Barron’s Gold Mining Index and Gold & Silver In 1920 Dollar Terms: THEYÂ’RE CHEAP!

Mark J. Lundeen
19 March 2012

So how’s the bull market in gold and silver going? As seen below, they are doing just fine. In fact gold and silver are doing better than the Dow Jones 1982-2000 bull market was at its day 2,746 on June 24, 1993. If we compare the progress of gold and silver to the Dow Jones, and all too many analysts mistakenly do, we might come to a conclusion that we are at, or have passed the mid-point of possible gains for our favorite metals.

But why use the Dow Jones, or any stock market index as a bench-market for what is possible for the old monetary metals? Look at the situation this way; the price of anything, and everything, is determined by the supply and demand in the market. This is true even with our current “regulated market” system.

It’s important to realize that if the Federal Reserve’s “Wiz Kids” could have “stabilized” the markets during, and after the credit crisis * without * printing money to support financial-asset valuations, they’d have done so. But to feign demand for financial assets that is absent in the market, central banks are forced to bloat their balance sheets by trillions of dollars, euros, or whatever unit of currency they print. So, governments and their bankers still find themselves subservient to the law of supply and demand. If they want prices higher in the stock and bond markets than market’s natural fundamentals would have them, the “policy makers” have to step in and become top bidders in the markets, paying prices no one else will, using as many tens of billions, or trillions of dollars of monetary inflation as it takes to achieve today’s contrived asset prices.

In any event, the supply and demand characteristics for the stock market are completely different than for the old monetary metals’ market. Take a look at the number of stocks trading at the NYSE and the NASDAQ from 1938 to today. The supply of listed stocks trading on the NYSE and NASDAQ expanded greatly, until the end of the high-tech boom. This is especially so after the start of the 1982-2000 bull market in stocks. I don’t have the data, but due to secondary offerings and stock splits from 1980 to 2000, companies like General Electric must have increased their total authorized stock float by at least a factor of ten. The huge increase in common stock listings, and the increasing number of shares traded from stock splits and secondary offerings, had a huge effect in the valuation of stocks and indexes, as money coming into the market had more and more choices to flow into.

I’m not suggesting that there is anything wrong with this. Well, actually there was with the NASDAQ from 1995-2000, as Wall Street’s M&A boys flooded the stock market with garbage IPOs for internet stock, but that is another story. I’m just noting that in a free market system, the success of Coke Cola in the stock market will always result in a Pepsi Cola being eventually listed too; it’s called competition.

But gold and silver are completely different, because Wall Street can’t increase the supply of * Actual * gold and silver in the physical metals market via IPOs, as “investment bankers” did in the stock market from 1982-2000. Only exploration and mining companies can increase real metal in the metals markets. Also, ounces of gold and silver never declare stock splits. The relatively fixed nature of the available supply of metal exposes the price of gold and silver bullion to the full impact of money panicking towards it. Or at least will after the New York and London paper markets and precious metals ETF managed by the big NY banks such as GLD & SIL are weighed, and found wanting.

It’s also important to realize that during the 20th century, financial assets, * not * gold and silver, were the primary beneficiaries of monetary inflation. Twice since 1920, the US Treasury increased dollars in circulation beyond the US Treasury’s gold reserves needed to redeem them. Ultimately, this inflation caused the US government to reneging on its US dollar’s gold obligations, but before these defaults, the Dow Jones experienced massive-inflationary bull markets. The first gold default was in 1934, which resulted in the Federal government confiscating its domestic gold coin and bullion. Then again in 1971, Washington defaulted on its global gold obligations. However, before paper dollar inflation forced a gold default, in both cases the stock market saw significant bull markets from 1921-29, and 1948-66.

A small note (and table), for the next chart is necessary here. If the 1949-66, 1982-2000 and 2002-07 Dow Jones bull markets don’t appear as much of a bull market in the next chart, it’s because these plots for the Dow Jones and the BGMI are corrected for CinC inflation. In other words, they are plotted in 1920 dollars. The table below, using weekly closing values, gives the specifics for US Currency in Circulation (CinC) and the Dow Jones. Look at the 1921-2007 totals. I think this makes the case that since 1921, after taxes and inflation, the Dow Jones has been a losing investment as the Federal Reserve, year after year, has relentlessly inflated the US money supply, and the Internal Revenue Service taxes phantom capital gains.

Note in the table below, the beginning of each Dow Jones bull market starts at a value below its former bull market top (see arrows), while the Fed’s CinC after 1929 (listed in billions), only increases year after year.

Returning to the chart below; since 1920, bull markets for the Dow Jones and the Barron’s Gold Mining Index have had a relationship with monetary inflation. Inflation is the prime mover for Dow Jones bull markets, until the inevitable monetary crisis arrives. At which point the BGMI is driven upwards as flight capital floods into mining shares, as wealth seek safety from deflating financial assets. It’s as simple as that. Now for the third time in ninety years, this pattern is about to repeat itself with the BGMI, and mining and exploration stocks on the edge of their biggest bull market in its history.

In fact, it has already begun. Since 2001, the BGMI has outperformed the Dow Jones in inflation corrected, and nominal terms. I’ll be the first to admit the junior producers and exploration companies have been in a funk since 1997, but since 2001 the major gold and silver producers have been great investments, and will continue to be for a long time to come.

That the financial media has chosen to ignore these long-term trends is largely due to how investment advice is propagated in today’s media: by star, know-nothing reporters who have chosen to focus on the opinions of beached whales in the financial assets markets, or hot traders looking for fast money, people whose time horizon is never longer than a few months. But this ninety-two year chart tells the real story: the BGMI is just a currency crisis away from once again blasting-off to amazing, inflation adjusted highs. Take a few moments and study this chart carefully.

It’s obvious that two major 20th century Dow Jones bull markets occurred during an inflationary cycle * before * a monetary crisis resulting in a US Treasury gold default. * AND * after the default, the BGMI saw a tremendous bull market that exceeded the gains seen in the previous Dow Jones’ bull market. And it looks like the BGMI is going to do it again.

Today the US Treasury cannot directly default on its gold, as it demonetized gold in 1971, so it has no direct gold obligations to default on. But ejecting gold from the global money supply forty years ago will make the coming monetary crisis even more destructive. Also for decades, governments and their central banks have actively suppressed the market price of gold and silver by using phantom gold and silver in the New York and London paper markets. In March 2010, Jeffrey Christian of the CPM Group testified before the CFTC that the NY and London gold markets had 100:1 leverage in their paper contracts. That’s insane, even criminal; selling every one ounce of gold they had to one hundred people in a futures market. What happens if only 2% of the contract holders ask for delivery? These markets will be exposed as fraudulent.

Think of this! That means that the current price of gold is based on the assumption that there is 100 times more the gold than is currently in existence! Also, European governments are becoming concerned with what the Federal Reserve is doing with their nation’s gold stored in New York; which the Fed is in no hurry to explain.

“Fraud and falsehood only dread examination. Truth invites it…Whoever commits a fraud is guilty not only of the particular injury to him who he deceives, but of the diminution of that * confidence * which constitutes not only the ease but the existence of society.”
-Dr. Samuel Johnson, 1709-1784: English man of Letters and Moralist

All and all, a historic collapse in “confidence” in financial assets, and national fiat currencies is at hand. A day is soon coming when a panic into the actual precious metals will start. The large gold and silver miners in the BGMI will perform as they always have in the past: wonderfully. But I expect the gains in the junior producers and exploration companies will be breadth taking. Why might that be? Because in the past ten years, central banks and Wall Street have polluted the balance sheets of pension, mutual funds and insurance companies with trillions of dollars of toxic byproducts from their derivatives operations. The markets for physical gold and silver, and their major producers are simply too small to contain the coming derivative blow back into precious metals. Smaller companies will finally catch monster bids as fiduciaries and hedge funds decide that even moose pasture in Northern Canada is a safer risk than US mortgages and Treasury bonds.

But what do I know? I know that Robert Rubin, Secretary of the Treasury for President Clinton, and the architect of the 1990s “strong dollar policy” is becoming concerned that he has too many dollars! From Bloomberg:

Rubin Says He Has Too Many Dollars 13 Years After Departing U.S. Treasury

Robert Rubin, who as U.S. Treasury secretary in the 1990s promoted a stronger dollar, said he has too much of his personal investments in the currency.

A “disproportionate amount” of his assets are in cash and he “should be more allocated away from the dollar,” Rubin, 73, said yesterday in a speech at the TradeTech conference in New York. He said he also was “greatly overweighted” in private equity and had investments in hedge funds.

This is an incredible statement. I assure you that during the gold standard, no one had any fears of owning too many dollars.

For your information, Mr. Rubin along with Alan Greenspan, was instrumental in allowing the US banking system to create the OTC derivative market, as an “unregulated” (read secret and untraceable) institution. Thirteen years after he left the US Treasury, he’s now concerned that he too may reap what he has sown.

Here is the problem for the “policy makers” (like Robert Rubin); since 1980 they have expanded their money supply by orders of magnitude. How many times could our money supply, in a stack of $1 bills, go to the moon and back? Something like 27 times the last I heard. But all the gold mined on Earth in the past 5000 years can still fit comfortably inside Yankee Stadium’s infield, and there is less silver above ground than gold!

So keep an iron hand on the tiller, and keep buying gold, silver as a core position, and mining shares to maximize capital gains, as they are really cheap!

How cheap? Well, really cheap when we look at their prices in 1920 dollars, as I did for the Dow Jones and BGMI in the chart above. In the following charts, we see how the Federal Reserve, the Great Engine of Inflation, has increased US Currency in Circulation by a factor of 244 since 1920. Deflating the price of gold with constant 1920 dollars gives us a current price of gold of only $6.78 (1920 dollars) as of the close of last week. This is far from gold’s January 1980 high of $30 (1920 dollars) for an ounce of gold. For gold to once again see $30 in 1920 terms, it would have to increase to $7350 in today’s dollars. But this price is a moving target, as the Fed will continue to inflate the supply of paper dollars in circulation until armed guards bar the doors to Doctor Bernanke at the Washington Fed. I don’t know if that would make a difference, as the good doctor would most likely go to the nearest park bench and create more dollars with his I-Phone.

Let’s look at silver. At the close of last Friday, silver was going for $0.133 in constant 1920 dollars.

This is all very interesting, but most of you realize that gold and silver are now purchased in Secretary Robert Rubin’s “strong dollars”; dollars that even he now wants distance from. Sad but true. But these charts strongly suggest that that most of the potential gains in the current bull market in gold, silver, and by proxy, gold and silver mining shares are still in their infancy, with most of the really big gains yet to come. For the third time in the past ninety years, the BGMI is sitting on the launch pad, with all systems go except for the final monetary crisis. I know it, Mr. “Strong Dollar” fears it, and now you should strongly consider what these charts are telling us.

Mark J. Lundeen
19 March 2012

Demand for Electrical Power is Collapsing & Barron’s Confidence Index Is Approaching Depression Conditions Levels

Mark J. Lundeen
10 February 2012

Electrical Power Consumption (EP)
From the first week of December 2011, to the 13 February 2012 issue of Barron’s; electrical power consumption’s 52Wk M/A BEV has declined a full 1.25% in only two months!

Minnesota, the land of snow and cold, is now enjoying the mildest winter in a very-long time. This has been true for other northern US states with significant populations, all large consumers of electrical power in the winter. But I also sense the economy is slowing down. So, is this HUGE 1.25%decline in EP (05 Dec -13 Feb) a response to unusual seasonal factors? Maybe. Or maybe Doctor Bernanke “injected” so much “liquidity” into the economy; that the pathology of “Toxic Money Syndrome” (TMS) progressed to the point of no visible-economic return: the point where increases in the money supply can only produce negative economic consequences.

Do you think I’m being an extremist? Then go to the Demonocracy.Info link below to see their graphical representation of just how many dollars are in the world. For your information, in 1920 there was only four billion dollars (two truckloads) in the world. In the past 98 years, the Federal Reserve, the global “engine of monetary inflation”, has been very busy.
If this new downtrend in EP doesn’t turn around by the end of March, and continues its decline into April, I’m calling the new downturn the start of a new phase in the continuing credit-crisis recession/depression. However, a -4.0% decline in EP before April will be an automatic tripwire for me to declare our economy is in cardiac collapse.

In any case, EP is still a long way from making a new all-time high, and has been since August 2008. There is something very wrong with the American Economy as true growth = growing demand for electrical power. So, I hope this isn’t what it appears to be; a collapse down to depression levels of economic activity. But darn if it doesn’t look like something of great importance (in the bad sense of the term) is occurring in EP’s chart below! Currently, the US government’s economic statistics are optimistic, as demand for electricity in the economy is plummeting. These two sources of economic indicators can’t both be right. Time will tell us which indication provided timely information on our future economic trend.

Barron’s Confidence Index (CI)
I haven’t posted the Barron’s Confidence Index chart for a while, so here it is. Since 1938, Barron’s has computed its CI by dividing their Best-Grade Bond Yield by its Intermediate-Grade Bond Yield to derive the CI. I pushed the series back to 1934 using the yield from the now discontinued Dow Jones 40-Bond Average as a substitute for the Intermediate bond yield; both yield series were very close to each other. I derived my Best-Bond Yield by taking an average yield of ten bonds published in Barron’s whose yields were close approximations to the first published value of Barron’s Best Bond Yield in their 19 Dec 1938 issue. The Dow Jones 40 Bond Average yield goes back to 1926. Unfortunately, Barron’s began publishing corporate bond prices and yields in their 01 Jan 1934 issue, so 1934 is as far as I could go.

The results of my improvised 1934-38 CI are impressive. From 1932-37, the markets saw an excellent recovery from their lows of 1932; so seeing my improvised CI above 80 from 1934-37 is something to be expected. Then from October 1936 to Barron’s first published CI value in December 1938, the CI collapsed to 45 as the US economy, and Dow Jones entered into the second deep economic turndown of the 1930s. All-and-all, my five year extension in Barron’s CI time-line is a valuable and timely addition to this venerable economic indicator.

But before I go any further with Barron’s Confidence Index, I first must explain the difference between Best Grade and Intermediate Bond Yields before you can understand the importance of this data series.

Come summer, winter, spring and fall (economically speaking) there are always a few companies that prosper no matter what happens in the economy, but most don’t. During the Roaring 1920s; Standard Oil of New Jersey (Exxon today) and General Motors, each appeared as prime credits in the bond market when business was booming. I don’t have the needed bond data before 1934, but I expect the bond yields for these two companies would have been very similar to each other during the boom years of the 1920s. Confidence in a continuing boom of the 1920s was epidemic:

“The nation is marching along a permanently high plateau of prosperity.”
– Irving Fisher, Yale University October 23, 1929
(6 days later Black Tuesday occurred)

Much like Alan Greenspan during the 1990s, Irving Fisher was the best known economist, and guru of growth in the 1920s. His economic statistical series were published in Barron’s. On 23 October 1929, few doubted the validity of his above statement of perpetual prosperity, which he knew was based on credit expansion. However, in 1935 when he published his book “100% Money”, he seems to have had second thoughts of the wisdom of credit expansion as a source of prosperity.

“Thus, our national circulating medium is now at the mercy of loan transactions of banks, which lend, not money, but promises to supply money they do not possess.”
– Irving Fisher, 100% Money

No data on the CI is available for the 1920s, but it must have been above 95, as
bond purchasers of that era, like Doctor Fisher, assumed the good times would last forever. Considering the mind-set of the Roaring 1920s, risk premiums for General Motor’s bonds (intermediate grade) must have compressed down to that of Standard Oil bonds (best grade) bond’s levels. But the inherent risks in these bonds were very different.

Remember, mass production of automobiles didn’t exist 30 years before 1920, making auto manufacturing in the 1920s’ bull market a much favored high-tech growth sector that everyone had to own! Sound familiar? That the internal combustion engine was the transportation of the future was true enough, but that didn’t mean that its pioneering manufacturers would be the long term beneficiaries of horseless transportation. To go from almost zero in 1900, and expand auto production exponentially in only three decades, the automobile industry assumed huge debts in the bond market to finance their growth. To service this debt, the auto industry had to sell new cars, which proved to be no problem during the Roaring 20s. However, the 1930s was no friend of high-tech growth companies with huge debts.

Unlike auto manufacturers, Standard Oil was an established giant of American business decades before Henry Ford invented the assembly line. Standard Oil was incorporated in Pennsylvania in 1868. In 1911 when it was broken up with anti-trust legislation, New York City had more horses than automobiles on its streets. The largest of the remnants of the old Standard Oil Company was Standard Oil of New Jersey (Exxon today), and its bonds were the best of the best as debt service was a negligible expense. Standard Oil’s capital infrastructure (refineries, pipe-lines, etc) had been paid in full long before 1929. That, plus it funded its operations by cash flow on a product that people purchased daily in good times or bad. For most people, buying a new car in 1932 was on top of the list of things * not-to-do * during the Great Depression. But
new car or old” target=”_blank”>new car or old

, the old
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(Ford Model- T) still needed gas every few days and a regular oil change.

