Baked Into The Cake Since 1913

February 21, 2016

How did the market perform this week?  No extreme days of market breadth or volatility.  That’s a positive.  And the Dow Jones was off its lows of last week.   However since January 12th it has yet to break above its BEV -10% line in the BEV chart below.  It ended the week 10.49% below its last all-time high of May 19th of last year, which will likely be recorded as the final all-time high of the 2009-15 bull market.  That is unless the Dow manages to increase some 2000 points from here, which seems unlikely.  But then Janet Yellen may decide to do QE4 which could do one of two things:

  • Take the stock market towards its last all-time highs, and maybe beyond
  • Create a selling panic in the financial markets

Which of these possibilities would happen I don’t have a clue – but then the members of the FOMC don’t either.

Looking at the Dow Jones Total Market Group (DJTMG)’s 52Wk Highs and Lows we see four new 52Wk Highs (#1,2,3&4), and one new 52Wk Low (#43).  But looking at the Average (#42) the groups are still -19.06% below their 52Wk Highs and only 10.76% above their 52Wk Lows.  That’s quite a difference from Barron’s 20 May 2013 issue, when their Averages were only -2.06% below their 52Wk Highs and a whopping 37.89% above their 52Wk Lows.

To appreciate just how far the market’s advance has stalled over the past three years, here’s a chart plotting the net DJTMG 52Wk Highs and Lows since 1990.  In Barron’s 20 May 2013 issue there were 58 individual groups making new 52Wk Highs, (63 indexes when including the broad groups such as Materials, Energy and Financials as is done with chart below).  Looking at the DJTMG, or even the NYSE 52Wk H-L data the broad based stock market peaked years ago.

I placed three stars in the chart identifying peak 52Wk Highs for the high-tech bull, sub-prime mortgage bull, and now the post credit-crisis bull markets.  Between the high-tech and mortgage bull’s peaks the Dow Jones declined by 38%.   Then, between the mortgage bull and post credit crisis bull peaks the Dow Jones plunged by 54%.  So far the Dow Jones has only declined by 14.5% since its last all-time high of 19 May 2015.  That low was seen on Thursday of just last week.  I find it hard to believe that Mr Bear would let us off with only a 14.5% bear market after the untold trillions of dollars “policy makers” have injected into the financial markets with their continual “quantitative easing.”  I’m expecting much deeper declines in the Dow Jones and the DJTMG to come.

Looking at the DJTMG’s “Top 20” – (the number of groups within 20% of their all-time highs) we saw a little bounce this week.  But after the large decline in January that’s in line with expectations.  Below we see how this data responded to the three bull market tops and two bear market bottoms since 1992.  After the Top 20 DJTMG Indexes peaked in 1996 it didn’t turn around until after the 38% Dow Jones bottom (of the Tech Wreck bear market) in January 2003.  We see the same phenomenon occurring when the sub-prime mortgage bull was followed by a Dow Jones 54% bear market.  During February/March 2009 there was a six week period when not a single group in the DJTMG was within 20% of its last all-time high. 

One has to wonder if for the first time in three decades the DJTMG’s Top 20 is going to reverse and turn up before it breaks below 10 on the downside.  It could, but I doubt it will.

Here’s the frequency table I use to construct the Top 20.  The plot in the chart above used the data in the “20% From All-Time High” column on the left, which is the sum of the five columns to its right.  As you can see, the number of individual groups in the -0.001% to -15% columns have been declining since the beginning of the year.

How bad could it get?  I’m thinking considerably worse than the 09 March 2009 subprime mortgage bear bottom.  Below we see the frequency distribution table for that bear market bottom.  It’s quite different than the Top 20 table above.  In Barron’s 09 March 2009 issue, which used data from the Friday prior to the actual Monday low on March 9th, no DJTMG indexes were within 29.9% of their last all-time high.  However, not seen in the table were the 35 groups that declined more than 70% from their last all-time highs.

