The weekly closing price BEV (Bear's Eye View) results for week 63 in the Dow Jones' 1929 & 2007 bear market's race to the Bottom are as follows:

1929-32: -51.61% from its all time weekly closing high of 380.33
2007-08: - 39.58% from its all time weekly closing high of 14,093.08

The last two weeks of the years are usually slow. This year is no exemption. I don't expect any action until after the start of 2009. But looking at the DJIA plot above, this is a market that could go down as well as up in the first quarter of 2009.

What could make it go down?

New revelations of massive financial crimes could drive the market into a new down leg for the Bear. How likely is that? I'm not privy to any privileged information on the dark side of Wall Street. But the Madoff Ponzi Scheme proved that Wall Street's dark side could operate unimpeded in full view of the government's regulators for years.

The SEC had sufficient information and various written complaints on Madoff's operations for years and did nothing to stop it. The SEC has proven itself to be a nice poodle for the powerful. The SEC will claim that they lacked funding to do a proper job, but that doesn't ring true. After the internet boom gone bust and specific frauds were reported in the daily news papers, did the SEC recommend a criminal fraud prosecution to the Justice Department for even one CEO of a major investment bank? No! The same can be said for the sub-prime mortgage frauds.

With the high-tech bubble, there were fines paid to the US Treasury, but no effort was made to make restitution to the 401K investors who as a group lost hundreds of billions of dollars when hundreds of billions of dollars meant something.

For the banks responsible for the sub-prime crisis, the government gifted them 700 Billion dollars with few questions asked. Compare this assistance to that government gave people who have lost their homes or those fiduciaries that purchased AAA rated US mortgage asset backed toxic paper. New York and Washington are corrupt to their cores. It's only prudent to expect more of the same from the same people who control other "regulated markets."

I'm thinking that sometime in 2009 it will be the CFTC's (Commodity & Futures Trading Commission) turn under the bright light of public revelation of questionable activities they have been fully aware of for years. When one realizes that Wall Street's (include Chicago too) commodities markets fix the price for vital basic materials with paper contracts, these markets must have a natural attraction for "policy makers" who make money out of paper. Manipulation of these markets would do much to control CPI price inflation from the explosion of CinC monetary inflation since 1982. But it is hard to say anything definite as the regulators refuse to disclose specific information even decades after trades have cleared.

Bernanke speaks often about the "tools" he has to manage the crisis. Well, what exactly is the crisis he is managing? The prices of assets or vital commodities have exceeded "economic policy's" specified parameters.

What "policy" wants to go down in price now wants to go up. What "policy" wants to up in price now wants to go down. And the old tricks don't seem to be working anymore.

All of what is happening with the US Congress, Federal Reserve and the US Treasury starts to make sense when one realizes that the United States Government's current crisis is the result of its losing control of a price fixing scheme. The current solutions are designed to regain this control of asset prices. Would there be a mortgage crisis if "policy" could once again make the collateral (the house) equal to or greater than the valuation of the mortgage that financed the sale? No! Same could be said about the stock market.

These "policy" guys taught economics at Ivy League Universities, they know how to harness the power of the law of supply and demand to the tethers of "policy."

"Policy" demands lower treasury bond yields for the up-coming mortgage resets? So one of the tools Bernanke speaks of might be to have compliant NY Banks purchasing paper US Treasury bonds futures until the desired yield is achieved. Oil prices too high? "Policy" directs these same compliant NY Banks to sell paper oil futures contracts.

Well OK, corruption at the highest levels of government may be as bad as all of this, and it might make the market go down, but what might make the DJIA go up?

Simple: more buyers than sellers. What we will not know is if the buying is intended for making a profit (real demand for stocks) or for "policy" execution (a quick fix to a problem that will not go away).

But for people in the market looking to make some money, it doesn't matter why the market goes up. Just be careful as the stock market is a house of cards. But its pathetic how this market just can't get a decent dead cat bounce from its -40% piercing last October. Three months of mush.

