The 1929 & 2007 Bear Market Race to The Bottom Week 118 of 149

January 16, 2010

You may think I'm just being stubborn, insisting we're still in a historic Bear Market. But ten months after the March 2009 BEV -53.78% Bottom, it's becoming clear the Bulls are just as stubborn as I am, but for weaker reasons.

When does the Stock Market only go up? If you care to call the above Blue Plot a "Rising Market." The only thing that could be confused as a DJIA Correction in the past ten months occurred from Weeks 87 to 91. On a weekly closing basis, the DJIA declined 7.42%. That was Mid June to July.

I suspect we haven't seen a Correction in the DJIA because the "Policy Makers" Fear they may not be able to turn the DJIA Back Up, if the Market had a normal Correction of 10% or so.

Look at the News:

  • Unemployment Levels not seen since the 1930s
  • Deficit Spending by the Trillions
  • Politicians promising to Tax Small Business into Extinction
  • Massive Home Foreclosures Rates
  • And then there are International Issues too.

These problems are only going to get worse. So what business does the DJIA have going up in at times like these? No business at all! The only thing this market has going for it, is the Federal Government.

It's a Mid Term Election Year. Members of Congress have a lot at stake this coming November. They have no idea how angry the voters are with their "Obama-Care." But as angry as the Voters may currently be, even Union Members will vote out the Democratic Party if their Pension Funds' Assets were to Decline to where the DJIA was in Wk 118 of the Great Depression Bear: -77.19% from its 1929 highs.

The "Policy Makers" grasp on the stock market is tenuous at best. Come Wk 119, will I have to move my little Data Box in the Chart above? Maybe, and maybe not. I'm thinking maybe not.

Below is the DJIA Volatility's 5 Day M/A & BEV Chart

The DJIA Volatility's 5 Day M/A is about ½ of 1%. It's been this low, or lower, since early November. DJIA 2% Days? Forget it!

My Agents in NY are reporting that the 100 top Hedge Fund Managers have Black Helicopters tailing them down the Streets of Lower Manhattan, and the primary reason President Obama is empting Gitmo of Terrorists, is to make room for Family Members of every Money Manager who controls assets of over 100 Million Dollars. It's rumored that High Powered Financial Officers have actually mumbled the word "Sell" at Board Meetings. My people are also telling me Doctor Bernanke now believes that even more Hostages are now the best "Tools" Congress can provide the Fed to insure "Market Stability."

I won't vouch for about any of this. But a year ago I would have been embarrassed telling my readers how I recruited my NY Agents from a Star Trek Convention. However, in Wk 118 with the Wacky Market Action we've seen in the past months, Mr Spock's weekly reports are looking more logical all the time.

Finally, the DJIA is above its BEV -25% Line. It took 48 Trading Days to move the DJIA these 5 BEV points. But its Step Sum is rocketing skyward, moving from a -3, to +13; a total of 16 Net-Up Days from 05 November to 15 January. Seeing 66% of the past 48 trading days Closing Higher is Huge! But the DJIA could only moved from its BEV -30% to its -25% Lines with so many positive day? Yep, Mr Spock's weekly reports are making more sense all the time.

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.

Bullish Rumblings from the COMEX Inventories

In the late 1990s, Bill Murphy and Chris Powell founded The Gold Anti-Trust Action Committee (GATA). Their objective: promote transparency in the Gold & Silver Markets. Previously, questioning the integrity of the Gold and Silver Markets' pricing mechanism was simply not done. GATA supporters were quickly marginalized as Kooks. But eleven years, and many financial scandals later, serious financial fiduciaries are now having their doubts too, as we see below.

Keynote Speech Presented by Nick Barisheff at the Empire Club's 16th
Annual Investment Outlook Luncheon
Thursday January 7, 2010

"As Wall Street churns out new gold investment vehicles, people are starting to do the math. If it becomes apparent that financial institutions have sold more paper gold than actually exists in physical form, then the price of paper gold and physical gold could diverge.

