Central Banking: Dumb Money On Qn Epic Scale

June 9, 2019

Last week it appeared the Dow Jones Index had one foot in its grave and the other on a banana peel, ready to break below its BEV -7.5% line and on its way to the -10% line in the BEV chart below.  I didn’t believe it would move lower by 2.5 BEV points in a single week as that’s a big move, but lower was the direction the Dow Jones was headed to.

Then came this week where the Dow Jones surged UP a huge 4.36 BEV points (1,169 points) from Monday to the close of the week.

Here’s the Dow Jones in daily bars with last week’s trading circled. Notice anything different between this week’s market action and that from January to April of this year?  Though this week saw no Dow Jones 2% days, they are big daily advances of the type seen in bear markets, where Mr Bear punishes people who believed going short in a bear market was easy money – it’s not!

So what’s going on in the stock market?  Is this week’s advance the first stage of a recovery that will take the Dow Jones up to new all-time highs, or is it a bull-trap (aka: dead-cat bounce) seen in bear markets, indicating the Dow Jones has much further to go down.  There is no way to know, but in the weeks and months to come we’ll all find out together. 

Lastly, here’s the Dow Jones with its 52Wk High and Low lines, a third view of our big week for the bulls.

So what’s going on here?  It’s not that hard to understand.  Using technical analysis for a market used to work much better as the quantity of money available to a market was limited by either a functioning gold standard, or the self-restraint of the people in control of money and credit creation.   In other words:

  1. Bear market bottoms were market events that offered compelling values available to those with the guts to buy when everyone else was selling.
  2. Bull market tops were marked by buying exhaustion as the money available to the market was at its end point.

As our current monetary system isn’t pegged to gold, and the people in control of money and credit creation have no self-restraint, the “policy makers” have the means to maintain the price of gold and silver at artificially low valuations in the paper futures markets; negating #1 above.  And have the option of forcing stock and bond market valuations higher by flooding the financial system with monetary inflation: negating #2 above.

But manipulating market valuations with monetary inflation is a process that can’t go on forever.  So, looking at the chart for the Dow Jones with its 52Wk Lines above, I see a strong indication of buying exhaustion in the stock market, so last week I became bearish and remain so this week.

Last week the Dow Jones closed at its BEV -7.5% line; and it didn’t take long before everyone wanted the Federal Reserve to cut interest rates.  Which is a euphemism for the FOMC to begin supporting financial asset valuations.

https://www.cnn.com/2019/06/06/investing/fed-rate-cut-bank-stocks/index.html

And the way the Federal Reserve cuts interest rates and bond yields is for them to purchase debt with monetary inflation at higher prices, prices rational people refuse to pay.  This is why the Federal Reserve, or central banking in general, is sometimes called by its distractors as the ultimate source of “dumb money.”

Warren Buffet put it nicely in 2003 after the Federal Reserve fixed the bottom to the Dot.Com bear market:

“Give me a few trillion dollars and I will show you a good time too!”

-Warren Buffet (comments upon the economic recovery efforts of the Federal Reserve of 2003)

The “few trillion dollars” Buffet referred to above was responsible for igniting the 2002-07 real-estate market bubble that followed, a “good time” for all while it lasted; until deflating real-estate valuations almost created a gravitational black-hole in the global financial market in 2008-09.

Next is the yield curve.  Since Barron’s May 6th issue, US Treasury Bond Yields have continued collapsing (bond price continue to rise).

It takes a lot of money coming into the Treasury market to force down these bond yields, and I have to wonder how much of it is “dumb money” coming from the Federal Reserve.  Then I can see another source of money coming into the Treasury market; money fleeing the Euro bond market.

Currently Germany’s sovereign bonds are yielding negative returns.  If a fiduciary had a few billion in euros to invest, it makes sense for them to buy T-debt yielding below 2% than German bonds yielding a NEGATIVE -0.08%, as they are at this week’s close.

