Bear Market Race to the Bottom - Week 79 - Inflation has Been Constant Economic Facto

The Bull is losing slowing down. Well so what? The Bear had difficulty breaking below the BEV -40% Line too. And now the Bull seems to be resting just below it. Nothing unusual is happening after the huge up-ward thrust we’ve seen in March. The BEV -40% line is not visited frequently, but in the big DJIA Bear Markets, important things happen there.




This chart, using daily data, goes back to 1900. A week or a month is an extremely small area on it. So while it appears that DJIA Bulls just spring up from these extreme bottoms, please realize that it actually takes time for the DJIA to recover from a Bear’s mauling.


Note the huge spike down during the Great Depression. It appears that the Great Depression Bear went down with no hesitation. That is not true.


Go up to my 1929/32 & 2007/09 Bear Race chart, the first chart shown on every issue of my reports. See how the Great Depression DJIA Bear had a struggle at the BEV -40% Line. Here is where the Bull and Bear really did battle 80 years ago. It took almost a year for the Bear to wrestle the primary trend away from the Bull. You may want to look at my Article on the DJIA -40% Bear Markets to see how past -40% Bear Markets have bottomed. The charts are at the end.


So, 6 months ago, the 2007/09 DJIA Bear crossed the BEV -40% Line. That is a good amount of time for the market to consider whether it’s going to chase after the 1929/32 Bear or rebound upwards and into the clear. In week 79 of my Bear Marker Report, I have to report that the Bear is still in negotiations with the “policy makers.” It could be awhile before one side walk away and surrenders control of the market’s direction to the victor.


But seeing all the financial garbage the “policy makers” are planning to generate with their pending stimulus legislation, I don’t think the Bear that is going to lose this war for want of nutrition. And what’s with the earnings reports for the banks that came out with this week? I’m not an expert on earnings or bank operations. But in April 2009, I’m very suspicious of any big bank’s ability to post positive earnings, with honest accounting. What major bank doesn’t have major positions in the derivatives market? The big NY banks all went wild with derivatives in the last decade. The Bear must be drooling when he thinks of their balance sheets!


One thing I’ve learnt from my market research of past Bull and Bear Markets, is that Bears eat the garbage left laying around by the old Bull. Another thing, at the bottom, the new Bull is a big believer in “Honesty being the Best Policy.” A good spanking can do wonders even on Wall Street. So I don’t believe we are at the bottom just yet. DJIA down to the BEV -60% Line by June is still a possibility.


Below is my volatility chart comparing 2007’s 40 & 200-day moving average closing price volatility with 1929 bear market volatility.


The 200 Day M/A has stayed fixed at 2.10% for two weeks in a row, and the 40 Day M/A is falling away. And as we can see below in my daily volatility table, for the first time in many weeks, there were no 2% days this week. So, it’s no surprise that the DJIA is only up 47.95 points or up by 0.59% for the week.


More evidence that the market is taking a bit of a rest. It’s not going last. We will see some more excitement in the next month or two. And if volatility picks up again, I suspect the action will be on the downside.
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.
Historically, daily 1% swings from the previous 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.”

Daily Volatility for Week 79
	Percent Movement	DJIA Close
Monday	0.32%	8057.81
Tuesday	1.71%	7920.18
Wednesday	1.38%	8029.62
Thursday	1.19%	8125.43
Friday	0.07%	8131.33
Historical Daily Volatility is < 1.0%

Take a look at this week’s daily volatility, and then compare these data points with the 200 Day M/A in the chart below. Volatility is the calling card of the Bear. So having three 1% days in a single week is telling me we are still deep in Bear Country. Since 1900, look at how infrequently the 200 Day M/A plot rises over the 1% line! How long does it stay about the 1% line? Not long!




To think that this market is calming down in Wk 79, when we are still seeing historic extremes in volatility is remarkable. Having the current Bear Market’s 200 Day M/A up above the 2% line is a sign calling for caution. But then maybe we really are going to see future dampening in daily volatility. That is good for the Bulls.


Like I’ve said, if the market is going up, jump aboard and make some money. But be ready to jump off even faster. Remember, its your money, not mine, that you risk in the market. The truth is that no one really knows what’s going to happen. But the Bull is slowing down.