When the US economy fell into the Great Depression, the difference between best grade bonds (Standard Oil of New Jersey), and intermediate grade bonds (GM) became painfully evident to the holders of their bonds. Had Barron’s published their CI in the early 1930s, I imagine their CI would have recorded its lows of the 20th century, as company after company fell into receivership because they couldn’t service debts taken on during the boom-times of the Roaring 20s.

So what does the Barron’s CI actually measure? The bond market’s confidence; or fear of future economic conditions that American corporations must service their debts. Strangely, the CI’s ability to anticipate future bull and bear bond markets is extremely poor. The Confidence Index * is not * a measurement of potential profit to be had by investors or money managers purchasing bonds, but the bond market’s confidence that less than best grade bonds issuers can service their debts to term. In CI’s chart above, I placed reference lines and text at CI levels I believe are strategic.

A CI above 90 indicates the bond market has an extreme level of optimism that debt laden corporations’ can service their debts to term. In other words, business is booming, and the bond market sees no future economic difficulties. Corporations with less than stellar balance sheets (bonds found in Barron’s Intermediate-Bond Yield Average) are borrowing money in the bond market at rates near best grade bonds to expand their future operations.

A CI in the 80s indicates a healthy skepticism of future economic conditions, causing risk premiums in intermediate-grade bond to expand. Every entrepreneur believes their product has infinite demand – the bond market knows better. Hopefully, this increase in project financing results in the cancelations of planned expansions of productive capacity by companies with weak balance sheets; companies that might not bear the increase burden of additional debt should the economy slow down. Here we see the bond market’s negative feed-back mechanism needed to check productive expansion beyond economic demand. This vital market feed-back mechanism is currently disabled as the world’s central bankers are now dictating bond yields.

A CI below 65 indicates the very real fear in the bond market of coming waves of bankruptcy and corporate-debt default that always result from significant, and prolonged economic declines.

My next chart shows the Barron’s yield series used in constructing the CI. The CI is computed by dividing the Blue Plot (Best Grade) by the Red Plot (Intermediate Grade) seen below. As I said before; the CI has little value for predicting bull and bear markets for bonds. The CI increased from the low 40s in 1940 to an amazing 99 in 1966, as bond yields doubled and consumer prices increased far above their pre-war levels. So, not only did bond valuations decline after WW2, but the dollars they were valued in continued to purchase less. Then from 1966 to 1981-82, consumer prices increased to double-digit rates by 1979 as all bond yields (including US Treasuries) saw double-digits current yields. One only has to look at Barron’s US Treasury Bond table to see US T-Bonds issued from that era with double-digit coupons trading in the bond market today. But during the 1970s and early 1980s, investors in bonds hemorrhaged money; however the CI never fell below 80 because the bond market estimated that most bond issuers would survive the inflationary 1970s & early 80s, and pay their debts in ever cheaper dollars.

Remember, the CI does not concern itself with the profits or losses of bond holders, just the likeliness of intermediate-grade bond issuers to stay in business, and servicing their debts. This makes Barron’s Confidence Index an economic, * not * a bond market indicator.

Why did bond yields explode from the late 1940s to the early 80s? For the same reasons bond yields * should * be going up now; the Federal Reserve was recklessly “injecting” too many dollars into the banking system. This inflationary fact was also true after 1981 to the present, but the inflationary flows from the Fed shifted channels in 1982; from consumer prices into financial asset valuations. Since 1920, this has happened several times.

Below we see data that has been published weekly in Barron’s for many decades, with Currency in Circulation (CinC = dollars in circulation) going up in good times and bad. The world loved Greenspan as his inflation (green plot) flowed into the Dow Jones (red plot) and high-tech stocks. But the world will come to hate Bernanke, as his inflation will ultimately flow into consumer prices (blue plot), as asset prices eventually deflate.

Price inflation of financial assets destroys the value of historical price data. Previous to August 1971, when the US defaulted on the Bretton Woods’ $35 to an ounce gold peg, little can be made of the data above. But making the prices of the Dow Jones and Barron’s Gold Mining Index (BGMI) ratios to the always increasing CinC, we see the flow of inflation shifting into the BGMI (a proxy of consumer prices), and the Dow Jones (a proxy of financial assets) several times since 1920.

You will never see the chart below on CNBC or Bloomberg TV, but the only 20th century Dow Jones bull market that exceeded the rate of inflation from the Federal Reserve occurred during the 1920s. This is a disquieting fact to most people who have invested in the stock market for decades for the purpose of funding their retirements. But to most people, if they are honest, they are now less well off than they were a decade ago because of what the Federal Reserve does in the economy – inflate the money supply to maximize profits for the banking system. Where do you think all that money used to finance mortgages, and second mortgages a few years back came from? The Fed and its banking system!

You should also note that the BGMI is typically countercyclical to the Dow Jones, as gold and gold miners naturally prosper during times of increasing consumer prices. If the past is prologue, gold, silver and their miners have one heck of a bull market ahead of them.

After the top in the Greenspan High-Tech market (January 2000), I suspect that if the “policy makers” had allowed the market to follow their natural course, as their Federal Reserve continued its recklessly expansion of the money supply, bond yields today would all be double digit. My reasoning for this is that from 1971 to 2001, the trend in the price of gold was a leading indicator of US Treasury long bond yields.

I placed red-dashed lines in the chart below at key trend changes in the price of gold. The relationship between trend changes of the late 70s to the late 80s between gold and T-Bond yields are not instantaneous, or proportional, but are there. After October 1987, to 2001, both gold and Treasury yields trended down together.

But this thirty year relationship didn’t survive long after Doctor Bernanke’s Helicopter Money speech, as we see in the chart below. The actual title of the Doctor’s speech was: “Deflation: Making Sure ‘It’ Doesn’t Happen Here” was delivered a month after the 2000-02 high-tech bear market bottom. The context is clear; Doctor Bernanke promised to use the one tool the Fed has, the power of its monetary-printing press to prevent the valuations of financial assets like stocks, US T-bonds and mortgages from “deflating” should he be selected as the successor to Doctor Greenspan as Chairman of the Federal Reserve. He did succeed Greenspan, and he kept his promise to Wall Street, who loves the guy for all he does for them.

“If we learned anything from 2008, it’s that liquidity is the key variable. Liquidity flowing into the system cures a world of ills.”
– Mitchell Stapley, the chief fixed-income officer at Fifth Third Asset Management. 07 Feb 2012

Well, if money managers applaud Doctor Bernanke’s anti-deflation “policy” of inundating the financial markets with “liquidity”, the rising price of gold is flashing an unambiguous warning of financial disaster to come.

We are currently seeing the largest bubble in the history of mankind, a bubble in the world’s massive bond markets. I’m not the only guy concerned of central bank machinations in the global fixed income markets.

I’m not smart enough to time the market; and those who try calling market turns find it’s a bad habit that’s easy to break. But take a moment and revisit my chart of Barron’s CI, and compare that to the charts above plotting gold and T-bond yields. To my eyes, something significant changed in the wake of the Greenspan High-Tech market bubble top of January 2000. The CI now has that 1930s’ look to it, and the spread between the price of gold and US T-bond yields in the chart above has only widened in the past eleven years, as America’s central planners continue their quest to slay their dragon-of-deflation with massive “injections” of “liquidity”. Something big, bad, and really ugly is lying in wait somewhere ahead of us; yep – Mr Bear and his financial market clean-up crew.

We all like a pat on the back for a job well done. So I think we all owe something to Barron’s statics department, without whose dedication in recording dry statistics from one decades to the next; boring old-fashion market statistics that since 1980 have been mostly ignored by the public as well as Barron’s columnist and editors. I dare say that I’m the only person on the planet Earth who currently studies Barron’s CI, Barron’s 50 Stock Average, and other Barron’s proprietary data series that span many, many decades.

My concern is that Barron’s is largely ignorant of the treasure trove of economic and market data they’ve published over the decades; and what you don’t use – you lose. So if you find my work analyzing Barron’s historical data useful in understanding market and economic trends, use the link below to show a little appreciation for the continued publication of their CI & EP, and the importance of Barron’s statistics in general.
We don’t want Barron’s to lay off their statistics guys to cut costs if things get really tough – do we? No we don’t! So take a moment and say thank you for a job well done.

Mark J. Lundeen
10 February 2012

Bull Market in Stocks, Bear Market in Gold? Only on TV!

Mark J. Lundeen
01 July 2011

The week ended with the Dow Jones up 4.48%, and gold down 0.92%. On CNBC, as usual, much was made of the Dow’s performance, with the term of “bull market” frequently used to describe this week’s gain in the Dow. Gold, on the other hand, is portrayed as “clearly in a bear market”, with no shortage of “financial experts” pessimistic over the future prospects for gold and silver. It would seem that the risk of higher-interest rates is placing tremendous downward pressure on the precious metals. As you will see further down in my article, higher-interest rates are actually good for gold and silver! Where do the big networks find these “experts?”

But one issue never discussed in the media, is the inflationary consequences caused forty years ago when the US abandoned the fixed price of gold at $35 an ounce which had been pegged there since the Bretton Woods Agreements in 1944, and ended the redemption of US dollars for gold by foreign governments at any price. Bull market in stocks, bear market in gold? Is that what you see below? Seeing gold would outperform stocks forty years after it was kicked out of the world’s monetary system is something to be expected!

Since the world was taken off the gold standard, gold has in no uncertain terms outperformed the Dow Jones. This chart’s data was personally compiled by the author from old issues of Barron’s, week by week, so you can trust what you’re seeing above. It’s scandalous how CNBC passes on mostly poor quality marketing material from Wall-Street bucket shops as investment advice to retail investors.

Well, if gold and silver are the only shows in town worth buying a ticket to, why should we follow the Dow Jones? I spend a lot of time with the Dow Jones as the Dow is always in the background of whatever else is happening in the financial or commodity markets. Ask the man (or woman) on the street what is happening in the much larger and more important bond market; chances are they don’t know or even care. But when people watch one of the legacy-networks’ nightly news program, they believes it was a better day when the Dow Jones (just 30 blue-chip stocks) closed up 100 points, than down. The “policy makers” understand the importance of the Dow Jones on public opinion, and for that reason they are currently working very hard keeping the Dow above its 12,000 line. A little excitement in the Dow Jones, like this week’s 4.48% gain, goes a long way in shaping public opinion on the economy.

Let’s look at the chart below, the Dow Jones has been trading in a fixed range since 1996 (blue plot, red square). Fifteen years of doing nothing for investors. However, since 2000, the Dow Jones is actually a story of investors paying capital-gains taxes on inflationary losses in the stock market. Why is that? Because since 1913, when Congress created the Federal Reserve, “monetary policy” has greatly increased the number of US dollars in circulation (CinC). There are now 8 dollars in circulation for each dollar in circulation in 1980. On an inflation adjusted basis (red plot below), blue-chip stocks when priced in constant 1980 dollars, have delivered significant negative returns for the past twelve years. The Dow Jones is 38% below its inflation adjusted highs of April 1999. Since 1980, blue-chip stocks have provided only a 78% pre-tax return in inflation-adjusted capital gains, and that would be substantially lower after paying capital gain taxes on the nominal gains of ~900%.

The Greatest bull market in the 20th century has only been an inflationary illusion.

Returning to the nominal dollar blue-plot above, will the Dow Jones break decisively upwards out of its box? Don’t hold your breath! My expectations are, that we will see the Dow break decisively below its lows of March 2009, as the Federal Reserve relentlessly expands CinC towards infinity. Before this bear market is over, I expect the Dow’s huge head and shoulders formation will be completed in a particularly nasty manner for the bulls.

How far could the Dow Jones fall? Well, stock-market investors have been in a bullish mood for decades, and bull’s don’t give a sweet-rat’s petutti about dividend yields. They never have, and they never will. But historically, dividend considerations eventually become paramount in bear markets, after the investing public accepts the new reality that capital gains are only distant memories and wishful thinking.

Let’s take a look at the Dow’s dividend yield from 1925 to 2011. Bull markets in the chart below can be identified by the Dow’s dividend yield falling down to the 3% line. In Bear Markets we see the Dow’s dividend yield rise from a 3% yield to above the Dow’s 6% line. From 1925 to 1987 (62 years), this relationship held fast. But then Doctor Greenspan became Fed Chairman in August 1987, and nothing has been the same since.

The bubble Doctor Greenspan inflated into the stock market has yet to deflate. I can say this with certainty, by simply pointing out the fact that since 1993, the Dow has been yielding less than 3%. What about that little 4.7% spike we see in the far right of the chart above? Oh, you must be referring to the Dow’s March 2009 bottom, also known as the #2 Dow Jones Bear Market bottom since 1885!

The astonishing thing is that the Dow’s yield increased to only 4.7% in March of 2009, resulting in the second deepest bear market bottom since 1885! This is not only an indication of how grossly inflated stock market values were in January 2000, when it yielded a miniscule 1.30%, but how painful it will be for shareholder values when the Dow Jones once again sees a dividend yield above 6%; which someday it will. Currently, the Dow is paying $300 a year in dividend payouts, yielding 2.39%. Assuming the Dow Jones can maintain its current dividend payout, the table below tells us what happens to the Dow when its dividend yield reaches 6%: the Dow Jones declines to 5000! That would be a 65% decline in the Dow Jones from its highs of October 2007.
Valuating The DJIA with Dividend Payouts & Yields

Range of Possible DJIA Dividend Yields

Div P/O2.0%4.0%6.0%8.0%10.0%12.0%$30015000 7500 50003750 3000 2500 $25012500 6250 4167 3125 2500 2083 $20010000 5000 33332500 2000 1667 $1507500 3750 2500 18751500 1250 $1005000 2500 1667 1250 1000 833 $502500 1250 833 625 500 417 Historically, Dividend Yields Have Always Risen in Bear Markets.
Sometimes Dividend Payouts Fall.

Source Barron’s
Graphic by Mark J Lundeen

Most people alive today only understand the stock market from the perspective of a bull. So pricing the Dow in terms of yields is alien to them. But the relationship between valuation, payout and yield is simple, mathematical, and non-negotiable. It applies in bull markets too, but bulls are rather stupid animals. Other than how many dollars they are up or down this day or week, the fundamental mathematics of the stock market is beyond them. I remember watching CNBC in January 2000, as the Dow topped out. Not a single stupid bull commentated that the Dow was yielding only 1.30%, making the stock market in January 2000 the most overpriced in the history of American finance. The provided link shows that some bulls in 1999 believed 36,000 for the Dow was reasonable!

But Mr Bear is a very clever animal, one who takes great delight in the simple mathematics (complex for bulls) seen in the table above. He’s a real bastard, too. For the simple joy of seeing the bulls flee like rats from the stock market, he’s not above driving the yield for the Dow Jones up past 8% with a 50% reduction in the payout. Such a move is well within the historical range of possibilities. Looking at the table above, this would drive the Dow down to 1875 for a bear market low of -87% from the Dow’s October 2007 high. This would rival the -89% drop the Dow made in 1929-1932 for the all time bear market bottom.

How likely is this? It is unavoidable in my opinion! Dividend yields will increase greatly as bond yields and interest rates increase to double digits. And rising interest rates will crush the public’s personal finances and corporate profits, making cuts in dividend payments a top priority by management.

How likely are interest rates to rise? Very likely! During the 30 years from 1971 to 2001, the trends in the price of gold (blue plot, left scale) and the US long bond yield (red plot, right scale) were closely correlated, with the price of gold frequently a leading indicator of future trends in bond yields. With rising consumer prices being the great levitator of bond yields – and gold, the chart below is a record of wealth fleeing fixed income, into gold from 1971 to 1980.

This fact is not widely recognized by “investment experts” today, but historically, the price of gold feeds on the flow of flight capital from fixed income as bond yields rise with consumer prices. The reverse is also true. Note that ever since the price of gold was released from its Bretton Wood’s $35 to one ounce of gold fix, the price of gold has suffered when * declining * bond yields caused investment flows to reverse, as is clearly evident below.

But this was only true until August 2001, when bond yields continued declining in the face of rising gold prices. Since 2001, the bull market in financial assets has been really creepy! Yes, “creepy” is precisely the correct word to describe what the Dow Jones and the US Treasury bond market have been doing in the face of rising gold prices. There is something really wrong with this picture, but it’s not the rising price of gold!