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.

The volume is really calming down. Three days this week were actually within the historical standard of less than 1.00%. But this week and next are holidays. January to March will be interesting to watch.

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."

Not much happening here. Next year will be interesting to watch.

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 hope I am not too long-winded in the following section. Please be patient as I have many readers who can benefit from the text. In any case you may want to skip down towards the bottom and look at the charts first. I'm sure that few people have seen these graphics.

The Fed Funds rate is the rate banks pay when borrowing from other banks within the American banking system. Why do banks need to borrow money? Because they have too. Let's look at an example of a bank borrowing money from another bank. We need a depositor, Bank A, and someone who contracts a car loan from Bank A and Bank B.

1). A depositor deposits $2,500 in Bank A. In taking this deposit Bank A just assumed a debt of $2,500 to the depositor. But that has nothing to do with the Fed Funds rate.

2). An applicant for an auto loan of $25,000 comes into the bank. Assuming that Bank A has a 10% reserve requirement on deposits; the $2,500 deposit will allow Bank A to make a $25,000 auto loan. Bank A makes this loan of $25,000. Here is the secret of banking. With every dollar a bank borrows from its depositors or the US Federal Reserve, they use that dollar to lend out ten or more dollars. It's called fractional reserve banking.

3). The depositor (for reasons known only to the depositor) removes his $2,500 deposit from Bank A and deposits it in Bank B. Bank A has now fallen below its 10% reserve requirement. It can either call in the $25,000 auto loan years before its term comes due, which neither Bank A or the new car owner wants to happen, or it can find $2,500 somewhere else.

4). Bank B having found no other profitable means of gaining interest from the $2,500 deposited in it by Bank A's former customer, puts this new deposit into the inter-bank system. Now Bank A borrows this $2,500 from Bank B at the Fed Funds rate and so maintains its reserve requirements.

But what if Bank B did not make this transferred funds available to Bank A? Will Bank A now have to call in the $25,000 auto loan? Before the creation of the Federal Reserve, Bank A might have had to do just that to stay clear of fractional reserve requirement problems with its regulators.

Before 1913 and the creation of the Federal Reserve, money was gold. Paper money was a call loan to the US Treasury. Call loans are payable upon demand. With the pre 1933 dollar, the US Treasury had to pay $20 in gold whenever paper money was presented to it. By this means, the gold standard, by design, kept money scarce and it was all managed without a genius at the monetary helm. In fact monetary policy prior to 1913 was that the US Treasury would not print money in excess of what it could redeem in gold coins. How much those dollars purchased was no one's business but those who were buying and selling. And there were No Fed Funds or Fed Discount Rate, and no Federal Reserve Open Market Committee prior to the creation of the Federal Reserve.

My great- grandparents were all of humble means. It was very possible that they never held in their hands two $20 dollar double-eagle gold coins they could call their own. But in 1913 a half dollar was very valuable. One hundred years ago, most people living in the United States lived by spending pennies, dimes and quarter dollars.

The money market is like any other market. But the pricing of money in the money market is in terms of interest rates. As with any market, there are some motivated sellers who will sell cheap and then some sellers who will only sell at a much higher price. Pre 1913, if a bank needed more money than was available at 2.00%, it would have to pay more to get what they needed. At some point the interest rate (the cost of money) would have become prohibitive and the bank & its client would have had to abandon their project for lack of funds.

"Policy makers" have always hated gold because with the gold standard, debt creation * must * have a profitable outcome. "Policy" does not do well in such a system as historically "policy" is economically unprofitable. I know of no instance where a lawyer, economist, politician or community activist created a large company employing thousands of workers. That is unless we include Washington Lobbying Firms, "Think Tanks", Law Partnerships, Non Governmental Organizations (NGO), and Political Parties with their Political Action Committees whose profit is actually a loss for the common tax payer.