Like the US Treasury market, European bonds are in a huge bubble.  In 1995 yields for these bonds were paying investors 7.5%; now with negative yields they are paying less than nothing.  In fact if you buy them it will cost you money!

And like T-bonds, in the wake of the 2007-09 sub-prime mortgage debacle (dashed vertical green line in chart above), the European Central Bank (ECB) ratcheted bond yields down to absurd levels.  And how did the ECB accomplish this?  With monetary inflation, which they used to buy bonds in the open market at prices rational people refused to pay. 

This is dumb money on an epic scale.  If at first you thought this was done by glue sniffing high-school dropouts, I would understand as normal people could never, ever do anything so stupid as investing vast sums of money knowing the return was a guaranteed negative return.

But it’s the economists with Ph.Ds who personally control the operations of the ECB who have transformed an entire market into financial garbage.  The horrors Mr Bear will inflict on the holders of German bonds when he returns to clean up this mess is going to stun the world.  That is unless someone holds their wealth in US bonds, as they will have their own problems to deal with when economic reality once again reasserts itself in the global debt market.

Today we see the 18th century’s Tulip Mania as the epitome of a market bubble (link below).  But three centuries later, we may ultimately discover the bond markets of the 21st century (not crypto currencies as the link below suggests) that exceeded the extremes of monetary madness of the 18th century.

https://www.focus-economics.com/blog/tulip-mania-dutch-market-bubble

Looking at the BEV values for the major market indexes in the table below, the NASDAQ Insurance index and the Dow Jones Utility Average were making new all-time highs this week.  Are we looking at the last hurrah for the 2009-2019 bull market, or will other indexes join the party and deliver new BEV Zero’s in the weeks to come?

Don’t ask me as I haven’t a clue.  However, as this week’s bounce was so extreme and painful on any short selling, as Mr Bear is want to do, I’m going to remain short-term bearish on the market.

Gold and silver enjoyed a good week, and it’s about time.  For the sixth time since 2013 gold is making a move on its -27.5% BEV level (or $1360 chart below), a level that for six years has defeated the best efforts the gold bulls could muster.  But after six years and six attempts, maybe the summer of 2019 is when gold and silver will once again shine.

All of the above sounds very good for us long suffering precious metals bulls, but until gold begins seeing a series of days of extreme volatility, daily advances for gold of 3% or more from a previous daily closing, with silver seeing daily advances of 5% or more, I’ll continue controlling my enthusiasm for the old monetary metals.

Still it’s going to happen, and when it does you’ll easily see a 3% day in gold’s BEV chart below. 

Gold’s step sum chart below is maybe the best graphic I have this week showing the excellent advance gold has made since last Friday.

In the Dow Jones’ step sum chart, it too enjoyed an excellent week.  But can it keep it up and break above the highs of April, and then take out its last all-time highs of last October?  I’m not so sure it can.  What about the bear box I’ve been talking about?  It’s still in the works.

Gold in its step sum table is seeing some strange market action, but I like it.  It’s good seeing gold break above $1300 at the end of May, and actually see an increase in price velocity as the week ended.  I don’t know if we’re at the point of a major price break out in gold and silver, but when their price break outs happen, I imagine they would look much like we see below with advancing days overwhelming decliners.

The pattern of daily advances and declines on display on the Dow Jones’ side of the table is more typical of what is expected.  But seeing five advancing days in a row suggests the Dow Jones is currently over bought.

But gold has seen seven consecutive advancing days, isn’t it also over bought?  It may be, but gold is still struggling to get past its lows of December 2015.  Three and a half years later precious metal investments remain off the radar screens of most investors.  While the stock market remains in the forefront of main-stream investment commentary.  Considering the above, I expect any surprises for gold would be positive, while negative for the stock market, but only time will tell if I’m right or wrong.

