! The 1990s was an era of financial asset excesses. We see how the total number of companies currently trading on both exchanges have returned to where they were at around Week 454 of the DJIA's Bull Market, when the DJIA was at 2920.79. To make both the DJIA and the NASDAQ soar to their final highs in 2000, the Greenspan Fed repeatedly "Injected" massive doses of cheap drugs, er ahh, I mean "Liquidity" into the financial system. But what would have happened to the valuation of those companies listed in 1991 had Wall Street not floated a large number of garbage IPOs that lost tens of billions for investors in the 1990?
Since then even more "Liquidity" has been "Injected" into the financial system. These dollars, going back to 1938, are all still there, as the system refuses to write down illiquid toxic debt. The Federal Reserve buys this garbage for reserves for the US dollar; good grief! And where are these inflationary dollars currently residing? In the stock and debt markets.
But since Week 454 of the DJIA Bull (April 1991), the financial situation of these companies trading in the stock market have been greatly compromised by Doctor's Greenspan and Bernanke's regime of "Liquidity Injections." The same is true for the finances of the United States' Government, the States and Local Government and many of the people reading my Bear Market Reports. There are exemptions to the following, but with so many financial entities only a paycheck or earnings report away from default, current Bond Yields are pricing debt instruments at fantasy valuations.
Gold Bugs see this situation as unsustainable, and are anticipating the day when trillions of dollars in wealth will flee counterparty risks, for their very financial lives, into an asset class with no counterparty risk: Gold and Silver. Investors who are not Gold Bugs, it seems to me, have a total lack of imagination and a perfect ignorance of financial history.
Possible Gold Problems at the COMEX
Speaking of financial history, financial institutions have a nasty habit of placing at risk other people's gold held in deposit. The victims are both the depositors of the gold, and the holders of the paper claims financial institutions sell to the public. During the Gold Standard era, banks were the main culprits. Today I suspect the ETFs and COMEX are playing this risky game with other people's gold.
Below we see the COMEX's Gold Contracts Open Interest, or the number of 100 ounce Gold contracts being traded at the COMEX from 1986 to 2009. As of the CFTC's 24 November report, there are 52.12 million ounces of gold being traded. That's about 1,600 tons of Gold, a larger tonnage of gold than most of the worlds central banks have in reserve. But these ounces are not real ounces, only contracts promising to deliver 52.12 million ounces of Gold if asked to.
I understand futures are a different beast than Gold Standard era banking. Futures contracts are used to hedge price swings in a commodity for commercials, and a means of speculating for speculators. Traditionally, most contracts have a cash settlement, not a transfer of the actual commodity. This is all very logical in an economy operating on dollars.
But with futures contracts, the option of taking actual deliver of the commodity is always a possibility. However, the COMEX's bullion warehouses currently contains only about 10 million ounces of gold, of which only 2 million are "registered", COMEX speak for being available for delivery. So if a situation develops where a significant number of COMEX Gold contract holders take the option for metal instead of cash delivery, the COMEX & the CFTC has allowed a situation to develop where 25 paper claims exist for each ounce of gold actually available for delivery. This same situation exist in the COMEX Silver market.
This is a highly unstable situation even in the best of times. But in times of massive monetary inflation, such as these, is it possible for these big banks to come up with 1,600 tons of Gold if asked to do so? After 22 years of Dr. Greenspan and Bernanke expanding bank credit, and Congress and the White House's malfeasant management of the public's financial affairs, a future shape decline in the US Dollar is inevitable. This would provide a compelling incentive for the COMEX longs to demand Gold delivery from their counterparties: the banks who've shorted 1,600 tons of Gold at the COMEX.
And then I have to ask, why are banks taking on such huge exposure in the Gold futures markets? They neither mine nor consume Gold. And the large mining companies, who used to hedge gold, under the advice of these same big banks, are now exiting the paper gold markets. So why are the banks staying in a market that is being abandoned by their clients?
This situation at the COMEX is exactly how "Big Banking" has so richly earned their reputation of being Big Bunglers. And how can the CFTC honestly say they are "ensuring the integrity of the futures and options markets" when the COMEX has allowed banks, who neither mine nor consume gold, to leverage themselves 25:1 (25 paper ounces to each available ounce of gold).
But let's assume everything is as it's taught in college: where Bankers are wise managers of risk, and Government "Regulators" toss and turn at night with concern of the general public's welfare. What do you think the price of Gold and Silver would be if these big banks did not toss tens of millions of ounces of paper gold into the gold market? A whole lot higher than $1200 an ounce! How many tons of paper gold did Friday's decline add to the Banks potential obligations?
But we don't operate in the perfect financial system taught in college. Our world is one rife with lies and deceit at the highest levels of Government and Finance. The day is coming when an ounce in the hand will be worth infinitely more than 25 paper ounces of gold held at the COMEX. And now the CFTC is allowing gold contract settlements in Gold ETFs. I have to wonder what going on there too.
4 December 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.
Email this Article to a Friend 
Printer Friendly Version