"This year, many analysts began to apply increased scrutiny to the gold and silver ETFs. In mid-July [2009], hedge fund giant Greenlight Capital announced they were moving assets out of the world's largest gold ETF - SPDR Gold Shares - and into physical gold. Greenlight is an industry leader whose movements are carefully studied and often emulated. Although Greenlight's manager, David Einhorn, claimed it was cheaper to own and store physical gold than it was to pay the ETF fees, the fact that a major, industry-leading fund would move to physical bullion * set off many alarm bells. *"
- Nick Barisheff: CEO Bullion Management Group

- End Quote -

"Set off many alarm bells" as well it should. Financial history is rife with examples of fraudulent activities concerning Gold and Silver. Historically, abandoning Free Market principals, such as transparency in market operations and marking asset values to the close-of-day prices; in exchange for Government involvement in the markets has been the path to national bankruptcy. Government corruption has been around for thousands of years.

"Where is that chief officer? Where is the one who took the revenue? Where is the officer in charge of the towers? You will see those arrogant people no more."
- Isaiah 33:18/19 New International Version (NIV) Bible

Yes, they skipped town in the early iron age, just like they'll try to do in the age of the internet!

With this in mind, let's take a look at the COMEX Gold Market from 1974 to 2010. I do note some points of interest.

Here is the quantity of Gold held at the COMEX approved storage facilities from 1974 to the present.

During the 1970's Gold Bull Market, there was an amazing rise in Gold Bullion stored at the COMEX. However, during the 1980-2000 Gold Bear Market, the Gold Inventories dropped by 90%. This is all logical. After all, markets can only sell what people are buying. In the 1970's, demand for Gold was huge while during the 1980-90s, investment demand for Gold vanished as people, for good reason, purchased stocks and bonds.

In February 1998, there was less than 500,000 ounces of Gold at the COMEX. But in the past 12 years, Gold Stored at the COMEX has increased 20 fold. As during the 1970s, the current increase in the COMEX Inventories occurred during a period of rising gold prices. In 2010, seeing a decade of rising levels of Gold Bullion flowing to the COMEX supports the Bull's case for further increases in the price of Gold.

Central Banks and the Price of Gold

But where is the Gold flooding the COMEX since 2001 coming from? Is it new mining supply, or old stockpiles from years past? After all - the nine and a half million ounces of Gold had to come from somewhere, but where? Maybe Doctor Greenspan knows something about this.

"Central banks stand ready to lease gold in increasing quantities should the price rise"
- Alan Greenspan: Congressional Testimony 24 July 1998

Considering the 20 fold increase of Gold stored at the COMEX since early 1998, the timing of Doctor Greenspan's Congressional testimony is intriguing; he gave this testimony exactly at the 1998 bottom in the COMEX Gold Inventory, just months prior to the Long Term Capital Management debacle.

The COMEX is principally a futures market where Contracts of Paper Gold, usually settled in US$, are traded. Let's compare at how many Paper Ounces of Gold have traded over the years, (Red Plot, Right Scale) to actual Gold Bullion (Blue Plot, Left Scale) held at the COMEX.

During the Clinton Administration, (above green oval) there was a four year period when the CFTC allowed the COMEX Short Sellers to leverage their COMEX positions significantly above traditional ratios. From December 1997 to March 1998, the Gold Paper Contracts were trading with less than 3% of the Gold required in storage to back their potential contract obligations. Had only 4% of the Gold Longs during this period demanded settlement in Gold, the COMEX would have defaulted.

Obviously, in 1998, the Gold Longs had no intention of demanding Gold for settlement on these contracts, but why would Government Regulators allow the Gold Shorts such leeway? And how high would the price of Gold have risen during this period, had the COMEX imposed position limits on the Gold Shorts, to maintain a 20 year ratio of only 5-10 ounces of paper Gold to each 1 ounce of physical Gold in Storage?

The Clinton Administration Surge in the Paper to Physical Gold Ratio coincided with Doctor Greenspan's 1998 Congressional Testimony. In managing markets Government Regulators, we are told, are on the watch for situations of Excessive Leverage by Counterparties, to guard against default. Understanding this is the key in understanding this chart during the Clinton Administration. The COMEX, and its regulators in the CFTC, must have known the Gold Shorts had access to leased gold from Central Banks, and so allowed the major players at the COMEX to short Gold, via Paper COMEX Contracts with abandon from 1995 - 99.