Rising gold prices on declining bond yields, along with the Dow’s dividend yield stubbornly below 3% for the past eighteen years while the Dow has risen from 4000 to 12,000, are solid indications that the prices of financial assets are set by the needs of “policy”, rather than by supply and demand fundamentals.

What in the hell does that mean? Just look at the chart below where I’ve charted the US Treasury holdings of the Federal Reserve and the world’s central banks, in terms of percentages of the US national debt. Since 2001, central banks have been in an inflationary feeding frenzy in the US Treasury debt markets, monetizing Uncle Sam’s I-Owe-You-Nothings, into their rapidly depreciating money. So it’s really no mystery why gold has been rising for the past ten years, as bond yields continued to decline: the managers of the world’s currencies are committing monetary suicide.

Obviously, the price of gold for the past ten years is not feeding on flight capital from deflating bond prices. So where is the money coming from that is driving gold higher? From the Fed’s “monetary policy”; as stated by Doctor Bernanke himself.

“By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services.”
– Ben S. Bernanke, Federal Reserve Board Governor, November 21, 2002

Helicopter Ben has been good to his word of “reducing the value of the US dollar in terms of goods and services.” People who understood the implications of Doctor Bernanke’s inflationary “policy” have been buying gold and silver for the past 10 years to protect themselves from the inevitable monetary collapse to come.

When bond yields begin to rise, trillions-of-dollars will begin fleeing the fixed-income and stock markets, and seek a store of wealth that cannot be inflated to worthlessness by central banks: gold and silver. In the past I’ve mentioned the possibility of gold rising above $30,000 an ounce. Nothing has changed my mind on this. Historically, governments have often destroyed their money by inflating it to worthlessness. This has happened many times in the history of finance, since the Roman Empire. A day is coming when gold and silver will become simply unaffordable to the impoverished masses. Gold at $1500, and silver at $33? Cheap!

But rising yields in fixed income and dividends are milestones that we have yet to pass, and the Dow Jones is only 30 large blue-chip stocks. Are there other indications that financial assets are in trouble? You betcha! Let’s take a look at the money market, where business borrows funds for their short-term money requirements.

The chart below shows the money market in dollars (blue plot, left scale), with a Bear’s Eye View (BEV) plot (red plot, right scale). The money market was very small in 1980, but had grown to just under four trillion in January 2009. It currently stands at 2.7 trillion dollars.

The money market provides us with an important insight into the health of business, since businesses use it for short term financing. And what does business use short-term money for? To finance inventory. Ideally, business wants its inventory to come into their warehouses one day, and out the next, all financed with other people’s money. This is a good arrangement, one that provides savers an income from the profitable operations of business in a thriving economy. At least it did, until Doctor Bernanke lowered short-term interest rates to zero in December 2008.

When the economy is in full gear, business is good, so the demand for 90 day money (money market funds) is high. This indicates that inventory is quickly flowing into, and out of warehouses; as fast as salesmen can get customers to sign contracts. But when the economy is doing poorly, commissioned sales personnel sit around a phone that doesn’t ring, and businesses lay off their employees. So the money market contracts as business slows, since companies don’t purchase inventory that can’t readily be sold.

Currently, the earnings for the Dow Jones are at all-time highs. But the two year, 1.3 trillion dollar collapse in the money market casts GREAT DOUBTS on the validity of the Dow’s current rise in earnings, and the Dow’s ability to sustain its current dividend payout. If the Federal government’s “regulators” were worth their salt, they’d already be investigating this divergence. But they aren’t, so be advised: the current dividend payout in the Dow Jones is vulnerable to unannounced cuts. The above chart is telling us that business is really bad in the United States. If you’ve forgotten what that portends for the Dow Jones’ valuation, go back and review my above table for yields, payouts and valuation for the Dows Jones.

The Bear’s Eye View (BEV) (red plot, right scale) earns its name in the Money Market Funds chart above! The BEV plot uses the same data from the dollar plot (blue plot, left scale) and expresses these dollars in percentages terms. Each new all-time high is reduced to a 0% (BEV Zero). All weekly values in the chart’s blue plot above that are * NOT * a new all-time high are converted into negative percentages * FROM * their last all-time high. The Bear’s Eye View plot above, compresses price data into a range of percentage spanning from 0% (new all-time high) to -100% (a total wipeout).

The money market’s BEV plot captured the severe recession of the early 1980’s, revealing a 30% contraction in the demand for short-term money that was barely noticeable on the blue dollar plot. The severity of the aftermath of Greenspan’s high-tech bubble is seen as a 21% decline in demand for 90-day money in the 2000s. However, the post credit crisis economy has produced the largest decline in demand for short-term money in the past 31 years; a 31% decline that shows no sign of abating!

This 31% contraction in demand for short-term money is also an indicator of how corrupt the political management of the economy has become. The last all-time high in Money Market Funds (Terminal Zero) occurred in January 2009, just days after President Obama was sworn in as president. Since then, quantitative easing, bailouts, direct subsidies to “green jobs”, and increases in Federal spending has sent many trillions of dollars flooding into the economies of all 50 states. I don’t know where this vast sum of money went, but the money market’s BEV Plot is telling us with certainty that these trillions in “stimulus” * DID NOTHING * for employers in the private sector. Well what else could we expect from a society where more and more power, is flowing into fewer and fewer hands, further and further away from where you and I make our living? Unions used to be local organizations funded by local union dues. But today, for the most part, the locals are controlled from their national headquarters in Washington, because these days, that’s where the money is!

One more item before I close: a look at the abnormal pattern in trading volume for the stock market since 2000. Ask yourself: what makes the stock market go up? Simple; people who were sitting on the sidelines, looking at all the EASY MONEY other people were making buying stocks, decided to come into the market too. So bull markets start with relatively few people buying stocks, but end with everyone and their grandmothers lusting after easy capital gains too. The result is an explosion in trading volume at the end of the bull market. But during bear markets, people one by one exit the market, and trading volume contracts. A good illustration of the expansion and contraction in trading volume during bull and bear markets can be seen in the NYSE’s trading volume, from 1926-42. I used a 40 week moving average to smooth the plot out.

From 1926 to the 1929 top, NYSE trading volume’s 40 week moving average exploded by 150%, then returned to 1926 levels at the market bottom in July 1932. From July 1932 to March 1937, the Dow Jones itself gained 372% during the Great Depression. But the NYSE’s trading volume tells us that those investors who survived the July 1932, -89% bottom were wary. Trading volume collapsed in April 1936, a full year before the Dow saw its 1937 top. After the 1937 top, the Dow saw some good rallies, but the trading volume required to sustain higher prices in the Dow just wasn’t there. What Wall Street did have from 1929 to 1942 were three massive bear markets (stars in the chart below). By the bottom of the 1942 bear market, the NYSE trading volume’s 40Wk M/A had contracted by 90% from its highs of 1929. By 1942, retail investors were as rare as dinosaurs on Wall Street.

But if we are to believe what we see below, “everyone and their grandmothers” in our generation are made of sterner stuff! Not only did trading volume increase going into the January 2000 top (as expected), but trading volume EXPLODED as the Dow Jones entered a 33 month, -38% bear market from January 2000 to October 2002, and then went BALLISTIC as the Dow Jones descended into the second greatest, all-time bear market bottom in March 2009. This pattern of trading volume can only be described as surreal.

Most peculiarly, since March 2009 the Dow Jones has entered into a regular CNBC “bull market” while trading volume in the stock market collapsed. Since March 2009, the fewer shares that trade on the NYSE, the higher the Dow Jones goes. It’s a scene from: Wall Street, the Theatre-of-the-Absurd!

As far as the stock market goes; I subscribe to the old fashioned idea of keeping out of it until the bear market is over! All things considered, waiting until the Dow is yielding 8% with a 50% cut in dividend payouts before you go back into the stock market is probably the best investment tip you’ll get in 2011.

So, we all have a lot of time on our hands until it’s time to start getting bullish again on stocks. So maybe you’ll have the time to read the following recent articles from Casey Research,and othershave shown that a return of over 1 million percent could have been achieved with just one single trade per decade, by identifying and riding the long term trends, * WITHOUT * using any leverage or derivatives, just 5 simple trades to turn $1000 into more than $10 million over a 40 year period. Notice that real estate was not the winning investment during any of the last four decades. The challenge we face now is to use our historical insight to determine where the safe place will be to perpetuate wealth over the coming, turbulent decade. Me, I’m thinking of physical gold and silver.

Mark J. Lundeen
01 July 2011

Silver’s Bull Market Summary

Mark J. Lundeen

18 April 2011

How hot is the silver market? In the past 14 months, the Silver to Gold Ratio has been cut in half!

Looking at Silver’s 1969-2011’s Bear’s Eye View (BEV) Chart below, we see the history of silver from 1969 to present. From 1969 to 1980, the largest correction in the price of silver was just short of 40%. This is a big decline in the Dow Jones, but something to be expected in Silver. After 1980, silver crashed down 92% by 1992, and for the most part, stayed there for the next 12 years.

As this BEV Plot uses 17 January 1980 for its last all-time high, the March-October 2008 decline shows a loss of 25%. But that loss is in reference to Silver’s last all-time high from 28 years before, where investors in 2008 actually saw a seven month loss of 58% ($20.69 to $8.79 Ouch!). Silver does that occasionally to those who buy it, or so it use to. Since May 2010, when Silver’s BEV Plot broke above its 60% line, the largest correction in the price of silver (daily basis) has been less than 15% (January, 2011). Using a weekly closing basis (table below), silver has only corrected by 9.64%.

Also remarkable, silver has made a new 31-year high in 19 (61%) of its past 31 weekly closes!

The table below uses the Bear’s Eye View (BEV Plot starting in late 1980, to eliminate the January 1980 highs) for gold and silver prices, with new highs (all-time for gold, and 31-year for silver) resulting in a Zero percentage, all weekly closing prices * not * a new high returns a negative percentage * from * its latest high.

Weekly Performance for Gold & Silver


Source Barron’s
Graphic by Mark J. Lundeen

Dates are Barron’s Issues. Prices are Handy & Harman Weekly Closes.

Since the 20 September 2010 Issue of Barron’s (31 Weeks), Gold has made 12 New All-Time Weekly Highs, while Silver made 19 New 31-Year Weekly Highs. The 31 Week Gains for Gold and Silver are as follows:

Gold : 16%
Silver : 106%
The Question Everyone should be Asking is Why Doesn’t the Price of Silver Correct?

The current phase in silver’s bull market is extraordinary, driving silver up 106% in just 31 weeks. This is not happening in a vacuum! One day, we will all wake up to a new financial crisis, with the silver market getting coverage it has not seen since the Hunt Brothers crisis in January 1980.

Mark J. Lundeen
18 April 2011

US Currency in Circulation & the Price of Gold & Silver: Part 1 of 3

Mark J. Lundeen 11 March 2010

Gold and Silver Bear’s Eye View for the Week
This was an exciting week in the gold and silver markets! On 09 March 2011, for the first time in 27 years, an ounce of gold was worth less than 40 ounces of silver, 39.66 ounces to be exact. This was a huge milestone in the precious metals bull market.

As expected, on Thursday March 10th, the Empire Struck Back, pushing the silver/gold ratio back above 40. But on Friday March 11th, the ratio hit another 27 year low of 39.56! We may see the SGR rise above 40 again some time in the next few months, but the next major SGR milestone on the horizon in our ten year precious metals bull market is 30.

Let’s take a quick look at gold and silver with the Bear’s Eye View (BEV). Gold’s last all-time high was on March 2nd. That was over a week ago, plenty of time for the “policy makers” to inflict some damage on gold longs. But so far they’ve only been able to drive gold down 1.74% from its last all-time high on 10 March. The week closed with gold only 1.09% from a new all-time high. And like I’ve said before, gold is in a bull market. So it’s only a matter of time before we see some new BEV Zero’s lining up on the Red 0.0% line below.

Silver’s BEV Chart is outstanding! After its 25 January decline of -14% from its last all-time high, it snapped right back to its BEV Zero line, making a new 31 year high (BEV Zero) on 17 Feb. Of the 16 trading days since 17 Feb, silver has made ten new 31 year highs. Currently, silver’s Bear’s Eye View looks like silver is at its lowest point since 17 Feb. But that is all due to yesterday’s -2.72% decline. Silver closed today only -0.31% away from making a new 31 year high. I wouldn’t be one bit surprised if we see silver make a few new BEV Zeros next week.

Gold and silver’s step-sums are showing no sign of weakness. We have every reason to expect that the best days of this bull market in gold and silver are still to come.

US Currency in Circulation & the Price of Gold & Silver
This is the first of a three part series on the growth in US Currency in Circulation (CinC) for people interested in investing in gold, silver and mining stocks. There is certainly no better subject than the expansion in CinC since the early 20th Century to illustrate just how underpriced precious metal investments currently are, and their potential for real appreciation in inflation adjusted terms one hundred years later. Except where noted, 99% of my data is from the statistical pages of old issues of Barron’s, which I personally entered into a spreadsheet. So the numbers we are looking at in these articles are the same numbers from decades past used by both the financial industry and ordinary investors when examining the markets.

Every now and then, I produce a graphic that seems to resonate with my readers, like my Gold Priced in 1975 dollars and its CinC deflator from my 04 March 2011 article last week. I received numerous requests for the same chart, but using silver and CinC. Come to think of it, I’d like to see it too. But first, here’s the gold chart that caught everyone’s attention, and an explanation of exactly what we are looking at here.

Currency in Circulation consists of paper dollars and base metal coins circulating in the economy. The Red Plot (right scale) is CinC in billions of dollars. In the last 36 years, paper money and base metal coinage have increased 1000%. This is a horrendous rate of inflation. If left unchecked, monetary inflation will continue to destroy the American dollar as an economic unit of account. In other words, with the likes of Doctor Bernanke at the helm of the Federal Reserve, it’s highly doubtful that the US dollar, AND the world as we know it, will last another 36 years. Contemporary Keynesian Economists refuse to even examine the historical aspect of monetary inflation, so we have to go to cultural historians to see monetary inflation’s ultimate effects:

“Such were the sources of that flood of paper money which, ever since, has alternatively accelerated and threatened the economic life of the world.”
-William Durant: Our Oriental Heritage, (1935) pg 780

The key phrase is: “alternatively accelerated and threatened”

Durant was examining the World’s first experiment with paper money in China a thousand years ago. As with any dangerous narcotic, monetary inflation is at first wonderfully stimulative, but ultimately the unchecked expansion in the money supply always proves to be a highly addictive drug; a pernicious habit the issuing government cannot kick until disaster overwhelms their society. Somehow, the following historical fact is never mentioned in Economics 101.

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.”
– Ludwig von Mises

Back to my chart above, whose Blue Plot (left scale) is the price of gold deflated by CinC. I “deflated” the price of gold by:
Indexing CinC to 1.00 for 06 January 1975. I did this by dividing each weekly value of CinC for the 36 years seen in the chart, by the first value in the series ($79.65 billion) published in Barron’s 06 January 1975 issue.

Dividing the price of gold by the indexed value of CinC from 1975 to 2011.

This makes the gold plot above a horse race between the price of gold, and monetary inflation as measured by CinC (red plot). And note how the Federal Reserve’s horse never once slows down or runs backwards!

The top of the 1970s gold bull market saw gold’s weekly closing price at $822.00 in Barron’s 21 January 1980 issue. But in the blue plot above, gold priced in 1975 dollars was only $530. This is because gold’s CinC deflator had increased from 1.00 in January 1975, to 1.55 in January 1980. So, even taking into account the 55% increase in the number of dollars in circulation, gold’s 5 year increase in 1975 dollars (Jan 1975- Jan 80) had risen to $530, from its January 1975 price of $174 published in Barron’s. This means that gold not only protected the wealth of those who held it from the ravages of consumer price inflation, it also provided $530 – $174 = $356 real profit in 1975-inflation adjusted dollars!

Well, so what? After all, didn’t gold go up in terms of both 1975 & 1980s dollars? Ya-sure, you-betcha. But the world wasn’t created in January 1975. The price action in gold and silver from 1975-80 were the final scene of a monetary disaster that began in the early 1950s when the US Government broke faith with the world by printing more paper dollars than it had gold in the US Treasury backing them. If Washington REALLY believed that honesty is the best policy, then CinC since World War 2 would not have expanded 34 times, and gold priced in US dollars would still be $35 an ounce.

The great lesson we learn from history is that people learn nothing from history.
But I still have hope that SOME individuals can learn from the past, so I occasionally list the following articles or editorial comments from the dusty, and now mostly forgotten pages of Barron’s on Banking and the US dollar. The list contains only a few of the relevant articles published in Barron’s over the years, articles that in retrospect did nothing, absolutely nothing, to protect us from ourselves.