In the step sum tables above for the Dow Jones and gold, one item I want to draw your attention to is the rising daily volatility for the Dow Jones.  Since May 3rd the Dow Jones daily volatility’s 200 day moving average has increased from 0.70% to 0.74% at the close of this week.  Though this increase is slight, should it signal a general increase in daily volatility for the Dow Jones, it’s not a positive development in the stock market.

I have books on technical analysis for the stock market.  To use these market tools I spend years gathering market data the old fashion way; one number at a time from old issues of Barron’s into an Excel Spreadsheet file.  But everyone is using these same tools.  And the technicians on CNBC using them for the general public’s benefit are always going to be better at using them than someone like me; someone who had a day job and so spent most of their adult life focused on things not financial.

I decided to look at the data I’ve compiled over the years to see if there were some gems in the data no one else has yet uncovered.  For some reason I began seeking extreme market events in my data, studying them for whatever effect they may have on the market.

Looking at daily volatility for the Dow Jones; how much the Dow Jones moves from one day to the next; I note bull markets are low volatility market events, while bear markets always see a significant increase in daily volatility.  Multiple daily moves, from one day’s closing price to the next daily closing of 2% or more, during a span of weeks or months, whether they are daily advances or declines seemed to signal the market was overvalued and a significant market decline was at hand.

Below is a chart plotting every Dow Jones’ +/-2% day, Dow Jones days of extreme market volatility for the past 119 years.  In the chart they appear as regular market events, but they are not.   In the note located on the lower left hand corner, of the 32,317 NYSE trading sessions since 02 January 1900 to the close of today (119 years), only 1,838 of these daily closings have seen the Dow Jones move more than +/- 2%.

Here’s a very useful market factoid; the Dow Jones sees its largest daily ADVANCES during bear markets.  How is this fact useful?  Because Mr Bear uses these big daily advances to lure the unwary back into a continuing bear market, so don’t be fooled when they happen in the coming deflationary market event.

The largest single daily move occurred during the October 1987 market panic, where the Dow Jones declined over 22.5% from the close of one day to the next.  But this was a day when the computers wired to Wall Street, all running the same software, all deciding to short the market at the same time; early morning October 19th 1987. 

There was no kill switch to stop the robotic selling, and no single bank wanted to unplug its computer as that may have left them open to legal actions by clients who lost money because they did.  Market regulators did nothing as they too were frozen with fear.  It was a horrible day, but one not repeated, so this day will remain a freakish historical curiosity in my book.  I see the daily moves of +15% during the early 1930s, Great Depression events as the largest daily moves ever seen by the Dow Jones.

Ignoring the freakish daily volatility of October 1987, the next largest daily move by the Dow Jones outside the early 1930s occurred during the 2007-09 Sub-Prime Mortgage bear market.  On October 28th 2008 the Dow Jones ADVANCED 10.88% from the previous day’s close in the middle of the second deepest Dow Jones Bear Market since 1885.

Another pattern I noted in the chart above was how these days of extreme market volatility (Dow Jones 2% days) are distributed over time. From 1929 to the early 1940s the Dow Jones saw frequent 2% days.  Then post the April 1942 52% bear market bottom, volatility in the Dow Jones was greatly reduced. 

Why did this happen?  Because after a 89% bear market bottom in July 1932, followed by a 49% bear market in March 1938 and a 52% bear market in April 1942, the public was OUT of the stock market, and wouldn’t be back until the yet to be born Baby Boomers came of age in the 1970s.  So for the three decades from 1942 to 1971 the stock market was mostly a professional market, a market of fiduciaries managing other peoples’ money.  

All of that can be deduced by studying the chart above?  Heck no, that’s just the raw data I used to construct the following chart. 

Converting all data points above into absolute values (no negative values), I added them in a moving 200 day sample I call my 200 count, or how many days of extreme market volatility occur during a running 200 day sample.  The results are seen below.