But that was then, and this is now.  How could one possibly even think something like that could happen again?  Because once again the “policy makers” are taking drastic steps to save their precious banking system from the horrors of their inflationary policies during the 20th and 21st centuries.

Europe may soon be losing its 500 euro note.  Not to be outdone Bill Clinton’s Secretary of the Treasury; Larry Summers recently stated in a Washington Post article:

“It’s Time to Kill the $100 dollar Bill.”

This is the “policy makers” latest attempt to save their precious banking system from imploding.  Currently there are fears of bank runs in Europe.  If they manage to get rid of paper money entirely, people won’t be able to make withdrawals from banks, only credit or debit card purchases, deposits, and transfers.  So as usual, the burden of the rescue will fall on private citizens as banks and governments “bail in” their depositors’ and citizens’ life savings will be sacrificed in the impending banking crisis; but this isn’t how academics on both sides of the Atlantic are selling the idea.

“I remember that when the euro was being designed in the late 1990s, I argued with my European G7 colleagues that skirmishing over seigniorage by issuing a 500 euro note was highly irresponsible and mostly would be a boon to corruption and crime. ---  More generally, at a time when such a demonstration is very much needed, a global agreement to stop issuing high denomination notes would also show that the global financial groupings can stand up against “big money” and for the interests of ordinary citizens.”

- President Clinton’s Secretary of the Treasury Larry Summers, 16 Feb 2016

Former Treasury Secretary Summers fails to see the irony of having a member of the Clinton Administration now standing against “corruption and crimes.”  While he served in the White House everything in America was put up for sale; from nights in the Lincoln Bedroom to deals with China for exporting American technology, factories and middle class jobs.  Secretary Summers was also in the White House when the Clinton Administration repealed Glass Steagall, the banking legislation which prohibited commercial banks from risking their depositors’ assets in risky Wall Street investments.  The Clinton administration also allowed these same banks to self-regulate their private and murky, illiquid multi-hundred trillion dollar OTC derivative market. 

These two actions alone made the 2007-09 banking crisis inevitable, but made Wall Street insiders, and Bill and Hilary Clinton wealthy beyond their wildest dreams.  These people and their willing stooges in the mainstream-media like the Washington Post and NY Times who refuse to expose the corrupt bargains stuck between politicians and Wall Street make me sick.

This isn’t the first time academics and elected-government officials in league with big banks devised “policy initiatives” that were at odds with the best interest of the general public and an orderly society.

Let’s look at the sad history of the US dollar since the creation of the Federal Reserve, using the Barron’s data on US Gold reserves published since 1925.  CinC data from 1925 to February 1931 is found in Milton Friedman and Anna Schwartz’s “Monetary History of the United States.”  CinC data from March 1931 to present is as published weekly by Barron’s magazine.

CinC inflation (Blue Plot below) during the Roaring 1920s wasn’t a factor for the inflationary booms seen in real estate, consumer credit and the stock market.  As with the sub-prime mortgages of the 2000s, fractional reserve banking (loans from the banking system) was the source of monetary inflation and rising prices at the NYSE and in the real estate market.  Soon after the stock market crash of October 1929, the banking system, and their client base of stock speculators and family farmers, became insolvent as the credit bubble of the 1920s began deflating in earnest.

President Hoover responded to the Federal Reserve’s first financial crisis by printing money.  From February 1931 through February 1932 he almost doubled the amount of currency in circulation. Predictably there was little positive effect on deflating markets, but the inflating supply of paper money did result in a run on the US gold supply (red box below). 

All this occurred during an era when money was gold (Red Plot).  Paper money (Blue Plot) was a debt owed in gold, in this case a debt of gold the US Treasury owed to holders of its paper dollars. Before 1933 anyone could take a $20 bill and demand a $20 gold coin from a bank, but that can only work as long as the US Treasury didn’t print more dollars in paper than it had in gold coins.