BANKING 11-Aug-52 Credit expansion goes on and on
BANKING 14-Mar-55 “Nothing Down” Credit can be bad
BANKING 19-May-58 Warning about easy credit
BANKING 6-Jul-59 Prices must vary! (Barron’s didn’t like Regulating “Stability”)
BANKING 23-Jun-69 Fanny Mae goes public
BANKING 26-Mar-73 Sources of Inflation
BANKING 22-Sep-75 Problems with managed interest rates

US$ 3-Feb-69 Currency crisis
US$ 19-Jul-71 Dollar Problems
US$ 16-Jul-73 Why the US$ is sick
US$ 1-Oct-79 US$ no good overseas! Big Problem for US Citizens in

We see in the last article on the US dollar (US$), that the consequences of expanding credit in 1952, and “nothing down” credit in 1955 were not immediate, but still inescapable in the fullness of time. The poor decisions made at the highest levels of government and finance in the post-war years, eventually resulted in a dollar crisis and bull market in gold and silver from 1968 to 1980. The same is true with our current gold and silver bull market, where inflation drives the price of gold and silver higher, BUT ONLY AFTER A PROLONGED PERIOD OF MONETARY ABUSES BRINGS ON A CRISIS IN THE DEBT MARKETS AND THE US DOLLAR ITSELF.

Largely unknown to contemporary market commentators and investors, is the fact that massive monetary inflation more often * REDUCES * the purchasing power of gold and silver than increases it. In the chart above we see this happening from 1980 to 2001. So seeing gold and silver rise up and down in price is not just about making money in the market. These long term trends in the prices of gold and silver provides a unique insight into the * economy’s reaction, * to the pleasure and pain experienced by the economy from the daily “injections” of “liquidity” from the Federal Reserve.

Currently, the rising price of gold from 2001 to 2011 is informing us that US “monetary policy” has once again driven the global currency markets into a crisis.
William Durant’s historical research tells us that we, as a society, are profoundly addicted to cheap credit and monthly checks from the government. The near riot conditions now seen in the Wisconsin State Capital building is but a taste of what is to come. Society will continue to demand its daily injection of “liquidity” from Doctor Bernanke to prevent the credit markets from going into another crisis, until the US dollar can no longer function as money.

Next we look at silver deflated with 1953 dollars, plotted with its indexed CinC deflator going back to 1953. Plotting CinC’s index shows us how many times the US Government has increased Currency in Circulation from its published value of $29.75 billion in Barron’s 06 April 1953 issue: 33.51 times. Again, note silver’s reaction to decades of massive inflation. It’s more inclined to go down than up, until there is a crisis in the US dollar.

Monetary inflation flowing from the Federal Reserve, or any other central bank is a tax on the economy that flows directly into the coffers of the government AND its banking system. Since 1953, the US “monetary authorities” have inflicted horrible losses on holders of US Currency, and fixed income investors with their continual expansion of currency and credit. Purchasing a high grade bond yielding 3% in 1953 and holding it to term in 1972 was a losing proposition, as bond holders were left with little after 20 year of inflationary losses on their principal and income.

Below is a plot of the price and yield for the Dow Jones 10-Utility Bond Average. Dow Jones discontinued this bond series in 2002, but the data provides an excellent record of the disaster bond holders experienced from the late 1940s to 1981. There is no safer bond than a high quality utility bond, but NO bond is a safe investment when a government inflates its money supply as a matter of “policy.” So starting in the early 1950s, the bond market began demanding an inflation premium that eventually took AAA utility bond yields (Red Plot) up to a yield of 16% in 1981,resulting in a loss in value of 45% for bondholders.

But using nominal dollar values fails to adequately describe the actual inflationary losses bond holders took on their principal and interest payments from 1947-81. Look at US Postage rates; a first class stamp cost $0.03 in 1952. But when bond yields peaked in October 1981, first class postage had increased to $0.18. This was a 500% increase in postage rates. It’s safe to assume that * all * living expenses increased at least a few hundred percent from 1952-81. So, a retired couple in 1952 who were living off the income from $40,000 invested in 3% utility bonds received a yearly income of $1200. They weren’t wealthy, but looking at prices from old newspapers of that era, an income of $100 a month provided a comfortable living for them. But monetary inflation from the Federal Reserve, a legislative creation of the US Congress, changed all that by October 1981, by transferring the purchasing power of the retired couple’s $40,000 bond portfolio, to the US Treasury and the Federal Reserve System via monetary inflation.

But the Fed has been inflating the US money supply since 1913. As my CinC, and gold and silver price data only goes back to January 1920, let’s take a look at the effects of this expansion in currency’s effects on the price of gold and silver using constant 1920 dollars; first gold:

We are looking at 91 years of CinC history. During these nine decades the price of gold in constant 1920 dollars has only seen three periods where the price of gold reacted positively to this massive inflation.
1920-30 (10 years)
1970-80 (10 years)
2000-11 (11 years)

So for 60 of these 91 years, the Purchasing Power Gold Represented only went * DOWN * in the face of the Massive Inflationary Flows from the Federal Reserve. This may be hard to believe, but it’s a fact documented in the data published weekly in Barron’s! My POINT is that “printing money”, or global wars, or social unrest in the Mideast oil producing nations, or even near riot conditions in the Wisconsin state capital doesn’t cause the price of gold go up. What makes the price of gold go up is when:
the “policy makers” have Printed * too * much money – FOR TOO LONG A TIME,
the “policy makers” have Expanded * too * much credit – FOR TOO LONG A TIME,
Debt ensnared consumers and business come to realize that there is no way out, and massive default in the money and credit markets become growing concerns. This is why gold and silver bull markets thrive during periods of rising interest rates: wealth flees into gold and silver from the crumbling credit markets.

As with any narcotic stimulant, initial injections of the drug produces pleasant reactions, in this case rising asset valuations in financial assets, real estate or even in real growth in economic activity. What’s not to like when the economy hums along on the “growth” flowing from the Federal Reserve? During such times, proponents of gold and silver become objects of ridicule, and central bankers become objects of popular adoration, as was the case during the Greenspan High-Tech bull market, and early on during John Law’s 18th century Mississippi Scheme. But as with any Schedule 1 narcotic, chronic, daily “injections” of “liquidity” from the Fed finally produce noxious reactions in the body economic. Ultimately there comes a time when the “injections” of “liquidity” can bring only pain, and we are now at that point. Note in the chart above, since 1920, periods of appreciating gold (in constant 1920’s dollars) all correspond with periods of monetary crisis in the US dollar; and these crises all follow prolonged periods of dollar inflation flowing from the Federal Reserve.

The Chart above fails to properly illustrate the degree of CinC expansion during World War 2, so I adjusted the scale in the chart below. Frequently, “economic experts” on CNBC will attribute the rising price of gold to war or inflation, BUT THIS IS INCORRECT! Look closely at what happened from 1934 to 1946; the US saw massive monetary inflation, and entered into World War 2 as the World slipped into Chaos with no change in the nominal $35 dollar price of gold. But an ounce of gold’s purchasing power, as measured by 1920 constant dollars fell from $30 to $5 dollars! During this time one of two things happened to Americans who owned gold bullion: if the Feds caught them, their gold was confiscated for a 100% loss on their gold investment. If they were successful in keeping their gold horde a secret, monetary inflation gave their gold investment an 83% hair cut by 1946.

This is because all during this period, the US dollar was seen as an important economic asset that everyone in the world wanted, while gold was not. This continued to be the case until as we see in the 1920-2011 chart above, gold in 1969 began increasing in 1920 dollar terms.

Next is a silver chart priced in 1920 dollars. Silver’s peak price of $50 dollars in 1980 has an element of “shock and awe” to it – when charted in nominal dollars. But when priced in constant 1920 dollars, silver only managed to exceed it’s 1920 value by a few cents for a few days. If silver is to repeat its amazing 1980’s performance, it would now have to increase to $296, 2011 dollars. Will silver do this? If the US Government continues its trillion dollar deficit spending ways, and continues allowing the Federal Reserve to debase the US dollar, I think it will go past $296 and then some! But people should stop thinking of gold and silver in dollar terms; and focus of how many ounces of gold and silver they can exchange for their paper dollars while they still can.

From the CinC data plotted on the 1920 to 1948 gold chart, one might be led to believe that the 1920s were a time of stable “monetary policy,” as CinC from 1920-31 actually declined. But the Roaring 20s “roared” for a reason! When a banking system controls the money supply, it can expand the money supply with either currency, credit, or both. The Roaring 20s was a time of reckless increases in bank credit, not CinC expansion. I suspect the reason CinC only began to increase in 1931 was because the banking system, and its clients were upchucking the credit taken on in the 1920s, and so the banking system in the early 1930s, as is the case now, was actually incapable of expanding the money supply using its normal practice of credit expansion. Also, bank runs were becoming a frequent phenomenon, and people closing out their accounts demanded paper money.

The marketing term “buy now – pay later” was first coined by the Singer Sewing Machine Company in the 1920s, using credit provided by the Federal Reserve System. Providing credit directly to the consumer was never attempted by the American banking system until after the creation of the Federal Reserve. The wisdom of this policy is now well understood by all too many deeply indebted “consumers” who took full advantage of the low interest rates offered by their bank, and made possible by the insurance companies and pension funds who now hold the securitized credit card, auto, mortgage, school and US Treasury debt

Reading the old issues of Barron’s, we see where cheap credit from the 1920s era Federal Reserve financed real estate boom/busts. C. W. Barron’s (the founder of Barron’s Financial Weekly, the source of 99% of my data) personally placed responsibility for devastating the Florida real estate market on the Fed’s excessive credit creation. Barron’s in the 1920s also observed the removal of gold coins from circulation, and correctly noted this was due to the Fed’s monetary excesses.

There is a lot one can learn from those old issues of Barron’s, but the best graphic to show the extent of credit creation by the Federal Reserve System during the Roaring 20s, is in the stock market. Here is a chart from an August 2008 article I wrote on NYSE Margin Debt and the Dow Jones during the Roaring 20s and depressing 30s. Note how CinC (green plot) actually went down during the 1920s.

The two key plots to note are the Red-Dow Jones, and the Blue-NYSE Margin Debt plots. Observe how they move up and down in lock step with each other from 1926 to 1932. And again, this data is from the actual issues of Barron’s from the 1920s and 30s, so we are looking at unaltered market history. Note how the Dow Jones broke down in 1929, even as more credit (margin debt) from the Fed was flowing into the stock market. But after the stock market bubble popped in 1929, even lowering the Call Money Rate for margin debt could not reverse the flow of “liquidity” away from the stock market. During the Great Depression Bear, the Federal Reserve was counting on low margin interest rates to lure retail investors back to the market. But when gold prices start rising; that trick stops working!

Currently I suspect the stock market finds itself in the exact same position it found itself in during the 1930s. If left to its own means, the stock, and bond markets would deflate to levels incomprehensible to investors today. But with today’s “regulated markets”, this is politically unacceptable. So I believe the main difference between today’s and the financial markets of the 1930s, is that the US Congress gave the US Treasury and its lackey, the Federal Reserve secret “NEW TOOLS” to combat “DEFLATION” back in October 2008.

I believe that the “policy makers” efforts to draw retail investors back into the stock market since the October 2007 top have been no more successful than were their efforts in 1930. So in the fullness of time, I believe we will all discover that the “new tools” granted to the Treasury and Fed, were most likely a simple agreement between our elected and unelected “policy makers,” that the Fed and US Treasury would support the financial markets by funneling “liquidity” to the “Favored-Unnamed Financial Institutions.” This could be done using accounts in the Caribbean banking system, with no questions asked by the Justice Department or the Internal Revenue Service. As seen in the link provided above, the small islands that make up the Caribbean Banking Center currently hold the 6th largest position in US Treasury debt. And unlike Switzerland, Uncle Sam isn’t putting public pressure on these banks to learn who owns these bonds.

These massive positions in toxic mortgage paper and US Treasury bonds (and I suspect shares listed on the NYSE and NASDAQ), currently owned by the Federal Reserve and its banking system will one day have to be liquidated, and losses accounted for. We may find that eventually, the largest banks own a controlling interest in themselves, (or each other), and will want to delist and go private.
Liquidation of companies that they don’t want to control will occur near rock bottom in the bear market with the Dow Jones at levels not seen since the Great Depression. If the stock market survives, the liquidation of the banking system’s clandestine stock portfolio would produce a low-risk, rock-hard bottom these deflationary bear markets always seem to produce, and once again gold and silver would become marginal investments. But on the way down, as bond yields soar past the double digit returns of the early 1980s, investors will want to be invested in precious metals.

This week I looked at CinC and the price of gold and silver. Next week in part 2 of this series, we’ll look at CinC and the US Gold Reserves from 1925 to 2011.

Mark J Lundeen
11 March 2011

Gold Bull / Stock Market Bear Overview

Mark J. Lundeen
07 January 2011

* Author’s Note 07 Jan 2011: 10PM *
I’m starting with a late Friday addendum to my article below. I’m not going to do a rewrite to fit the following short comments into the body of the text, but I want to comment on Gold & Silver’s Bear’s Eye View Charts for the week. The talking-heads on CNBC, for the most, part were greatly concerned by the “crashing” price of gold this week. My Bear’s Eye View Chart (BEV), with its emphasis on all-time highs (BEV Zeros), and percentage declines from last all-time highs tells a completely different story.

Gold has declined less than 4% from its last BEV Zero (last all-time high), seen just this Monday.

Silver has fallen only 7.5% from its last 30 year high, also seen on Monday 03 Jan.

So far the action gold and silver saw this week is completely normal for a bull market and in no way deserves the hysterical comments expressed by so many TV “experts” in the gold markets. I’m not saying the closing prices for the week are the lows for the move, they could go much lower. I am saying that based on what we saw Friday 07 Jan, there is no logical basis to shout “crash” on TV unless you are attempting to start a selling stampede in the gold and silver markets. My investment tip for the week is: if after watching television you feel like selling your gold and silver: stop watching TV.

* End Gold & Silver BEV Comments / Start my latest article. *
For the past eleven years, the financial media has touted the virtues of Wall Street’s slowly aging soiled doves. Little is made of the major bull market in precious metals that’s been raging for the past ten years. Using the Dow Jones Industrials and the NASDAQ Composite as proxies for the stock market, and Barron’s Gold Mining Index (BGMI) & the XAU for precious metals miners, the chart below displays the profits investors have lost listening to the “advice” by the main-stream financial media for the past decade.

Gold, and the Gold Mining Indices have all gone on to new all-time highs since their 2008 credit-crisis plunge, with silver in striking range of its old 1980 high of $50. The Dow Jones Industrials has just last week exceeded its highs of 2000, but is still 18% below its highs of October 2007. The NASDAQ Composite has performed miserably since 2000. It’s currently 6% below its highs of October 2007, and 47% below its highs of March 2000. But the benchmarks of 2000 are getting stale. So let’s take a look at how the precious metals and a sample of major stock-market indexes have performed in 2010, relative to the highs and lows of 2007-09. Not surprisingly, silver leads the list from the lows of the credit crisis.
Relative Performance of Precious Metals and the Stock Market
from the Credit Crisis to End of 2010

2007-08 Highs2008-09
CloseCredit Crisis
DeclinesBounce Back from Credit Crisis LowsSilver 20.698.7930.91-57.51%251.65%* BGMI1,528.87464.111,624.69-69.64%250.07%* XAU206.3770.86226.58-65.66%219.76%NYSE Financial9,982.832,110.684,958.62-78.86%134.93%NASDAQ2,859.121,268.642,652.87-55.63%109.11%Gold1,003.20704.901,421.10-29.73%101.60%NYSE Comp10,311.614,226.317,964.02-59.01%88.44%Dow Jones INDU14,164.536,547.0511,577.51-53.78%76.84%* Based on Weekly Closing Prices, all Other Prices are Daily.

Precious Metals and Mining Shares (BGMI & XAU) Peaked in Late 1st Quarter of 2008, and Bottomed in December 2008. Stock Market Indexes Peaked in 4th Quarter 2007 and Bottomed in March 2009.

Source Barron’s
Graphic by Mark J. Lundeen

With the exemption of gold itself, precious metal assets have exceeded by a good measure, the returns seen in the stock market since their lows of 2008-09. In fact gold, silver and the BGMI & XAU have all exceeded their pre credit-crisis highs, while the major stock indexes in the table above have yet to do so. As we were reminded constantly by CNBC during the 1990s high-tech bull market, two bull-market hallmarks are upward momentum, and the ability to recover from declines. For the past decade, these hallmarks have taken on a golden aura.

Washington’s worst kept secret has been that the financial markets are supported by the Federal Reserve and the US Treasury, via their agents on Wall Street, with hundreds of billions of dollars of pure inflation. Yet with this gale-force wind to its back, the general stock market has been unable to outperform precious metal assets. This is an ill-omen for the stock market, and a huge plus for precious metals.