There were macroeconomic motivations for allowing banks and insurance companies, financial companies who neither mine nor consume gold, to depress the price of Gold with overwhelming short-selling at the COMEX: low Gold prices = low Interest Rates. In fact, Harvard Professor, Lawrence Summers, who became Treasury Secretary during the Clinton Administration, and is now an Economic Advisor to President Obama wrote a paper stating exactly that.

However, by late September of 1999, problems had developed in the Gold Market. Gold exploded upwards in price as its lease rates rose to double digits.

Curiously, just hours before the pending crisis in the Gold Market was registered on the ticker tape, the World's Central Banks to came together on Sunday, 26 September 1999, to announce their Washington Agreement on Gold. The Washington Agreement stated that Gold was an Important Monetary Reserve, and committed the signers of the agreement to Gold Sales of no more than 400 Tons, in total per year, for the next 5 years. We can infer from this statement that prior to the Washington Agreement, Central Bank sales of their Gold Reserves were in excess of 400 Tons per year. By March of 2000, the COMEX Ratio returned to its Historic Range.

So what are we to make of all this? First: the World's Central Banks sold more Gold than they're willing to admit. Second, and more importantly, Central Banks knew the Gold Market, as constructed, was and is a threat to the International Monetary System should the Price of Gold exceed a known (to the Central Banks) threshold. In other words, Central Bankers have placed their Gold Reserves at risk in the Paper Derivatives Markets.

After all, in the 5 trading days previous to Sunday 26, September 1999, Gold only increased from $255.00 to $267.90 - a mere +5.06%. Yet this 5.06% move in Gold motivated the major Central Banks to fly to Washington, and work over the Weekend with Lawrence Summers and Alan Greenspan in attendance. Just a five day gain of 5.06% could do this? It could if the Central Banks knew the Gold Longs intended to take Physical Delivery of Gold in settling their COMEX and OTC Gold Contracts, and these same Central Banks knew the Gold to be Delivered was theirs.

Whatever it was, on Sunday, 26 September, these Central Bankers knew something big was happening the next day. The Sunday news release was intended to send a message that they were united and ready when all hell broke loose at the COMEX in the following two weeks.

In January 2010, I suspect an ever present danger still lurks in the shadows of the World's Gold Markets. I expect a day is coming when the rising price of Gold will again give Central Banking a reason to work over the Weekend. This goes for the COMEX Silver Market too.

Until then, and after, Gold and Silver investments will be the place to be. But I would take to heart Nick Barisheff advice of hearing "Alarm Bells" when it comes to Paper Gold. It seems that in Autumn of 1999, the Central Banks prevented a default in Paper Gold Markets. The next time, they may be unable to avert disaster.

Gold and the DJIA's Bull's First 459 Weeks

Et tu Credit Suisse?

Investors seem to become resistant to invest
in ETFs at gold prices over US$1000/oz

Source: Company data, Credit Suisse Standard Securities estimates

"Our analysis of the gold market leads us to take a bearish stance with regard to the gold price in 2010."

- End Quote-

After 10 years of rising Gold Prices, the Big Banks still cringe at the thought of higher Gold, but should we? I don't! Let's take another comparative look at the first 459 Weeks of the late DJIA Bull and our current, alive and well, Gold Bull.

The Gold Bears have been negative since before 2001. And if you listen to the Popular Financial Media, as I do, these Big Bank Analysis have failed to provide the investing public, a single warning of a Pending Bubble Market Top since the NASDAQ High Tech Bubble in January of 2000. But somehow, they can look at Gold and see nothing but "Bubble Valuations" since it exceeded the old 1980's highs in December of 2007.

But as you can see above, for most of the past 459 weeks in the Gold Bull Market, it has * Underperformed * the DJIA of the 1980s. Gold is not performing like the 1990's hot High Tech Stocks, but rather like the Stodgy-Old-Blue-Chip Stocks that made up the DJIA 20 Years ago. By resent standards, Gold * is not * a hot market! This is a consideration you should keep in mind when you see "Overvaluation" and "Gold" used in the same sentence in the Financial Media.