Back in 1931 anyone with a quarter could purchase an issue of Barron’s and they would have seen the US Treasury was issuing more paper money than it had gold to back them.  Then in September 1931 the predictable run on the US gold reserves began, and just as predicted by Gresham’s Law citizens possessing gold coins withheld them from circulation. 

This situation of too much paper money in circulation relative to the quantity of gold reserves held by the US Treasury should have been resolved by pulling paper money out of circulation.  Instead in 1933 the new Roosevelt administration made possessing gold a felony, demanding that US citizens turn in their gold coins and ingots to the Federal Reserve at $20.67 an ounce.  One year later FDR initiated the world’s first ever “bail in” by devaluing the US dollar from $20.67 to $35 per ounce of gold, which in effect confiscated 70% of the value of the US paper dollar.  If Americans risk imprisonment by keeping their gold coins, their $20 gold double eagles were now worth $35.  But most people turned in their coins in exchange for a $20 paper bill.  FYI: today those old $20 double eagle gold coins, even in junk grades are worth over $1,200 paper dollars and will soon be worth many more.

In the chart above you can see the effect of this paper dollar devaluation (green box).  Before the devaluation there were more dollars in paper than in gold, but then with a stroke of the pen, Roosevelt created more dollars in gold than in paper.   But for those people who wisely kept their savings in gold coin, their $20 double eagles increased in paper dollar terms by 70% and would now buy approximately $35 in goods, although the government then made them criminals for making the wise financial decision to avoid taking a 70% haircut to “save the banks.”

The increase in the US gold reserves seen after 1934 came from European central banks depositing their gold bars at the NY Federal Reserve for ”safekeeping” during the rise of Adolf Hitler in Germany. 

Now let’s look at the same two data series out to 1975.  Now we can see the massive inflow of European gold during the 1930s and the paper money inflation from World-War Two.   But considering all the foreign monetary gold held in safekeeping by the US Treasury (at the NY Federal Reserve Bank), monetarily the increase in CinC wasn’t outlandish. 

However it wasn’t without consequence either.  Excuse my ample use of old quotes from Barron’s below, but there is no finer historical source documenting Washington and Wall Street’s abuse of the dollar to be found.  Besides, any text written by me is only commentary, these quotes are history.  

“We hope that the government of the United States, despite the big spenders, and the gold tinkerers, maintain a sound dollar, a dollar worth saving, a dollar worth earning, and a dollar that can be traded in any part of the civilized world.”  

- Barron’s World at Work Column, 02 January 1950 issue, Front Page


“Paris – The Paris gold market is worrying the U.S. Treasury.  In recent months, the free gold price has been 20% to 30% higher than the $35 an ounce: dollars are therefore, cheap in terms of gold.  To depress the gold price, the French treasury has been selling gold for dollars.  Having acquired the gold from the U.S.  or through the European Payment Union, at $35 an ounce, it (France) reaps tidy arbitrage profits.  Although the French support the dollar, our Treasury resents the way they have turned the gold market into a source of dollar gains.”

- Barron’s World at Work Column:  29 January 1951

(As early as 1951 the US Government was selling off its gold reserves to support a fictitious valuation of the of its paper dollar.)


November 15, 1951 reached a new low of 53 cents in terms of 1935-1939 dollar value. In extended comment on the shrinkage of the dollar, the National City Bank’s December Letter says: “From the standpoint of the creditor—the buyer of Savings bonds, the pensioner, the insurance beneficiary, the school teacher with lagging pay—the experience during and since World War II has been disheartening.  Inflation is a concealed type of tax and these are the people who took the brunt of it.” In line with the repeated views of Professor Sumner H. Slichter, the City Bank adds: “People reconciled to a dollar of wasting value look around for real estate or other equity investments as a hedge against price inflation and dollar shrinkage.”