The problem “policy makers” always come to in an inflationary financial system, is that the flows of “liquidity” don’t always go where they desire it to go. In this case, the Fed’s “liquidity” isn’t puddling under the stock market as they would have it, raising valuations in stocks both large and small. But since 1913 this sometime happen, when the consequences of uncontrollable money flows benefits the commodity markets, and increases the price of consumer goods, not the valuations in financial assets.

Prices trends aren’t based on “monetary science”, as Doctor Bernanke would have us all believe, but on what fickled people do with the inflationary dollars Doc B creates with a few simple keystrokes on his computer. This is why investors, over time, have always had a love / hate relationship with their investments: because deep in the monetary water-table, “liquidity” is constantly flowing from one aquifer to another, turning once rock solid positions into quicksand, and trash into cash.

Gold mining shares were an excellent 20th century proxy for gold during a time when the price of gold was fixed by the US Government. That changed in 1968, when gold was finally allowed to float. Washington had no choice, as central banks were taking the Fed’s inflationary dollars, and returning them to the US Treasury, demanding gold for them at a $35 paper dollar to 1 ounce US Treasury gold rate.

The problem was that the Fed had created many more paper dollars than the US Treasury had gold to redeem them. With gold’s official price set by the 1945 Bretton Woods Monetary Accords of $35 paper dollars for each one ounce of gold held in deposit at the US Treasury, gold at $35 paper dollars became a legal fiction that could no longer be maintained in 1968.
Paper Dollar Inflation 1945 to 2011
US Dollars to One Ounce of US Gold

Event MilestoneYearDollars per One Ounce US Gold ReserveStart of Bretton Woods1945 $39.00 : 1Start of London Gold Pool1961 $64.97 : 1Kennedy Assassination1963 $81.42 : 1End of London Gold Pool1968 $135.01 : 1US Closed Gold Window1971 $198.82 : 1Barron’s 03 January 2011 Issue2011 $3761.60 : 1
The Bretton Wood’s Monetary Accords instituted a $35 Dollar an ounce Gold Standard. This Standard was to prevent the United States from Printing more than $35 Paper Dollars for Every Ounce of Gold it Held in the US Treasury. History shows that the US Never took the BWA’s $35 / 1 Ounce of Gold Standard Seriously. This is the Root Cause of today’s Current Debt Crises.

Source Barron’s
Graphic by Mark J Lundeen

A fact largely forgotten today, is that there was a run * on * the US Treasury’s gold reserves from 1958 to 71; and then a run * from * the US dollar into gold from 1971 to 1980. This is exactly what the smart money has been doing since 2001, running away from dollar assets, seeking safety in gold, silver and mining shares. The current trend of appreciating precious metals and mining shares will continue building momentum as the Federal Reserve, and US Treasury continues with their quantitative-easing program. This makes investing in gold, silver and mining shares possibly the safest, and highest returning investment opportunity investors in 2011 will see in their lifetime.

We can see the shifting flows of “liquidity” since January 1920 by plotting the weekly values of the:
the Barron’s Gold Mining Index (BGMI)
the Dow Jones Industrials (DJIA)
and Currency in Circulation (CinC)

Using the BGMI as a proxy for consumer prices, and the DJIA for a proxy of financial assets in the chart below, we get an excellent picture of these oscillations of “liquidity” flowing from financial assets into consumer prices, and then from consumer prices back into financial assets. Note how the creation of dollars (monetary inflation from the Federal Reserve) is the one constant in the economy. Where these inflationary dollars are flowing to, is clearly seen in the price action of the DJIA and the BGMI.

In the chart above, note how rising CinC, (the number of US paper dollars issued by the United States) drives the values of the DJIA and BGMI. The CinC plot reminds me of a moving average, where financial assets underperformed gold mining for decades. Sometimes the DJIA and the BGMI rise and fall together, but typically they have been counter-cyclical to each other for the past 90 years.

So the rising CinC green plot above not only explains why in 2011, gold no longer trades for $20.67 an ounce (as it did in 1920), but also why my little house, which cost $500 to build in 1910, saw a market valuation of $150,000 in 2007! There is no doubt about it, if investors don’t understand that price trends (both up & down) in the financial and commodity markets are driven by uncontrollable oscillations of inflation, flowing from the Federal Reserve, they cannot be successful in the markets over the longer term. As the current flow of inflation is away from financial assets (stocks and bonds), and towards commodities which includes gold & silver, we should all position our portfolios accordingly.

My next chart uses the same data as the chart above, but the plots are ratios using CinC as the divisor:

The plots below takes into consideration the effects of CinC inflation on market valuations. The Green line indicates when either the DJIA or the BGMI has been inflated as much as CinC itself, which in Barron’s 03 Jan 2011 issue is 219, meaning that there are 219, 2011 paper dollars in circulation for every 1 paper dollar circulating in 1920. The best way to understand the plots below are as follows:
Under the Green Line: Asset has returned an inflationary loss
At the Green Line: Asset broken even to its 1920 valuation
Above the Green Line: Asset has delivered a real inflation adjusted profit

Of course whether an investor makes a real inflation adjusted profit on these oscillations depends on when they take a position. Purchasing on a rising uptrend is the key. In 1982, investors in the DJIA (red plot) did see real gains in the Dow up to 2000. We know that as the DJIA’s red plot was rising slightly towards the CinC’s green 1920 break even line, even though the Dow failed to break above it. The red plot also tells us that even if in December 2010, when the DJIA finally exceeded its highs of 2000, investors in the large blue-chip stocks (as measured by the DJIA), actually took a 44% inflationary loss in purchasing power.

These are real losses. Look at the issue price of Barron’s and the cost of first class postage. In January 2000 an issue of Barron’s cost $3.50, and a first class stamp cost $0.33; today they’ll go for $5.00 and $0.44. These are price increases of 42.8% and 33.3% respectively. Rising prices for food, fuel, and yes gold, silver and mining shares have been largely unreported facts of life since the DJIA’s 2000 top. Doubt what you see below at your own peril.

So you see why I like using CinC as a deflator. CPI is just a bad joke government economists and statisticians play on the gullible American who actually watch CNBC with the volume turned up. Critically, until 2008, CinC went up in lockstep fashion with the Federal Reserves balance sheet. So CinC has actually tracked “monetary policy” since the late 1930s.

However after Doctor Bernanke’s QE1, the Earth no longer produces sufficient cotton to allow the BEP’s monetary printing presses to match the dollars gushing out by the trillions from the Doc’s hard drive. That’s a joke on my part – I hope. Still, the growing production of paper dollars spilling off the BEP’s printing presses is as good an inflation index as can be expected.

From a CinC perspective, the last Dow Jones Industrials’ bull market that produced real after-inflation returns was during the Roaring 20s. Since then, inflation has made non-sense of the dollar price of the DJIA. For example, using the actual price of the DJIA, it went from 92.92 on 28 April 1942 to 193.16 on 15 June 1948, a nice 100% gain; until you look at the DJIA in inflation adjusted terms. From a purchasing power perspective, the Dow actually declined from 0.33 on 28 April 1942 to 0.29 on 15 June 1948. An actual inflation adjusted loss of 13%.

But the IRS’s capital gains policy has always insisted that investors calculate their taxes with nominal dollars. For reasons that should be clear to you now, a dollar to Washington is no different in 2011 than it was in 1920. So since 1929, investors have frequently paid capital gains taxes on actual inflationary losses they’ve taken on their wealth. The reinvestment of dividends may have made a difference, but dividends are taxed as ordinary income, and the income tax laws are so complex, with so many different tax rates that change from year to year, sometimes up to 70% for wealthy individuals; that a simple model for a typical tax payer is impossible to derive. But with or without dividends, it’s fair to say that since 1937 the returns from investing in blue chip stocks have mostly failed to compensate investors for the inflationary losses resulting from the Federal Reserve’s “monetary policy.”

Unsurprisingly when one really considers what has happened since the creation of the Federal Reserve in 1913, the Barron’s Gold Mining Index has frequently proven to be a superior investment to the Dow Jones Industrials for the past 91 years. This is a historical fact recorded with ink on paper, on the pages of dusty old news papers from many decades ago. That this is not widely known says a lot about the ship-shod research produced by Wall Street analysts, and targeted at retail investors from financial news sources such as CNBC. We should expect our current cycle of rising consumer-prices and deflating financial assets, will once again drive the BGMI high above the CinC’s 1920 break-even line sometime in the not too distant future, and stay there for quite some time.

I’m going to close this article with a look at how a broad range of stock groups from the Dow Jones Total Market Groups (DJTMG), various commodity prices, and monetary & inflation indices have performed in 2010. I took this Data from Barron’s first and last issues of 2010. Here is the color key:
DJTMG ———————————————: Yellow & Grey
Metals and Miners ——————————–: Black
Major Stock Market Indices ———————: Green
Inflation and Washington’s Disinformation —: Red

Strangely, aluminum mining is last on the list. I don’t know why, or care.
Investment returns for 2010
From Barron’s First and Last Issue of 2010

Category% Chg

Category% Chg1CLOTHING FABRICS122.08%
51GAS UTIL16.94%2SILVER One Ounce73.64%
64OIL DRILLING14.04%15XAU (Precious Metals)31.51%
65RUSSELL 100013.79%16BGMI (Precious Metals)30.83%
68S&P 50012.70%19COAL29.31%
74DJIA10.98%25COPPER One Pound27.25%
76TELECOMMS IDX10.71%27RUSSELL 200026.15%
81BANKS9.46%32OIL SERVICES25.05%
82BIOTECH8.48%33GOLD One Ounce24.81%
95ELECTRIC UTIL1.20%46TOYS18.90%
100ALUMINUM MINING-3.74%2010 was a Good Year for Investors. It was hard finding an Investment that didn’t return an above Inflation Profit. But as a Class, Metals and Mining were at the Top of this List!

Source Barron’s
Graphic by Mark J. Lundeen

If my standard for real above inflation gains is for appreciation higher than that of CinC, (item #86 in the table), 2010 was a generous year for the 87 items that gained more than CinC. But I do note that metal prices and mining shares (black items), with the exemption of aluminum, are all in the top 1/3 in the table above. I expect these same investments in metals and mining will do even better in 2011, but I don’t care to risk my reputation saying something positive for the financials and high-tech issues.

Mark J. Lundeen
07 January 2011

Bear Market Race Week 135: Bull & Bear Markets Review

The 1929 & 2007 Bear Market Race to The Bottom Week 135 of 149
Bull & Bear Markets Review
The Guild of Mad Science
COMEX Gold Charts
Mark J. Lundeen
14 May 2010
Color Key to text below
Boiler Plate in Blue Grey
New Weekly Commentary in Black
Below is my BEV chart for the Bear Race.

The DJIA was up 239 Points in Wk 135, and my only recommendation is that people should run away as fast as their legs can carry them! The Stock Market’s internals are crumbling. Rising Volatility, NYSE 70% A-D Days coming one after another, Mr Bear is taking a Monkey Wrench to the Stock Market.

Who knows what tomorrow will bring. I sure don’t. But there is such a thing as situational awareness. In the past two weeks, there have been many changes not seen since Autumn of 2008. That is not good. So just because you’re an investor, it doesn’t mean you have to be in the Stock Market all of the time. There are times when it’s best to step back and let the bus go down Wall Street without you. This is one of those times.

Let me tell you something about you & Mr Bear. Most people don’t know who they are dealing with, but Mr Bear knows exactly who you are! You’re the people, Long or Short, whose wealth he is going to take home in his lunch bucket. Last week he ate the Longs’ Lunch, this week he ate the Shorts’ Lunch.

Simple Gold and Silver Coins look very good at times like these. The fundamental problems in the Financial Markets are from all of the distortions in Market Valuation caused by Doctors Greenspan and Bernankes’ past “Liquidity Injections.” For this reason, Precious Metals are off Mr Bear’s menu. They may take a hit now and then, but that’s from the “Policy Makers” trying to shake you down. But they are weak, while Mr Bear is strong. So a year from now, Gold and Silver will be much higher, the Stock Market much lower, and there is nothing the “Policy Makers” can do to stop this from happening.

Below are the DJIA Volatility’s 5-Day M/A & BEV Chart

Seeing the Up Spike in the Blue Volatility Plot above is not good! Don’t take my word for it; look at the DJIA’s Red Plot. We saw these Volatility Up-Spikes in August of 2007, just months before the DJIA’s Octobers Terminal Zero. Look at what followed a year later. In Wk 135, we don’t know if we are about to see is a replay of 2008-09. But why is Volatility spiking up like it did in August of 2007? And why from nowhere are we seeing such a large spike? Something beneath the surface of the Stock Market is changing!

This Volatility Up Spike isn’t from anything we’ve been reading in the news papers for the past month. Someone, or some people of wealth and power knows something we haven’t been told about, and they are repositioning their assets. Let’s see if a huge, but currently unknown to the public, news story hits the media in a month or so.

It’s been a long time since I published this next chart. It’s a Volatility Comparison of the Great Depression and the 2007-10 Bear Markets. All Percentage changes in Volatility are positive. Up or Down days are all converted into positive values on my Excel File. But to provide for the best comparison, I inverted all the 2007-10 data points to negative values. This allows me to show the two Bears in two different windows. So when our Bear’s Volatility starts heading down in the chart (2007-10), it’s actually going up.

For the first time since 26 January 2009, the DJIA Volatility’s 40 Day M/A is above its 200 Day M/A. That’s significant. But what is worse is that in Wk 132, the 40 Day M/A turned up. Now in Wk 135, the 200 Day M/A has also turned up.

This development needs to be watched very closely. When the 40 Day M/A hit 3.5% in 1929, people were jumping from windows over Wall Street. It was worse in 2008; Congress demanded the Federal Reserve and US Treasury do something to “Stabilize” the Stock Market. Only God knows what will happen when the 40 Day M/A goes over the 3% line again.

Daily Volatility Statistics for Wk 135
70% A-DMonday10785.14+3.90%3+88.23%* Tuesday10748.26-0.34%3-Wednesday10896.91+1.38%3*Thursday10782.95-1.05%3-Friday10620.16-1.51%2-73.87%* Wednesday saw a NYSE A-D Ratio of just a fraction from 70%: +69.83%. This is the Second Week in a Row where the NYSE A-D Ratio just missed hitting the 70% line. Seeing the DJIA rising * only * 1.38% on Huge Breadth is not a sign of Market Strength!