  • From 1900 to 1920, peaks in the 200 count (peaks in market volatility) occurred in bear market declines of 35% or more. 
  • During the Roaring 1920s bull market, daily volatility was greatly reduced, but began increasing in December 1928, ten months before the Great Depression Bear Market began. 
  • At the bottom of the Great Depression Bear Market (May-July 1932) the 200 count increased to 103 (Box-A), or every other day saw the Dow Jones move +/- 2% or more.
  • July 1932 to March 1937 saw a big bull market advance (371%) as the 200 count declined to only 4 days of extreme market volatility in March 1937.   After this market top a bear market began resulting in the count increasing to 58 (Box-B) in May 1938 as the Dow Jones deflated by 49%.
  • The April 1942’s 52% bear market is very unusual, as it saw no increase in daily volatility in the Dow Jones.  The United States just entered WWll a few months before, and after the 1930s few people cared about the stock market.
  • From April 1942 to 1970 the Dow Jones saw remarkably little volatility.

  • Two events happened in the early 1970s that had a huge impact on daily market volatility:
  1. Baby Boomers (people with no living memory of the 1930s) entered the stock market;
  2. In August 1971 the US Government abandoned the Bretton Wood’s $35 gold peg (Red Vertical Line in Chart).
  • As evident in the chart, after 1971 daily volatility for the Dow Jones changed drastically as the Federal Reserve’s new monetary policy of unchecked expansion of currency and credit created a series of booms and busts.
  1. Box-C saw the first Dow Jones’ -40% bear market decline since April 1942.
  2. Box-D resulted from the computers running wild on Wall Street.
  3. Box-E was from the NASDAQ High Tech bubble deflating.
  4. Box-F was from the Sub-Prime Mortgage bubble deflating.
  5. Box-G occurred in the autumn of 2011 during a manufactured crisis with the US Government’s debt ceiling.  The public was still in shock from the credit crisis, though the Dow Jones itself did little for either the bulls or the bears.

Currently the Dow Jones’ 200 count stands with 18 days of extreme volatility in the count.  Because of the historical significance of rising market volatility to bear markets, I follow this indicator very closely.

Some things are happening in the shadowy world of Washington and Wall Street that may negatively impact the financial markets.  One is former FBI Director James Comey is going to be arrested for his part in the Hillary E-Mail, and Russian / Trump collusion scandals. 

https://www.youtube.com/watch?v=PUTQQSxLpEU

We saw what happened to the stock market when President Trump raised issue of unfair trade and tariffs with China and Mexico.  This summer we’re going to see how the market responds to the arrests of former senior officers of the FBI and DOJ as well as the other intelligence agencies.  I don’t think it will be a positive development for the Dow Jones, but could be a triggering event for gold and silver to break out of their eight year funk.

I like the following quote from H.L. Mencken

“The government consists of a gang of men exactly like you and me. They have, taking one with another, no special talent for the business of government; they have only a talent for getting and holding office. Their principal device to that end is to search out groups who pant and pine for something they can't get and to promise to give it to them. Nine times out of ten that promise is worth nothing. The tenth time is made good by looting A to satisfy B. In other words, government is a broker in pillage, and every election is sort of an advance auction sale of stolen goods."

- H.L. Mencken

We don’t have the caliber of people like H.L. Mencken in today’s MSM.  Journalists today love government, and their unflagging support of President Obama and Hillary Clinton tells us what kind of government they are most fond of.

If you have been following the Qanon posts as I have you’d know just how vile today’s political, cultural and financial elites are.  With the Mueller report on President Trump now out, the President can now go on the attack against his foes.

These people never thought Hillary could lose the November 2016 election, so they never bothered to cover their tracks.  They are fully exposed and Trump and Attorney General Barr have everything, and are ready to use it in a court of law or military tribunals in Gitmo as appropriate. 

Let’s see how the markets handle the dismantling of the old establishment on live TV, a political purging never seen before in America. 

Mark J. Lundeen

Mlundeen2@Comcast.net

It is estimated that the total amount of gold mined up to the end of 2011 is approximately 166,000 tonnes.