DJIA Volatility Milestones
Market	Moving Average Maximum Value	Trading Days Post BEV Terminal Zero	Date of Peak Val
1929/32	40 Day M/A: 3.81%	77 Days	13 Dec 1929
1929/32	200 Day M/A: 2.50%	803 Days	17 May 1932
2007/09	40 Day M/A: 3.83%	284 Days	21 Nov 2008
2007/09	200 Day M/A: 2.10	378 Days	09 Apr 2009
* 3 Types of Daily Volatility from 1900 to 2008 *
Type 1: DJIA Close to Close Price Volatility’s 200 Day Moving Average Oscillates Above and Below 0.5%.
Type 2: DJIA Close to Close Price Volatility’s 200 Day Moving Average Ranges Between 0.5% & 1.0%.
Type 3: * Persistent Extreme Volatility * Consists of Two Parts Part 1: DJIA Close to Close Price Volatility’s 200 Day Moving Average Rises Above 1.0% and Stays There for Over a One Year Period Part 2: DJIA Close to Close Price Volatility’s 200 Day Moving Average Peaks Above 1.5%.

It’s the Kid and the Old Man thing again this week. For this move, both the Step Sum and DJIA are at record highs. But the Step Sum is showing more energy going up than the DJIA is. That means that there are more up days than down days, with the up days doing a slightly more good than the down days are doing bad.


It seems to me that what is need here is a stiff downfall in the DJIA and the Step Sum. There are just too many happy people on CNBC for this market to go up much farther from here on this move. But then, there is always “policy” to worry about. Bernanke might just sneak up from behind and give this Bull something to make him drop his cud and run for his life up the hill. The Bear? I don’t see him around, just now. I don’t think he’s finished with the Bull and Bernanke just yet.


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 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.




Investors must realize that since 1913, when the US Congress created the Federal Reserve, monetary inflation has been a continual factor in the dollar economy. Look at the chart below. How can any economist claim that the Fed is fighting inflation when the US Currency in Circulation has increased 20,000% in the past 95 years?




“Liquidity injections” is the term central banker’s use when they increase the money supply. This is a good description of what is actually happening. It’s an “injection”, as the new money is inserted into a specific spot in the economy: the banking system. It’s “liquidity” as it flows throughout the economy from the point of the injection via bank loans.


Investors should understand that there are two broad channels where this “liquidity” can flow from the banking system.


Channel 1. “Liquidity” flows into financial assets, resulting in Bull & Bear Markets


Channel 2. “Liquidity” flows into Consumer and Producer Goods & Services, resulting in rises in the cost of living.




Inflationary flows of money, creates uneconomic price structures in surprising areas. Consider the price of a college education. In 1970, it was possible for a student to pay for a college education with a part time job. If a student lived at home, it was possible to graduate from college with little to no debt. Hollywood movies of the 1930s and 40s often used a college kid, working his way through college as a character in their plot line.




The government-sponsored, school loan program has financed a bull market in college expenses. Thanks to monetary inflation blowing a bubble in education costs, the higher income a college education does in fact produce, now goes toward servicing student loans many years after graduation. So, a student’s function in today’s economic model is to work their butts off to enrich banks for many years to come.


It was not like this. In 1970, when Bretton Woods still had a tenuous $35 to 1 Ounce of US Treasury Gold link, it was still possible for a college student to work his way through college.

Paper Dollar Inflation 1945 to 2009 US CinC to One Ounce of US Gold
Event Milestone	Year	Dollars per One Ounce US Gold Reserve
Start of Bretton Woods	1945	$39.00 : 1
Start of London Gold Pool	1961	$64.97 : 1
Kennedy Assassination	1963	$81.42 : 1
End of Gold Pool	1968	$135.01 : 1
US Closed Gold Window	1971	$198.82 : 1
* April 2009	2009	$3435.23 : 1
The Huge Expansion in US Dollars, after 1971, went toward Financing Bubbles in the Stock, Bond, Real Estate, and also the College Tuition Markets. This Expansion is also Responsible for Enslaving the American Consumer with Easy Credit Terms and the Huge Increase in CPI Inflation since 1971. Nothing Positive for the American Public Resulted from Breaking the Dollar Gold Peg in 1971. But Washington, Academia and Wall Street Benefited Greatly. These Terrible Three are Economic Predators.
Source Barron's Graphic by Mark J Lundeen

This model for financing a “higher education” will eventually terminate itself. When students’ college debt loads exceed any economic benefit a college education formerly provided, the education market will collapse exactly as did the housing market. And for the same reasons! The lawyers and Keynesian social scientists, who control government in the United States, woke up one day and decided to “stimulate” education with “liquidity” from the Federal Reserve via a government-guaranteed loan program.


It’s not surprising that medical costs have soared since the Federal Government became involved in health care in the 1960s. Their solution to any problem they involve themselves in is always the same: throw unlimited money at a limited resource. The results too are always the same: the growth of a huge bureaucracy that justifies its existence by breeding suspicion of the economy under its control.