- Barron’s Editorial, 31 Dec 1951


“Solvency in international affairs is, of course, measured largely in gold and by this hard standard, the U.S. for many months has been losing ground. --- “The long years of inflation, it would thus appear, are coming home to roost.  In such circumstances other governments have chosen some of the classic remedies available, including tighter credit and fiscal policies.  But this country, even under the G.O.P (Republican Party), has not yet nerved itself to swallow so bitter a pill.   ---    “Yet in the end all nations, no matter how rich or powerful must play the game by the rules or suffer the consequences.  It’s time Washington took heed of its dwindling stack of chips.” (U.S. gold bullion reserves)

- BARRON’S Editorial: 20 September 1954


The left star on the above chart marks the point in time that Barron’s called on the new Eisenhower administration to keep a promise long held on the Republican Party’s platform.

“Not the least remarkable plank in the Republican platform President Dwight D. Eisenhower is now committed to support is its statement favoring a dollar on a fully convertible gold basis.  Technically thought it may sound, this statement without question reflects a deep and legitimate yearning of the part of the American people for a return to hard money, and an end of the monetary tinkering which ushered in the “baloney dollar” nineteen years ago.”

- Barron’s editorial “Golden Plank – It’s a Test of Republican Promises” 14 July 1953.

The Republican Party has a long history of disappointing its supporters.  The second star marks the point in time when silver coinage was “suspended” by the US Treasury.

“Now, I will sign this bill to make the first change in our coinage system since the 18th century.  And to those Members of Congress, who are here on this very historic occasion, I want to assure you that in making this change from the 18th century we have no idea of returning to it.  --- If anybody has any idea of hoarding our silver coins, let me say this. Treasury has a lot of silver on hand, and it can be, and it will be used to keep the price of silver in line with its value in our present silver coin. There will be no profit in holding them out of circulation for the value of their silver content.

“Now, all of you know these changes are necessary for a very simple reason-silver is a scarce material.  Our uses of silver are growing as our population and our economy grows.  * The hard fact is that silver consumption is now more than double new silver production each year. * So, in the face of this worldwide shortage of silver, and our rapidly growing need for coins, the only really prudent course was to reduce our dependence upon silver for making our coins.”

- President Lyndon Baines Johnson remarks made on signing the Coinage Act on July 23, 1965

Historical note:  the US Treasury’s silver reserves were depleted in 2002.

Unmentioned by President Johnson at the signing ceremony, but quite obvious in the chart above: by 1965 the US Government had increased CinC by a factor of 10 from 1925 levels.  Johnson and the “policy makers” knew damned well that the government would continually increase the quantity of paper money issued until, by 2016, the quantity of dollars, paper and gold, are as shown below.  Small wonder that coins today are made of zinc and copper, or that a quarter of a dollar coin can no longer purchase a breakfast at a diner.  Recently the price of zinc had gotten so high (the 2016 dollar’s ability to purchase zinc is so insignificant) that the government was considering substituting aluminum in the manufacture of pennies.  

And now these cretins want to pull the $100 dollar bill from circulation for fear of “criminal activity.”  The chart below displays one hundred years of actual criminal activity; the confiscation of wealth by government and the Federal Reserve from honest commerce and private citizens via monetary inflation.

As you can see the problems we wrestle with today have been a long time coming.  I cringe when market commentators blame President Nixon for terminating the Bretton Woods gold standard, as it proves the commentator hasn’t a clue that our problems go back long before “Nixon closed the gold window”, back to the time when President Woodrow Wilson and Congress created the Federal Reserve in 1913.

 I’ll let President Andrew Jackson have the last words, what he told the bankers who controlled America’s second central bank in 1832 before he “routed them out”:

“Gentlemen, I have had men watching you for a long time and I am convinced you used bank funds to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the Eternal God, I will rout you out.”

- President Andrew Jackson: To a delegation of bankers discussing the Bank Renewal Bill, 1832

One ounce of gold is so ductile it can be drawn into a wire 50 miles long

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