Today's schools of economics understand very well where their money comes from. So it's no surprise to see them prefer an inflationary dollar backed by the full faith and credit of the US Government. So too do politicians and bankers. With a "monetary regime" dominated with paper and computer hard drives, by necessity they have had to confuse actual economic growth with the growth of the money supply backed by economically unviable debt that has funded their schemes.

Decades ago growth meant more production of steel, oil, heavy equipment or even sewing machines. Today's "economic growth" is measured in debt creation within the economy that does little to sustain the productive economy and so not real growth at all. If the Federal Reserve's "liquidity injections" are actually capital injections, why are the targets of these "injections" doing so poorly?

Because the Fed's "liquidity injections" have nothing to do with the nuts and bolts produced within the US economy. We see in the chart below that actual US production to an extreme degree has failed to keep up with consumer debt.

Note on Electrical Consumption: The data used was the 52 Wk M/A of US Electrical consumption as published in Barron's Pulse of the Economy.

Alan Greenspan frequently made an issue how smoke stacks were out and "information" and "services" were in when it came to a 21st century economy. On Greenspan's recommendations, let's ignore domestic oil and steel production and just consider electricity consumption.

In the service and information industries, not much happens without consuming electricity. Examining the chart above we see that from 1973 to 2008 electrical consumption only increased by 136%. But exactly what economic activity increased? Much of that increase in power consumption can be attributed to consumer electronics purchased from foreign manufactures using credit cards financed by Federal Reserve "liquidity." With a 27% reduction of steel since 1973, the steel industry (and other similar old line basic industries) has been a net loss to the power grid.

Greenspan in his mumblings before congress made much about increased economic efficiencies from the information economy. His specific message was the US economy was getting more output from less input. From this perspective what other industry has had more efficiency that the consumer credit companies? Since 1973, they have increased their consumer loans by a factor of 6 for every one unit of electrical power consumed?

This trend from 1973 to 2008 greatly assisted a small Saint Paul, Minnesota company called "Sound of Music" whose business in 1973 was selling Rock and Roll records to teenagers. This same company has since changed its name to Best Buy.

Best Buy is currently the largest retailers of consumer electronics in North America and possibly the world.

I'm happy for Best Buy, but I fail to see how purchasing foreign manufactured consumer electronics with American inflation will ultimately benefit those foreign manufacturers or the American economy. But it is a matter of record that members of academia, both in and out of "policy positions" encourage this trend with enthusiasm. Somehow academia became ignorant of the consequence of economic activity that produces no profit.

With the creation of the Federal Reserve, and the subsequent piecemeal abandonment of a monetary metal standard from 1934 to 1971, a profound change has occurred on how we view economic growth. A quick examination of "Barron's Pulse of the Economy" tells the story. Note the many series defined in terms of "bils of dollars." When the Federal Reserve and the banking system seem willing to expand the US dollar supply past the outer reaches of human gullibility, there must come a point when charting in terms of "bils of dollars" becomes as meaningless as the dollar itself.

Exactly what does the chart below tell us when these same results could be accomplished with fewer units being produced but at a higher unit cost - much less than what the "policy makers" statisticians would have us believe.

1) Aging Baby Boomers
2) Municipal Governments
3) College Students

1) A significant proportion of America's over-50 segment of the population is at risk due to their high levels of indebtedness. Fifteen years ago, these people were "investing" in the Greenspan stock market bubble. When that bubble went bust, they then were floated down a river of "liquidity" made just for them into the real estate bubble.

The American Real Estate Bubble of 2000 - 07 will prove to be a historic event. To keep "economic growth" growing, the "policy makers" lured common people into huge debt loads by taking advantage of moronically low mortgage rates. The real estate bubble really hurt many aging Americans.

And now, after the stock and real estate bubble have failed them, the survivors of the 1994 - 2007 bubble in stocks and real estate only want to keep what little they have left after years of abuse in New York's government "regulated" markets by buying US Treasury debt.