The Federal Reserve's Balance Sheet

Since the Credit Crisis of October 2008, the Federal Reserve has been on a US Treasury Bond buying spree. In Wk 118, after purchasing 1.25 TRILLION in T-Bonds in only 15 months, the Fed's US Bond portfolio has almost caught up with the US Government's Toxic Waste Dump for Congress's Sub-Prime Mortgage program - Total Fed Credit. CinC is up only 4.46% from a year ago, but then CinC can only grow as fast as the US Bureau of Engraving and Printing can print money, and the US Mint can strike coins.

The day is coming when CinC will have to adjust to the increases in its reserves of the past half century. We'll either see a new $10,000 Federal Reserve Note, replacing the current $100 Note as the top US currency denomination, or Washington will issue a new currency into circulation along with our current coins and paper money that will have 100X the current dollar's purchasing power. This is what Mexico did a few decades ago with its Peso. For awhile in Mexico, there were two prices for everything. For example, a gallon of gas could be purchased with either 100 Old Pesos or 1 New Peso.

Of all the charts I publish, this chart best displays the true scale of the US Government's involvement in managing Financial Asset Valuations. Washington, in the 21st Century, believes it's proper for politicians to decide who wins and who loses in the Financial Markets and the Economy. Currently, Washington believes the holders of retirement accounts should be the winners, while Companies, whose shares litter these retirement accounts, should be the losers. That doesn't make sense to me, but it does to "The Best and the Brightest in Economics" managing the Obama Administration's "Economic Policy."

In January of 2010, we have two generations of market participants whose Expectations of Investment Profits have only been of Capital Gains. Dividend income, derived from profitable company operations, is only something people read about in the history books. So it's no surprise seeing the Stock and Bond Markets doing well during a period of massive layoffs and company downscaling. If the Fed and Treasury are willing to enter the market to "Support Asset Valuations" (and they are), Corporate Bankruptcy, Insolvency, or Total Cessation of Company Operations will not prevent a company's shareholders from receiving the profits Washington's Politicians intend to send their way. But this Political Scheme will only last as long as interest rates stay low, and they won't.

Although the ability of the US Treasury to issue debt, and the Federal Reserve's ability to purchase that debt with inflationary dollars is theoretically unlimited, the effects of this inflationary scheme is parasitic and injurious to the global economy. There will come a point where the world will reject the US dollar as its "Reserve Currency" to free itself from the chains of American Socialism.

Here is the problem. The US Government decides that certain people with no money to buy Stuff; should have the Stuff anyway. For example: two US Senators, one from Nebraska, the other from Louisiana, whose votes are needed to pass the proposed healthcare legislation, want some Stuff for their Home States. These senators are not against healthcare, it's just that they need a few hundred billion in Stuff to pass out to the voters so they can be sure of winning the coming elections.

If the US Passes its Health Care Legislation, here is what must happen if President Obama is to honor this corrupt bargain. The US Treasury will sell the better part of a Trillion Dollars in Bonds to the Federal Reserve, who then issues an equal amount of Dollars (units of Global Reserve Currency), back to the US Treasury. The US Treasury sends these Hundreds of Billions of Units of Global Reserve Currency to the State and Local Governments of Nebraska and Louisiana. These two votes in Congress will ultimately be paid by Asian or Latin American Manufactures when this money is spent in Nebraska and Louisiana on foreign goods and services.

Americans, especially in Nebraska and Louisianan, see the wisdom in the Post Bretton Wood's Monetary System. But Foreign Manufactures of Stuff, are beginning to have doubts in using the US Dollar for purposes of World Trade. When Global Manufactures take US dollars in payment for their goods and services, they are in fact paying taxes to the US Government.

You know where I stand; I'm siding with the Foreign Manufactures. The US Dollar, as currently managed, is a unit of Economic Confiscation that does great harm to everyone. In the end, even Washington will refuse its own dollar for payment of taxes when it becomes worthless.

Today, we all need dollars to pay our bills and expenses. But the day is coming when the US Dollar will fail to function as money. Do yourself a favor and trade some of your dollars for some real money, Gold and Silver.

Gold is the world’s oldest and most known currency.