Historical Daily Volatility is < 1.0% Source Dow Jones Last week, I said the most Bearish Thing that could happen in the Stock Market was for us to see a Positive NYSE 70% A-D Day. Well we got one on Monday, and missed another in Wk 135, Wednesday, one by only 0.17%. What does this mean? Well it's sort of like a herd of cattle in one of those old Cowboy movies. But in this movie, Mr Bear is in the saddle. First he makes his cattle stampede one way (Advancing), and then he stampedes them the other way (Declining). All this stampeding tires them out and makes them docile, as he drives them to the railhead, and then on to slaughter. Bull & Bear Markets Review Human Psychology Drives Markets Bull and Bear Markets have one thing in common with each other; the People who come into the markets to buy and sell. Markets are human things. There is no market analogue in the Animal World, as only Humans generate surpluses for the purpose of trading. That's true with the Stock Market too. When People generate more income than they need to pay the bills, they may decide to take their surplus income to the Financial Markets, hoping to improve their situation in life. But Bull and Bear Market, as we all know, have great differences too. To most people, its enough to know that in Bull Markets, prices rise, while in Bear Markets prices fall. However, as Serious Students of the Markets, we should know there is much more to Bull and Bear Markets other than rising or declining asset valuations. Human psychology plays an important part in how a market values what is being traded. There's only one market cycle that is dependable. It's based upon Human psychology, and is completely independent of the “Valuations”, of whatever is being traded. For half of the Cycle, Markets are driven from despair to euphoria in a Bull Market. In the other half, the Market is driven from euphoria to despair in a Bear Market. There is no set schedule of how long it takes these Bull and Bear Markets to drive their investors from the Penthouse to the Outhouse, and then back again. It may take years, or even generations for a particular market to go from where everybody is * out * to where everyone is back in. For example: the Stock Market from 1932-2000. The same is true for when everybody is * in * the Market to where everyone promises never again to play the fool for Wall Street: the Stock Market from 1929-32. Note I did not use the 2000-10 Stock Market era as an example for a mass market exodus. Today's Retail Investors, even after two major bottoms in the DJIA, have not abandoned the Stock Market, en-mass, as they had in 1932. They may no longer be lining up around the block to buy Wall Street's latest IPO, as they were in 1999, but the Baby Boomers are still holding on to a forlorn hope that the Stock Market will still provide for them in their retirement. It will not! Before Mr Bear is finished with his work, the Stock Market will become an object of public scorn and contempt. That will be the bottom, and should produce one of those generational buying opportunities, as stout hearted Gold and Silver Investors saw in 2001. From 1971 to 1980, as Gold rose from $35 to $840 an ounce, the Precious Metals Markets went from zero public interest to a mass mania. But things change all the time, as from 1980 to 2001, Precious Metals went from being a respectable asset class, to an object of public ridicule. But notice how the Precious Metals Market turned, just as its Market Psychology bottomed in 2001. After a 21 Year Bear Market, Gold declined to $255 an ounce and respectable investors and money managers wanted none of it! Nine years later, Gold and Silver are no longer only for the “Tin-Foil Hat Crowd”; Central Banks are buying too, but you now have to pay $1240 for an ounce of Gold in an increasingly crowded market. As always, the Bull Market in Precious Metals will not terminate until it once again we see panic buying by the public, who will pay any price for their heart's desire. But due to the success of the American “Policy Makers” in integrating the US Dollar into World Commerce, demand for Gold and Silver will go Global when the US Dollar fails. Demand for Precious Metals is still in its early stages. How far Valuations are driven up or down in these cycles are not determined by the Bullishness or Bearishness of the Market's participants, but is dependent upon the extent of the expansion of Credit that banks have provided the Market. As we live in a time that worshiped Megalomaniac Central Bankers, and the massive “Liquidity” they “Injected” into the Financial Markets, my expectations are that we will see a massive Bear Market in Financial Assets that will rival or even exceed that of the Great Depression's 89% decline in the DJIA, before we see our ultimate bottom. Currently, Monetary Inflation has become so grotesque, that “Policy Makers” now have to create Trillions of Dollars of Monetary Inflation to finance their “Policies.” But one day, this process will go into full reverse. The World will upchuck Doctor Bernanke's Dollars. Precious Metals will then be on the receiving side of this flow of “Liquidity”; driving Gold and Silver prices up to levels that are simply not believable today, as Financial Assets are ground into dust. You may disagree, but this is my logic for expecting the March 2009's lows in the DJIA, not to hold when Mr Bear comes back in earnest, and that Gold may soar far north of $30,000 an ounce. Time will prove or disprove my Bearish Thesis. Trading Volume & Market Volatility In my studies of Stock Market mechanics, I've found two indispensable variables in tracking Bull or Bear Markets: Trading Volume (number of shares traded daily) Market Volatility (daily % moves in valuation from the previous day's Closing Price) DJIA Bull & Bear MarketsMarketDJIA 2% DaysVolume BullFewIncreasing BearManyDecreasing Bull & Bear Markets are Mirror Images of Each Other. Source Barron's Graphic by Mark J Lundeen Trading Volume Bull Markets see rising Trading Volume as the Bull progresses from a Bear Market Low, towards the Bull Market's BEV Terminal Zero (the last all-time high of a Bull Market Cycle). This is a very logical relationship. As Valuations rise, additional investors are drawn into the Market, increasing Trading Volume as their bidding competes for available shares. Bear Markets see declining Trading Volume as the Bear progresses towards it ultimate Bear Market Lows. This is because during Bear Markets, investors become discouraged with their losses, and leave the market as asset valuations decline. In Wk 75, I covered this topic from 1900 to 2009. I noted this relationship held true from 1900 to 2000: 100 years. But after 2000, Volume began increasing in down markets and decreasing in up markets. This is the exact opposite of what happened with Volume in the previous 100 years. Its no secret what is going on; Congress is on record telling the Federal Reserve and US Treasury to “Stabilize” the Markets. The only way the Government can “Stabilize” a Market in a selling panic, is to buy stocks in the open market at prices no one else is willing to pay. So it's reasonable assuming the increase in Trading Volume during the big market declines of 2000-09, were the result of the US Government “Stabilizing” the Stock Market. We should not be surprised if one day we learn that the largest shareholder in most American Companies is the Federal Government. Until an audit of the Federal Reserve is performed, we really don't know what the Government has been buying with its Inflationary Dollars. All we can say with certainty is that after 2000, the public record shows that Washington has been very busy in the Financial Markets. Investing, and following the Markets isn't studying science. While much of what Markets do can be calculated with Mathematics, what actually drives Markets are the changing Emotions of Fickled Mankind. I include the “Policy Makers” in this. So my Rules of Thumb for Volume and Volatility are not iron clad laws of nature, like Ohms Law in Electricity. But over time, in aggregate, they should hold up. When they don't, there is something wrong. Since early February, it has been real quiet in the Stock Market, but starting in late April, we're seeing 1% & 2% DJIA days again. It's interesting comparing these days of increased Volatility in the DJIA, with the DJIA trading volume in my table below. Something is out of whack in the Stock Market. DJIA & DJIA Trading Volume (Mils)DateDJIADJIA Vol% DJIA% Vol19-Apr-1011,092.05214.660 20-Apr-1011,117.06175.1080.23%-18.43%21-Apr-1011,124.92188.8450.07%7.85%22-Apr-1011,134.29210.7570.08%11.60%23-Apr-1011,204.28207.1600.63%-1.71%26-Apr-1011,205.03191.8780.01%-7.38%27-Apr-1010,991.99263.333-1.90%37.24%28-Apr-1011,045.27236.2990.48%-10.27%29-Apr-1011,167.32194.2991.10%-17.77%30-Apr-1011,008.61255.091-1.42%31.29%3-May-1011,151.83178.0661.30%-30.20%4-May-1010,926.77241.886-2.02%35.84%5-May-1010,868.12215.727-0.54%-10.81%6-May-1010,520.32459.859-3.20%113.17%7-May-1010,380.43428.338-1.33%-6.85%10-May-1010,785.14313.3543.90%-26.84%11-May-1010,748.26223.949-0.34%-28.53%12-May-1010,896.91196.6261.38%-12.20%13-May-1010,782.95201.475-1.05%2.47%14-May-1010,620.16256.496-1.51%27.31%Typically, Big Up Days for the DJIA should Match the Big Volume Days, and Big Down DJIA Days should Match with the Low Volume Days. But since 2000, this has not been so.Source Barron's Graphic by Mark J Lundeen Let's deal with facts: President Obama is a Socialist. His political roots spring from the Students for a Democratic Society (SDS) of the 1960s. He's introduction into Chicago Politics was by the Political Terrorist William Ayres, founder of the Weather Underground. I can't believe Our President is a big supporter of personal property. The Bond Holders of GM and Chrysler discovered this last year. If he could get away with it, I believe he'd support the idea of Washington purchasing America's “Means of Production” with Monetary Inflation, leaving scant little for the Floor Traders on the NYSE to buy and sell. When Mr Bear comes back, and the DJIA breaks its BEV -60% line, it would be a perfect crisis for such a “Big Government Solution.” They may not be thinking of this now, but what options will they be considering when the DJIA descend to levels not seen since the Great Depression? Would a DJIA BEV -90% Market be acceptable to our President and Congress, Republicans included? I think not! I'm not saying this is going to happen. But with our current President and Congress, I don't see why they wouldn't favor eliminating an institution, the Stock Market, Socialism has never approved of, when it becomes a major thorn in their side. The Political Aspects of the Market is just something I think warrants watching. Market Volatility as Seen in DJIA 2% Days Bear Markets are Volatile Markets, and the bigger the Bear, the higher the Volatility. Surprisingly, the largest up days for the DJIA in the past 110 years are found in the Big Bear Markets. It's a fact, during the Great Depression Bear, and our 2007-10 Bear, the largest moves from the previous day's close were positive days. In the Chart below, I stripped out every day where the DJIA's close was less than 2% from its previous day's Closing Price. Those periods with few or no DJIA 2% Days, tend to be good markets to be in. But it's hard making money on the long, or the short side when Volatility rises. Note how Mr Bear makes life miserable for Short Sellers with plenty of strong up days, just before he takes the market down again. You know, Mr Bear doesn't care if the DJIA moves up or down by over 2%, or greater; he likes rocking everyone's' boat. I don't know why I should treat big down days different than big up days. So in the Chart below, I treat all 2% days (+ or -) as being positive events. I then take a 200 Day Running Sample, to see how many DJIA 2% days are in each Sample. This is really an amazing chart. With the exception of the 1942 DJIA BEV -50% Bear, it catches every major DJIA Bear Market from 1900 to 2010. Here is my list of DJIA Bear Markets. Dow Jones Bear Markets 1885 to 2010 -40% Declines * Daily Closing Prices Date of DJIA Bull Bear Time in Bear Bottom HighLow% Decline Weeks 108 Jul 1932381.1741.22-89.19%149209 Mar 200914,164.536547.05-53.78%1353* 28 Apr 1942 194.4092.92-52.20%2364* 31 Mar 1938 194.4098.95-49.10%56515 Nov 1907103.0053.00-48.54%96608 Aug 1896 78.3841.82-46.64%325724 Aug 1921119.6263.90-46.58%94809 Nov 190378.2642.15-46.14%124906 Dec 19741,051.70577.60-45.08%100The Current Bear Market is only 135 Weeks Long. But Bear Markets can last a very Long Time. Don't be Surprised if the 2007-10 Bear still has Years to go. The US Federal Government is doing Everything Necessary to drag this Bear Market out for a Long Time to Come. * Based Upon 10 March 1937 Bull Market TopSource Dow Jones Averages 1885-1990 Business One Irwin & Barron's Graphic by Mark J Lundeen As the #1 & #2 Bear Markets are the Great Depression Bear, and our own, a side by side comparison of the DJIA's 2% Days in a 200 Day Sample is interesting. At the Bottom of the 1929-32 Bear, every other day was a DJIA 2% day; Wow! In October of 2008, we came close, with 40% of the days in the 200 Day Sample being a 2% Day. This was a big deal. Big enough to make Congress go on Live TV and order the Fed and US Treasury on CNBC to do what they had to do to stop the pain, and “Stabilize” the Stock Market. I don't want to be repetitious, but too little is made of the fact that our “Free Markets” in 2010 are mostly political props. Anyways, you may want to take a second look at my first 2% Chart (the chart above the table) to really appreciate how massive these two Bear Bottoms were. Currently the 200 Day Sample is a 12, with 6 of those 2% Days from the first of August 2009 to New Year's. If Mr Bear leaves us alone, we should see this plot shortly dropping to 6, and staying there, or go lower, for months, and years to come. But I notice that in the past two weeks, we've seen 3 DJIA 2% days. I think this is an omen of bad things to come. If I'm correct that Mr Bear is back, we will see Market Volatility, and DJIA 2% days increasing as he goes about his work destroying those Asset Values the “Policy Makers” treasure most: American Voters' Retirement Accounts Pension Fund Assets It's what Mr Bear does for a living, and he does it very well. In the process, we'll see the 2007-10's Red Plot once again rising up, and I suspect exceeding the highs of the Great Depression Bear. It's a mess made in Washington. I hope I'm wrong, but my fears are that I'm not. When I put it this way, the idea of Washington buying out the Stock Market doesn't sound so outrageous, does it? Considering that at the 2009 bottom, they bought GM & Chrysler with Monetary Inflation. Why not the entire S&P 500 in the next? The Lundeen Bear Box and Step Sum is below. The DJIA's Step Sum is heading down. And guess what; so is the DJIA. Not much else to say about this in Wk 135. But I suspect I'll have something to say about it in Wk 136. 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. The Guild of Mad Science These are interesting times in the Gold Market! Zero Hedge reports a Gold & Silver Run in Europe. I'd expect seeing that happening in Europe first. Unlike Americans, Europeans during the 20th Century have frequently seen their money turn to dust before their eyes. A life time of saving just vanished, because there comes a point when an ever increasing supply of paper, or its “electronic equivalent” can no longer function as a means of trade, or as a store of wealth. That's when Paper stops being Money, and being a Billionaire becomes nothing special very quickly. "Such were the sources of that flood of paper money which, ever since, has alternatively accelerated and threatened the economic life of the world." -William Durant: Our Oriental Heritage, (1935) pg 780 I doubt our Doctor Bernanke, during his days at Princeton, spent much time in his lectures on the when's where's and why's of past failed paper money schemes. Those academics who DO never become Chairmen at the Fed. So it wasn't a coincidence after Bernanke's November 2002 speech at the NY Economics Club, where he promised he would drop bails of $100 Bills from Helicopters to stop asset price deflation, that he became Alan Greenspan's Heir Apparent in the media. In Science Fiction Movies, the "Mad Scientists" who attempt to destroy the World are either Medical Doctors or Ph.Ds in Physics'. But this is only in the movies. In Real Life, the actual Mad Scientists who really are destroying the World are the “Social Scientists.” Our current Fed Chairman is a Keynesian Economist, and a member in good standing in the Guild of Mad Science. This Chart above shows his considerable contribution in the coming Global Chaos. The Guild needed someone to destroy the American Dollar, and in Doctor Bernanke they found the man willing to do a “Proper Job” on the Dollar. No currency can survive this level of over issuance, and the Doctor knows it. That's why he does it, and why they love him in Washington and Academia. COMEX Gold Charts Now that I've shown you the current lay of the Monetary Landscape, let's take a look at what is happening over at the COMEX. Here is a Chart giving how many Ounces of Paper Gold have been traded daily, as well as how many Physical Gold are Stored at COMEX approved vaults since 1974. The Blue Plot (Left Scale) is for Physical Gold Stored at COMEX approved facilities. Only a fraction of this Gold is available for delivery in settlement of a Paper Gold Futures Contract. The Red Plot (Right Scale) is how many Ounces of Paper Gold are being traded at the COMEX. Currently, there are 5.6 Ounces of Paper Gold being Traded for every 1.0 Ounces of Gold stored at the COMEX. There actually is nothing wrong with this, as everyone who currently trades Gold Futures knows this is the situation. Anyways, most traders of Gold do so to either hedge Dollar production costs, or are seeking profits in Dollars. The problem I see coming, is if a day comes when the Gold Longs (buyers), as a group, decide they would rather take actual Gold, instead of Dollars, from the Gold Shorts (sellers) in contract settlements. It's their right to do, but currently, the Gold Shorts don't have the Gold to Deliver. I said “if a day comes”, because I don't want to say anything “irresponsible.” But in May 2010, there are too many Infernal “Policy Makers” in Washington talking in terms of Trillions of dollars, to fund their expanding, but bankrupted Government for this not to happen! The price of Gold and Silver Coins could double, or more on the news of a COMEX default. After a COMEX Default, Mining shares are likely to become the replacement of choice of those people seeking a rational Gold and Silver derivatives to hold in their portfolios. I say beat the crowd and buy the Miners now. But as we can see below, in Wk 135 of our Bear Market, the crowd is still hanging out at the COMEX. The COMEX's Open Interest for its Gold Contract reached a new All-Time High (BEV Zero) on Friday 14 May 2010. This is the first BEV Zero since January 2008, and the largest Open Interest in the history of the COMEX. I just get the feeling that there are going to be many disappointed people trading at the COMEX, sometime in the not to distance future. Right now Gold and Silver Mining shares are cheap, so why waste your time and money on Paper Gold at the COMEX? A few weeks back, I recommended that my readers may want to consider as a * speculation *, a few Exploration Companies, and one Junior Producer. One of them, International PBX Ventures has drilled some excellent cores from their Copper-Molybdenum property. This news came out just days after I made my recommendation, so I thought an update would be appropriate. This project has a lot going for it, and has the potential to make some excellent profits for PBX's shareholders. I need to note that I'm a large shareholder in PBX, but I receive no reimbursement, in any way from PBX in making this, or past recommendations. Mark J. Lundeen 14 May 2010 Dow Jones -40% Declines From 1885 to 2008 is the article inspiring 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.

Bear Market Race Week 123: DJIA Market Volume, Dividend Payout & Yield Considerations

The 1929 & 2007 Bear Market Race to The Bottom Week 123 of 149

DJIA & Market Volume
DJIA’s Dividend Payout & Yield Considerations

Mark J. Lundeen

19 February 2010

Color Key to text below
Boiler Plate in Blue Grey
New Weekly Commentary in Black

Below is my BEV chart for the Bear Race.

The DJIA had its best week since last November, (Wk 108). Well during Bull Market, there are bad weeks, and in Bear Markets there are good weeks. Until the Bulls force me to relocate my text box, I’m not impressed. And if Doctor Bernanke and Secretary Geithner force me to move that Text Box; I’m going to be really upset with them! There is absolutely no reason for the DJIA to be that high with the problems the Financial World currently has. But they never listen to me.

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

The DJIA is up this week with a slight decline in daily Volatility. But so what? I do find it interesting how in the Summer of 2007, there were several peaks and valleys in Volatility, starting in March of 2007, just prior to the DJIA’s October top. We can always learn something from studying the past, but past performance is no guarantee of what is to come. But still; this could be seismographic evidence of Market Magma rising.