There is no hope for the Baby Boomers.

2) State and municipal governments' financial situation have become precarious due to easy credit that allowed them to use debt to finance unsound projects beyond their traditional public services functions. In defense of local government, the US Federal Government's "policy" has imposed expensive "unfunded mandates" upon local government. This created a situation where the Federal Government forced local governments to provide services or create projects beyond the ability of the local tax base to shoulder. Wall Street, using their access to the Federal Reserve's "liquidity", was delighted to provide debt financing to local governments' increased burdens.

So the reason people's property taxes soared with the real estate bubble, but will not come back down to Earth with the real estate bust is because of the massive debt loading caused by "policy's" unfunded mandates. This was just one more ill-advised "policy" that resulted in massive and uneconomic debt creation.

Below is a history of Corporate and Municipal bond yield from 1938 to December 2008. Remember that municipal bond yield is tax free income.

My next chart is a plot of municipal bond yield divided by Barron's Best Grade Corporate bond yields. Good grade, tax-free municipal bond yields should be significantly lower than similar grade corporate bonds. These bonds default risks are seen as lower as they are funded by state and local tax receipts. So unless someone is in a higher income tax bracket, bond buyers are better off with the bonds of IBM or Exxon than with the State of California.

But what is this we see in the chart below? For only the third time since 1938, when Barron's first published tax-free municipal bond yield data, we see tax-free bond yields higher than comparable corporate bond yields. The two other times when this occurred were also periods when the American economy was under great distress.

In the years to come, expect significant American municipal bond defaults unless Washington comes to the aid of their vassal states and cities. Will Washington bailout local government with yet again another massive dose of "liquidity?" When one realizes just who supervises the votes counting on election day, I think the fix for local government will come shortly. Even so, the fix will not be predicated upon profiting the holders of these bonds. Or so the above chart seems to be suggesting.

I don't have the data on the size of this market but it must be huge. As these bonds' income streams are tax-free, it is a safe assumption that the current owners are wealthy individuals. Whether by default or the coming double-digit inflation, these bonds seem a poor way of preserving affluent peoples' wealth and purchasing power in the years to come.

This market's failure would really be distressing as much of what state and local governments provide is actually essential for an orderly society. Expect local real estate taxes to soar everywhere but especially in those areas that are considered affluent. High real estate taxes may become a major hurdle in Washington's attempts in reflating the housing market.

3) College students of modest means accept significant levels of debt to fund their education for the promise of higher earnings a college education provides. These students do not understand the situation they are placing themselves in.

The schools they pay so dearly to attend are part of an unholy trinity (politicians, bankers and academia) that has crafted an economic system that will be the primary beneficiary of the higher wages they will earn for years to come. College graduates with extensive school debt will find their take-home pay belongs to others for years to come. "Policy", with its school loans, has increasingly made a college education a liability.

It's not my intention to place a scarlet letter upon people who have worked hard in gaining an education at a prestigious institution of learning. I hope such people do make a fortune for what they bring to the world. But on the whole, the current American university system has catastrophically failed the society that has funded it. But I doubt this parochial society would be capable of coming to this conclusion until it receives the necessary government funding for a study on this topic.

When academia's leading lights (members of congress, NY investment bankers, and government regulators) perform so incompetently in their positions of power at the expense of people not as fortunate as they, how can the schools these powerful people attended not share the responsibility in the coming destruction of the American middle class?

Sources for CinC & Global Production Charts:

- Oil Daily Production: US Department of Energy
www.eia.doe.gov/aer/txt/ptb1105.html

- Steel and Copper Annual Production: US Geological Survey
http://minerals.usgs.gov/ds/2005/140/

- Grain Annual Production: Earth Policy Institute
http://www.earth-policy.org/Updates/Update31_data_WorldProdCons.htm

- US Currency in Circulation: Barron's and St Louis Federal Reserve Bank
http://research.stlouisfed.org/fred2/categories/48

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.