If the social science schools were to close during a Bear Market in the coming crash in the tuition market, that would bring no tears to my eyes. I also expect to see the day when the social scientists torch their own school’s endowment funds with the fires of inflation they are now fanning. They are like kids playing with matches with no adult supervision.


No doubt about it. The Federal Reserve and Keynesian Economics are two really bad ideas that found fertile soil in Washington and academia. What’s next: a government bailout for Harvard and Princeton? It’s coming!


This will be bad news for the engineering and medical schools. Well, when government decides to finance essential economic activities with inflation, bad things always happen.




Let’s take a hypothetical look at oil production. Unless an oil well is a gusher, (an oil well that produces oil with natural pressure) oil must be pumped from the ground. And pumps take energy to operate. In a free market economy, (an economy free for government interference) when it takes the equivalent energy of one barrel of oil to pump one barrel of oil from the ground, pumping oil from the well must stop as it can no longer finance itself.


But, what if one day in the future, Washington decides that domestic oil production must be increased from our existing oil resources to lessen foreign energy imports. This would increase oil production without expansion into the vast untapped energy resources now available off the Pacific & Atlantic coasts as well as in Alaska and North Dakota. This is a good idea that no one could argue against.


Doubtless, the lawyers in Congress would use their favorite economic stimulation plan: a government-guaranteed loan program. With money from the Federal Reserve, they could finance the rebuilding of the domestic oil industry. Washington would need to hire many economic graduates from Princeton University to manage the system.


Now, the oil well operators can, (and will) with government credit, purchase two barrels of oil from the middle east to power their pumps, producing their one barrel of oil in the US. A Princeton economic graduate will write his Ph.D thesis on the how he revitalized the domestic oil industry. This would earn “the doctor” the necessary stripes in government service to become a commissioner of the CFTC. The money managers of Princeton’s endowment fund, discover a bull market in domestic oil companies in the making. They would be sure to stock up on shares and bonds of Oil R US Inc. Oil from Texas, that geologists said could not be recovered, is now flowing from the ground thanks to social science!


CNBC will offer copious air time to Congressman Barney Frank and Senator Chris Dodd, who co-wrote the domestic oil production legislation. Both members of congress will easily win their re-election thanks to the generosity of the Texas Oil Industry. The new Chairman of the CFTC, whose Ph.D thesis made Texas a global petroleum powerhouse, will be invited to speak at the New York Economic Club on the future of oil in Texas. Alan Greenspan will make an appearance on Larry King Live to discus how financial bubbles are no longer possible, now that the Federal Government cleaned up the monetary mess left by Dr Bernanke.


But the well operators have known something from the start that the government somehow missed. In effect, for every barrel they pumped, they now owe two barrels of oil to the Middle East. So any well operator who pumped 50,000 barrels of oil, now owes 100,000 that they’ve known all along that could never be paid back. But Washington made them a deal they could not refuse! It’s a load of TARP, but that’s how lawyers and economists do things. Those operators, with degrees from Ivy League universities, would have the connections to know who to pass on some old Morgan Silver Dollars and Gold Double Eagles to keep their names out of the press and the upcoming Dog and Pony Shows hosted by Congressman Barney Frank and Senator Chris Dodd, as they moved on to a comfortable retirement at some unknown location in the Caribbean. The dollar index would roar up to 6.1 from 6.0 on news that US unemployment was down to 75%.


Is this possible? Ask yourself what area of the economy these scoundrels (aka the US Congress) have taken upon themselves that has prospered? Energy Independence? Social Security? Healthcare? Education? Urban Blight? Community Re-Development? The NY Stock Exchange? They’ve made much about their “Wars” on poverty and drugs decades ago, but poverty and the drug trade have thrived for 40 years under their assault! Washington’s touch is death to our future peace and security. But they still wants more money and control.


Maybe the worse of the lot are the graduates from the “Schools of Journalism.” Despite all the evidence to the contrary, over decades of time, how the government has squander our country’s resources and is destroying America’s cities, there are no bigger supporters of Big Government than journalists. What happened after Washington stimulated the housing market! For people whose only source of news is news papers and television, they still don’t know. It’s no wonder why big city newspapers are going out of business. They’ve adopted Pravda’s business plan from the old USSR days. To bad for them that readers are still free to * not * read them. The same is true with video journalism.


Not that the press has noticed it, but these same lawyers in Congress, supporting a President with a background in “Community Organization” from the crime-infested South Side of Chicago, in cahoots with Keynesian Social Scientists, using liquidity from YOU KNOW WHERE, are planning to “stimulate” the American economy with a few trillion dollars. I have a real bad feeling when I think of the next 10 years.








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.