I haven’t shown the next Chart for months! If Market Volatility was all I was following, this Chart would tell us the Bear left town a long time ago. And you know what? He has!

Well after all, 2010 is an Election Year, and the “Policy Makers” like things looking as normal as they can make it. They’ve succeeded as far as the DJIA’s Volatility is concerned! But as I’ve noted below, in my section on Market Volume, there are signs of official-level monkey-shines going on at the New York Stock Exchange. Like any forensic investigator can tell you, there are some things that just can’t be hidden.

No word on this from my agents in Manhattan. It seems that PETA has refused them a lawyer, so they’re still enjoying the hospitality of Major Bloomberg. I’ll let you know when he lets them out of the clink. Until then, we will just have to be satisfied with my charts.

Here is another interesting Chart I haven’t shown for a few months.

As I’ve said before, Market Volatility increases in declining markets, and declines in rising markets, it’s been that way for 110 years. But this pattern has been aggravated since the US Took the dollar off the Bretton Woods Gold Standard in 1971. This can’t be denied! When the Bear comes back, we’ll see his tracks first in my Volatility Charts.

Daily Volatility Statistics for Wk 123

70% A-DMondayHolidayN/AN/AN/ATuesday10268.81+1.68%1-Wednesday10309.24+0.39%0-Thursday10392.90+0.81%0-Friday10402.35+0.09%0-
Historical Daily Volatility is < 1.0% Source Dow Jones The Lundeen Bear Box and Step Sum is below. This is a change! The DJIA was up 3% this week with only an increase of 4 in its Step Sum, very nice! But will this trend last? For a few weeks or even a month or two: sure it could. But I'm still a long term Bear. From this point on, I think the current Bullish Correction, within our Greater Bear Market, is nearer its end than its beginning. Come on; it's been going on for a year now.Sometimes the smart position in the Stock Market is no position in the Stock Market. But 2010 is an election year, and Washington has all the money in the World to make the voters happy. Below is a 15 Year Chart of the DJIA and its Step Sum. It's just amazing that the #2 All-Time DJIA Bear Market went down 53% on only 25 Net Down Days! Well the DJIA and its Step Sum are now working together, at least they have been recently, and as we see below, the DJIA is bouncing back nicely after an 800 point correction. The Ball is on the Bull's side of the court. They cleared the failed bounce the DJIA had in early February, and now have only 300 points to go before they exceed the highs of 19 January. If the Bulls are really in control, those 300 points should be easy to find in the next few weeks. But I'm only watching this market for its entertainment value. I don't believe any of these prices are the result of a free market attempting to discover real prices. In other words, I'm assuming the “Policy Makers” are currently managing market expectations, on a day to day basis, via the changing valuation of the DJIA. This means that they don't want investors getting to Bullish, or to Bearish. They don't want to incite the Voters into doing something stupid that the “Policy Makers” will later regret. So, I find all of this a complete farce, but a very entertaining farce. We are living history here! Fifty years from now all of the shenanigans Washington pulled on the rest of the world will be taught in school. Including the bit where in 2013, 95% of Congress decided to take a prolonged 4 Year recess at Davos, Switzerland. They decided it was finally time to conduct an audit of the Gold that was formerly stored at Fort Knox. It's happened before. This is from the Bible. “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 Ya; you won't see them or the Gold they stole from us: “no more.” 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. DJIA & Market Volume In Weeks 75 & 99 of my Bear Market report, I covered the relationship between the DJIA and Stock Volume. This is only an update to those Reports. But to people who haven't read these reports, it might be worthwhile to read them, although a little review is in order for everyone. Bull and Bear Markets, since 1900 have been closely associated with Volume and Volatility Trends: § Increased Volatility is the Calling Card of the Bear § Increased Volume is the Calling Card of the Bull Remember, Market Prognostication is not a science, but more of an art. So we should expect periods when these two rules of thumb are not present in the Stock Market. However, over the course of a Bull or Bear Market, these rules should be clearly evident in the charts. I'm taking some charts from Wks 75 & 99 for my review. The chart below is for the DJIA and NYSE during the Great Depression. 1926-1934 Rising NYSE Volume is clearly evident during the Roaring 1920s. After the DJIA's 1929 BEV Terminal Zero (last all-time high), the DJIA declined with NYSE Volume. How hard is that to understand? I've frequently mentioned in the past, that the single best year in the history of the DJIA was from July 1932 to July 1933; the DJIA increased 163% in those 12 Months. But there was also a nasty -37% correction in February in 1933. The rise, fall, and then the rise again in the price of the DJIA from July 1932 to July 1933 is evident in the Volume Plot above. 1932-1966 The DJIA may have seen its single best year from July 1932-33, but the 1930s were hard markets to make money in. We see that NYSE's Volume found a bottom in 1942, along with a BEV -50% Bear Market Bottom. But for the next 24 years, the DJIA was to rise from its 1942 Bottom of 92.92, to 995.15 in 1966 for a gain of 1171%. This gain was supported with a tremendous increase in NYSE Volume. Using Charts from Wk 99, next are some examples for the DJIA using a 10 Day M/A of the DJIA's Volume. So the above charts are NYSE Volume with no Moving Average. The charts below use the DJIA's Volume with a 10 Day Moving Average. Moving averages are nice as they smooth out the day to day noise. 1950 to 1966 From 1950 to 1966, the DJIA saw a Bull Market as the Fed's “Liquidity” flowed into the Stock Market. The effects of this flow of inflation can be seen in the rising DJIA's Blue Plot. But note also the effects on the DJIA's Volume. It too rose for these 15 years, as the DJIA increased from 200 to 1000. Oh about that Volume Spike in June 1962, that is one nice signal the Five Month DJIA Correction was over. In Barron's 08 June 1962 issue, which records this data spike, Eleanor Roosevelt claimed the resent market correction was a conspiracy by “Big Business.” J Paul Getty was buying more oil shares. Barron's, as it always did back then, had a front page editorial. Topic for 08 June 1962? One of these days Washington is going to bankrupt us. “Basically Sound? The US Should Beware of Easy Optimism” Barron's warned its readers that deficits and trade imbalances do matter, and the basic problem with the American economy was the Red Ink in its trading with our partners. There was the record * 3.4 Billion Dollar * trade deficit in 1960, and things look worse for 1962!Gold was draining from the US Treasury. The US Dollar was under pressure in the currency markets. In 1962, these problems had been chronic for a decade already. I'm sure in 1962, no one at Barron's thought this would go on for another 48 years! What I wouldn't give for one of those old fashioned 3.4 Billion Dollar Trade deficits! 1964-1983 This is a very interesting period in market history. Note the Blue DJIA Plot is not a BEV Plot, but the DJIA itself. From 1966 to 1981, the DJIA tried 5 times to breach its 1000 line, and 5 times it failed. But as we know now, on the 6th try the DJIA made 1000 stick. The last DJIA closing below 1000 was last seen on 16 Dec 1982, with a closing price of 990.25. Note from 1966 to 1974, with each attempt on the 1000 line, the DJIA fell into successively lower lows until 1974, when the DJIA saw its first BEV -40% Bear since 1942. All during this time the DJIA's Volume was rising, but not by much. After the 1974 bottom, the DJIA's Volume increased dramatically over the next 8 years, resulting in a pattern of higher lows when the DJIA had price corrections. In August of 1982, the DJIA's Volume exploded, taking the DJIA above its 1000 line. 1979-1991 The relationship between the DJIA and Stock Volume began to break down during the Greenspan Fed. Notable in the chart below is the huge spike in DJIA's Volume during the Crash in October 1987. On Live TV, Doctor Greenspan promised “Ample Liquidity” for the markets, and he delivered. But the 1987 Crash was unique in the history of the Stock Market. In 1987, all of the major Investment Banks began “Program Trading”, where computers (Black Box Programs) were fed information on when to buy and when to sell. Apparently these programs' parameters for selling were alike. On Monday 19 October 1987, Robots ruled Wall Street as selling thresholds were met, and mindless computerized selling in the Stock Market began. Wall Street's Robots took the DJIA down 19% in hours. And the lower the market went, the more the Robot Traders were programmed to sell. The Banks were all afraid to turn off their Robots, so the selling continued until the close of Trading. So maybe this spike in volume doesn't have Doctor Greenspan's fingerprints on it. Note how the Stock Market performed for the next few years. A rising DJIA as its Volume stayed static. This is one of those instances where the DJIA rose in spite of lackluster volume. Remember, you invest in the Stock Market, not in its volume. 1990-2000 The DJIA continued to increase, while its Volume lagged behind until 1997. After 97, the Stock Market Bull entered its Blow-Off Stage and Volume exploded. Why did Market Volume explode? Because the Stock Market became a public mania. Its easy riches lured in people who had no business in the Stock Market.In the late 1990s, Investors were assured that there were no 10 year period in the Stock Market where Investors, “who bought and held stocks for the long term” lost money. So with interest rates on savings single digit, the promise of double digit gains in the Stock Market of the 1990s, and the Real Estate Market 10 years later, proved to be fatal attractions to many people. Note the two vertical dashed lines in the Charts below. These spikes in Volume have Doctor Greenspan's fingerprints all over them. The old “Greenspan Puts” as they use to say. The markets are rigged by the Government. Still, if people make a serious effort in educating themselves, good money can be made in the Stock Market. But one has to know when to be in it, and more importantly, when to BE OUT! Currently, my studies conclude that I want nothing to do with the General-Stock Market right now. The day will come when I will change my opinion, but right now Gold and Silver coins are compelling values in our Inflationary World. The alternative is collecting “risk free” interest on bank deposits or in the debt markets. Today's yields on short term T-Debt are at Great Depression levels. This “Risk-Free” assumes that US Treasury Debt, and the US dollar are sound, which I don't believe they are. In my opinion, the only risk-free investment easily available to the public are Gold and Silver Coins. If you don't know where to purchase gold and silver, just get on GATA's Chris Powell's mailing list. You'll be informed on current events in the markets, and provided with a list of Gold and Silver Merchants who have supported GATA for years. 1998-2010 Since the 2000 DJIA Top, the relationship between the DJIA and its Volume, has changed beyond recognition. As the DJIA declines, its Volume has consistently increased. As the DJIA rises, it Volume has consistently declined. If this happened only once or twice, we could assume these violations in the Bull and Bear Market's Volume Protocol were merely a few of those inexplicable market anomalies. But it's been this way for 10 Years now! 2005-2010 This pattern has become extreme since the DJIA's October 2007's Terminal Zero (last all-time high). Market Volume and the DJIA were in sympathy with each other from 1900 to 2000 (100 Years), and then after 2000, everything changed. So we need to ask ourselves: what's changed? I believe the difference is, previous to 2000, the major players in the market had Market Risk to worry about. Smart money, like major investment companies purchase their stocks at market bottoms, not on the way down. They know that buying in a declining market is an effective technique of losing money. But take a moment and examine my charts from 2000-10 again; we see a repetitive pattern of significant Volume increases as the DJIA goes down, and then Volume backs off after the DJIA turns around. Logically, this pattern only makes sense if the big NY Financial Houses are using the Federal Reserves' Inflation to maintain the Stock Market's valuation within “Policy's” designed parameters. When the market falls, measured amounts of “Liquidity” are “Injected” directly into the Stock Market via the Big Banks. When the market reverses, it's a mission accomplished, and the spigot of “Liquidity” is turned off. If this is true, and I'm sure it is, the spikes in the above Red Plot shows how much muscle the Fed had to use to make Mr Bear say Uncle. In Weeks 75 & 99, I have charts for 110 years of Market history. Is there anything historically comparable to what happened from August 2008 to March 2009 above? No there is not! The big players would never do this with their own money, so the Federal Government must be giving them our money to play this losing game. And the insiders know that if all goes wrong, Congress will bail them out again. Why wouldn't Congress bail them out? The money at risk is coming from the Government's monetary printing presses.Remember, 2010 is an Election Year. Politicians want a good Stock Market when it's reelection time. When the Stock Market breaks again, and it will, the upcoming Congressional Hearings should prove to be a real Dog and Pony Show. Someone has to take the rap, but who? Martha Steward" target="_blank">Martha Steward

took it in 2004 for a trumped-up charge of insider trading. I guess the Department of Justice showed her the error of her wicked ways! It will be interesting to see who takes it this time.

DJIA’s Dividend Payout & Yield Considerations
Robert Prechter of Elliot Wave Fame is predicting a DJIA Bottom of below 500.Here is a 7 minute Bloomberg Video from October 2007, at the top of the DJIA. The video is over 2 years old, but his points on the Stock Market are only more valid in 2010 than they were in 2007. When it comes to Gold however, Prechter has been a Bear since Gold was at $250 an ounce. No one is perfect.

Can the DJIA fall to 500? That would be a retracement of the entire move the DJIA has made since the 06 Dec 74, 577.60 Bottom! What is he thinking?! I don’t know what Mr. Prechter is thinking, but using the DJIA’s Dividend Yields as a Valuation Model, the DJIA could fall further than most “Experts” think possible today.

Let’s take a look at the DJIA’s Dividend Yield from 1925 to 2010. There was an old rule that investors should sell the Stock Market when the Dividend Yield on the DJIA was near 3%, and come back into the Market when the DJIA’s Yield rose above 6%. That rule, as we see below, was an extremely effective market timing system for decades. But, as usual, when Doctor Greenspan became Chairman of the Fed, the old rules of prudent investing only lost money.

The old rules worked because there are two methods of valuing the DJIA:

§ The Inflationary Expectation Model
§ The Dividend Yield Model

People would purchase stocks at a DJIA 6% Yield, because a 6% yield, with the promise of future capital gains, provided a superior source of income on capital, as one waited for the Bull Market to start. From 1925 to 1975, banks didn’t pay 6% on their savings accounts.

As the Bull Market progressed, the DJIA’s Yield would decrease. But who cared when the Inflationary Capital Gains more than made up for a smaller Yield. For 50 years, 3% on the DJIA proved to be a tipping point. A time to sell your stocks, take your capital gains and wait until the DJIA Dividend Yield again saw +6%. But in August 1987, when Doctor Greenspan became the New Sheriff in Town, all that changed as we can see in the chart above.

So how important are the DJIA’s Dividends and Yields? Well currently, as the Market is being valued by Inflationary Expectations, they’re not important at all. People see the DJIA’s current Yield of 2.70% and they’re not impressed. Should they be?In Week 123 of my Bear Market Report, buyers of Stocks are after bigger game: Capital Gains. The DJIA can do better than 2.70% in a single day, so what attraction does 2.70% a year have to people hooked on Inflationary Profits? None whatsoever!

But when Inflationary Gains become Deflationary Losses, as we saw in March 2009, the DJIA was Yielding 4.74% while 2 Year T-Bills were paying only 1.03%. That 3.74% split was no good for people who took the -53% loss in the DJIA from its October 2007 high. But there is always lots of money in the Fixed Income Markets that might be tempted to sell some bonds and buy good yielding stocks.As we all know now, that was an excellent trade!

But unlike Bonds, whose payout is fixed, and cannot be cut without defaulting, Stock Dividend Payouts are at the mercy of a company’s Profits. During times of Economic Stress, Dividends are reduced or eliminated, and since September 2008, the DJIA’s Payout has been reduced by 16%. Corporate America is currently under great strain. How bad can it get? Let’s look at the Great Depression, and see what happened to the DJIA’s Payout and Yield 78 years ago.

These relationships are mathematical; it’s simply not possible for the DJIA’s Valuation to rise, or even stay range-bound if its Payouts Decline as its Dividend Yield rises. Here is the DJIA’s Valuation formula.

DJIA’s Valuation = Dividend Payout
Dividend Yield
When the Stock Market is being valued by its Inflationary Expectation Model, investors ignore the Dividend Payout and Yield. The 11 January 2000 issue of Barron’s reported a DJIA Yield of 1.30%! To most investors in January of 2000, Dividends were only an irritation that made them fill out an additional line on their 1040 Income Tax Form. Had the DJIA doubled to 22,000, while maintaining a constant Payout, the Yield would have fallen to 0.65%. The Bulls of January 2000 would have rejoiced! They were only interested in the Inflationary Capital Gains Doctor Greenspan was Injecting into the Stock Market.

But there comes a point where values do matter. This is when money decouples from bovine fantasy, and jumps onboard economic reality. Such times are called Bear Markets. And Mr. Bear doesn’t care a whit about the Value of the DJIA. His only concerns are about the quality of the DJIA’s Dividend Payouts, and that those Payouts are priced properly. As we saw in the chart above, Mr Bear slashed the DJIA’s Dividend Payouts by 79%, and then repriced them from 3% in 1929, to 10.38% in July 1932. In the process the DJIA fell 89%, and resulted in much human suffering. But Mr Bear’s attitude has been rather clinical when it came to correcting the excesses of past Bull Markets. I expect more of the same when he goes to work in correcting the excesses of our current market

I started this segment with a prediction by Mr Prechter that the DJIA could fall below 500. Let’s take a look at the DJIA, as Mr Bear does, and see if what would happen to the DJIA, if the Payout and Yields trends of 1929-32 were repeated.

DJIA Dividend Yield and Payout
What if 2007-10 was a Repeat of 1929-32?
Barron’s IssueDJIA PriceYieldPayout02 Sept 1929380.36 3.31%$12.59 11 July 193241.23 10.38%$4.28 15 Oct 200714,093.20 2.06%$290.32 Unknown950.95 10.38%$98.71 My 950.95 DJIA Value is based on a 66% Reduction in the DJIA’s Dividend Payout, with a July 1932 Dividend Yield.

Source Barron’s
Graphic by Mark J. Lundeen

The results are not as bad as Mr Prechter predicts, but seeing the DJIA Valued below 1000 would be shocking to everyone; but Mr Bear may want more. After all, with the mess the Bulls left behind, there is so much work for him to do. In the 1930s, interest rates collapsed as the Yield of the DJIA soared. In a yield hungry environment, where savings returned less than 2%, the July 1932, 10% Yield on the DJIA was compelling!

But in 2010, with decades of Monetary Inflation and Fiscal Malfeasants hiding in American Government, Corporate and Personal balance sheets, we should not expect a collapse in future interest rates, or that the earnings on the DJIA will be predictable and stable.They haven’t been since US Politicians and Bankers intentionally took the US dollar off the Bretton Woods’ Gold Standard in August 1971. My BEV Chart shows the reality of the post Bretton Wood’s DJIA’s Earnings fluctuations.

It’s not just Greece that went to Wall Street to hide their liabilities!Wall Street has created a thriving derivatives market that has intentionally obfuscated accounting for the past two decades.

Most people are unaware that there exists a 600 Trillion Dollar OTC Derivatives Market created by Wall Street’s major “Investment” Houses. These are Leveraged Junk Financial Instruments. Warren Buffet called them “Weapons of Mass Financial Destruction.” They were not sold directly to the public, but rather to the publics employers, insurance companies and pension funds. We know the names of some past purchasers of Wall Street’s “derivative products”, the Government of Orange County, California, who in the mid 1990s went bankrupt because of derivative losses. And then
Enron” target=”_blank”>Enron

comes to my mind. Enron and their accountant Arthur Anderson went down. But as is so typical, Banks like JP Morgan who made these fraudulent deals possible, are always ignored by the US Justice Department and the Media.

We should suspect that many Enrons are currently listed on the major stock indexes, and Orange Counties in the Municipal Bond Market. With hundreds of trillions in notional value in the OTC Derivative Market hiding somewhere, there must be Companies whose financial obligations for payroll, capital re-investment and taxes will be overwhelmed. Dividend Payout for such companies will be the first line item to go to zero when these ticking time bombs detonate.

What will make them blow up? When Doctor Bernanke and Secretary Geithner lose control over asset valuations, currency and interest rates. These were the risks being hedged. And I note that all of these “Risks” were * NOT * present in the global economy when the world was on a Gold Standard.

It would be wise to expect future yields for US Dollar Debt to explode, taking the DJIA’s Dividend Yield up with them. In such a situation, how high must the DJIA Dividend Yields rise to compete with Bonds when Capital Gains are only a pleasant memory, and Dividend Payout cuts a constant fear?

Looking at Barron’s Best and Medium Grade Bonds in December 2008, the lesser quality bonds had to half their price in a matter of weeks to produce a competitive yield with Bonds of higher quality.I don’t care to predict when, but I strongly suspect we will see the DJIA’s Dividend Yield soaring above Bond Yields.

Money knows no borders. The day is coming when the Political, Economic, and Corruption realities currently present, but largely ignored in the United States, are going to be priced into the valuation of American Financial Assets. American companies, such as the 30 listed in the DJIA, are going to have to compete with other nations, whose companies have better prospects because they operate in Economies with vastly less corruption & pettifogging government regulations.

Mr Prechter believes that to be competitive, the American Stock market must discount the DJIA to around 500. I think he’s on to something.

Mark J. Lundeen
19 February 2010

Dow Jones -40% Declines From 1885 to 2008 is the article inspiring 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.

Bear Market Race to the Bottom – Week 89 – The Baby Boomers go Double or Nothing

The 1929 & 2007 Bear Market Race to The Bottom Week 89 of 149

The Baby Boomers go Double or Nothing.
Huge Increase in NYSE Margin Debt

Mark J. Lundeen

26 June 2009

Color Key to text below
Boiler Plate in Blue Grey
New Weekly Commentary in Black

Below is my BEV chart for the Bear Race.

The Bull closed the week below the DJIA’s BEV -40% line. I’m referring to this market as a Bull as it had a nice bounce off its BEV -50% line. But this is only a courtesy. If we had a real Bull, the -40% line would be no problem for him. As it is, he seems stuck on it.

June saw the lowest daily volatility for well over a year. Considering that we saw the second worst DJIA Bear Market Low since 1885 only 4 months ago, I think June’s low volatility is an anomaly. Such an extreme low should have created huge upward pressure for the DJIA, and a reduction in daily volatility should have benefited the Bulls. But it did not. That is something we should keep in mind.

Forget last March’s lows below the BEV -50% line. Let’s pretend our market is one with little public or official expectations of it. We saw such a stock market from 1940 to 1971. As we can see in the chart below showing the DJIA Daily Volatility’s 200 Day M/A since 1900, from 1940 to 1971, the DJIA had the lowest daily volatility of the 20th Century.

Why would that be?

There was a generational hangover from the 1930s market. After the 1930’s, retail investors disappeared from Wall Street and didn’t come back until the Baby Boomers, born long after 1929, became old enough to become investors.

NYSE Margin Debt (see charts in next section) never recovered from its 1929 highs. The stock market was un-leveraged.

And maybe the most important factor was that the US Dollar still had a link to the Bretton Wood’s gold standard.Before 1971, the “policy makers” didn’t have the “liquidity” to move markets that they clearly have since 1971.

These are 3 circumstances not at play in our market! The public is up to their eyeballs in stocks. May & April of 2009 saw a huge increase in NYSE Margin Debt. And the US dollar is experiencing historic inflation, with much of this inflation targeted at the stock market.

So I have reasons to believe that June 2009’s low volatility is a freakish occurrence within a massive Bear Market. When volatility picks up again, we should see a drive downwards to new Bear Market lows in the DJIA. That is how I’m envisioning the market in the months to come.

But the market has a way of frustrating its prognosticators. Who knows exactly what the future holds? I don’t! So the market may still have a few good months ahead of it. If that is the case, I have no problem watching it rise up without me.

Below is my 8-Count & DJIA BEV Chart

Well June may have had abnormally low daily volatility for a Bear Market, but it couldn’t keep its 8-Count down to zero for more than 2 days.

Look at the chart above. From March 2006 to July 2007 there was only one 2% day! This 16 month period took the DJIA from 11,000 to 14,000. By following these 2% day (up or down 2% days, makes no difference to the Bear) we can see when the DJIA started to have problems; July 2007.

Seeing the 8-Count bumping up and down above its zero line is historically very Bearish. Seeing June of 2009 with four 2% days is not a good omen of things to come.

Daily Volatility Statistics for Wk 89

70% A-DMonday8339.01-2.35%2-75.43Tuesday8322.91-0.19%2-Wednesday8299.86-0.28%2-Thursday8472.40+2.08%2-Friday8438.39-0.40%2-

Historical Daily Volatility is < 1.0% Source Dow Jones DJIA Volatility Milestones MarketMoving Average Maximum ValueTrading Days Post BEV Terminal ZeroDate of Peak Val1929/3240 Day M/A: 3.81%77 Days13 Dec 19291929/32200 Day M/A: 2.50%803 Days17 May 19322007/0940 Day M/A: 3.83%284 Days21 Nov 20082007/09200 Day M/A: 2.12385 Days21 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%. The Lundeen Bear Box and Step Sum is below. For the past 24 trading days, the DJIA has completely ignored its Step Sum. Step Sum goes up or down, the DJIA mostly just hung around the BEV -40% line munching those green shoots. But then, the last 24 trading days were in the month June, and June had almost no daily volatility. But like Dr. Fudd said: “push hard enough & it will fall down.” I will be interesting to see which way the Step Sum will be pushing the DJIA this summer, up or down. 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. The Baby Boomers go Double or Nothing. Huge Increase in NYSE Margin Debt I didn't say I was going away, just that I was going to reduce my weekly work load. So when I do my weekly update of data from Barrons', and I see something interesting, I'll pass it along. I wrote about NYSE Margin Debt in March 2009. You may want to review this report. The NYSE published weekly Margin Debt (NYSE MD) numbers from the 1920s to 1965. Starting in 1966, they switched to a monthly basis. The change in data is clearly evident in the BEV Chart below. NYSE Margin Debt are loans made by brokerages to retail customers for the purpose of leveraging positions. If someone has $10,000, but wants to purchase $20,000 of a stock, they can do this with the use of margin debt. Buying your stocks with someone else's money can double gains, * and losses * in a hurry. The numbers for May 2009, NYSE MD's came out last week in Barron's. I found the increase in retail investor's leverage alarming. As with any financial series concerning debt or money, we can see how monetary inflation has increased since 1926. What's amazing about this chart is the abrupt U-Turn NYSE MD has taken since April 2009. NYSE MD has increased 79% from its lows of February! Has this ever happened before? Examining this data as published will not answer that question. So let's look at NYSE MD with a BEV Chart. The BEV Chart below uses the same data as above, but is processed by my BEV Formula: (Data Point / Last All-Time High)-1 Or as Written on my Excel Sheet =K4995/MAX(K$988:K4995)-1 New all-time highs are recorded as zeros in a BEV Chart. The last zero of a bull market is called the "Terminal Zero." All other data points are register as a negative percentage from their last all-time high. The BEV Chart strips away the decades of monetary inflation, uncovering much useful information. Above is a BEV Plot of every NYSE MD data point published in Barron's. Look at the extreme moves in NYSE MD from 1929-48. I take the 95% drop in August, 1932 very seriously. The 82% drop of 1940 I ignore. Why? Look at the next chart. The 95% drop in 1932 was the bottom of highly leveraged market of 1929. Where did the credit for these speculative loans of the Roaring 20s come from? The Federal Reserve. The extremes drops in MD, seen from 1932 to 1966, occurred in markets free from excessive leverage. I wish I could show exactly when the NYSE MD exceeded the 1929 highs, but the monthly values, post 1966, are incompatible with the weekly values. I don't know why this would be. Going back to my first chart on NYSE MD, it's all too obvious the stock market tops of 2000 & 2007 occurred with excessive leverage by retail investors via margin loans. Like 1929, spikes in NYSE MD of the past 10 years were red flags warning of Bear Markets to come. When these positions were liquidated, retail investors with levered positions suffered in the Bear Markets that followed. We in 2009 can see what happened three times before when Retail Investors assume significant leverage via NYSE MD. The spike in 1929 happened in isolation. This is not the case for the spike in 2000 which was followed with another, even more extreme spike in 2007. The difference between the two cases (1929 & 2000) can only be from differences in “economic policy” and communications technology targeted at consumers. Bears are seldom allowed the same access to the media as bulls. So it's not surprising to see retail investors returning again and again to the stock market. Knowing that Social Security has massive problems, what choice do people really have? As people are now older, it's logical that they would leverage their positions to make good their losses since 2007. I believe this reason is the cause for the massive increase in NYSE MD since February. We have to wait a month to see if NYSE MD for June also rises. But what happened in just the past few months tells me that investors believe the worst is over and are making a huge gamble in the stock market. There is something is terrible wrong happening in NYSE MD. In 1929, 2000 & 2007, too many people with no knowledge of the markets were purchasing stocks using margin debt. With the 20/20 vision of historical hindsight, we can see the red flags in the charts above. Now for the 4th time since 1926 we see NYSE MD rising perilously. A 79% increase in only a few months is a sign of great recklessness. When these positions are unwound, expect new lows for this Bear Market. A -60% DJIA Bear is even more likely now. I want no part of this market. If you want my opinion of what you should do, I'd think going cash is a good move right now. And by cash I mean $10 & $50 bills and T-Bills no longer than 6 months in duration. I like gold and silver coins and bars. I really like junk silver coins. You know; old coins that were used as money before they started minting coins from slugs of copper and other base metals in the 1960s. If you have children, and want to do something for your future grandchildren, go to the bank and buy a few boxes of pennies and nickels. Put them aside and forget about them for 20 years. When inflation picks up again in the next year of so, the Feds are going to stop minting pennies and nickels. Those still in circulation will be sent back to the mint and melted down. This is exactly what happened to the coinage of quarter, half and dollars coins minted in silver. I don't know how many old silver dollars and mercury dimes were melted down since 1964. I suspect most of those beautiful old coins did not survive the 1970s. Old coins of silver and gold are much rarer than people think and are well worthwhile to buy and hold for investment purposes. There is just something magical about a Morgan Silver Dollar with an 1879 mint date. Old coins of silver and gold are wonderful to look at and hold. They also make great gifts too! The $1 bills will be discontinued too. Crisp new $1 bills will one day become collector's items also. I'm just thinking ahead. Mark J Lundeen 26 June 2009 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.

Dow Jones Industrials -40% Declines 1885 to 2008

Dow Jones Industrials
-40% Declines 1885 to 2008
Mark J. Lundeen
12 October 2008

From 1885 to 2008, (123 years) the Dow Jones Industrial Average, (DJIA*) has fallen -40% from a bull market high on only nine occasions. Such deep bear markets are always historic and distressing.

Using my “Bear’s Eye View” (BEV) chart below, we see 123 years of DJIA market history in chart format below.

The above BEV chart is “adjusted” for the 1929 to 32 crash. The chart below is unadjusted.

As you can see, without the adjustment we lose data on the Bull-Bear cycles of 1938 and 1942.

My BEV Chart presents a unique view of the 123 year history of the Dow Jones Industrial Average by rendering each Dow data point into specific percentage information ranging from 0% to -100%. This format allows direct comparison of every bull and bear market cycle from 1885 to 2008.

For those who are familiar with my BEV chart technique and my 1885 to 2008 DJIA factor unified data series, they may want to skip down to the BEV charts below the next few paragraphs.

When new all-time highs occur, they are recorded as 0% in the BEV chart. So understand that bull markets are seen as a series of 0% in a BEV chart. All other data points that are * not * new all-time highs are reduced to a precise negative percentage decline from its last all-time high. There are compromises in processing market data like this, but more is gained than lost by compressing 123 years of DJIA history into percentage terms bounded in a range between 0% to -100%. Charting the data as published actually provides little historical information due to the effects of monetary inflation over the decades. Below is a chart of the unaltered data I used in creating my DJIA BEV charts. Compare the information displayed by my above BEV charts with what you see below.

(*) A quick note on my data is in order. The Dow Jones Averages had many modifications over decades to arrive at their present construction. In 1885 Charles Dow compiled a single average of 14 stocks consisting of 2 industrial and 12 rail-road companies. The current 30 stock Dow Jones Industrial Average was not published until 01 October 1928. The data charted and used in the table above uses Dow Jones approved sources of what is available from Dow Jones from 1885 to 1928. Dissimilar data series were combined into one unified data series by the use of factors. The author chose to use his unified data series in the table for continuity purposes for the 6,452 weeks of data of the Dow Jones Averages. So the values listed in the above table prior to 01 October 1928 will not match those published values as published by Dow Jones.
Just to satisfy people’s curiosity of how the S&P500 has done, here is a BEV chart of the S&P500 from 1978 to present.

The S&P500 also fell below the -40% line this week.

An examination of the nine times the DJIA experienced a -40% drop from an all time high.

With all that out of the way let’s look at the nine occasions from 1885 to 2008 where the DJIA fell below the -40% line in the above charts. To accomplish this I made nine charts from my factored unified data series. I have included approximately 52 weeks before the terminal bull market high and 52 weeks after the bear market’s terminal lows in each chart. The dates given on the charts are for the period charted, * not * the period of the bear market decline. Remember, I included a year before and after the bear market in the charts. However, the weeks listed in the table are the number of weeks from terminal 0% to terminal bottom in the bear market.

There is much to be learned in studying these nine charts. Keep your eyes on the following.

1. Look at the bull market’s series of 0% data points leading up to the fall into a bear market phase in the cycle. Specifically how deeply does the DJIA correct before and after the last bull market all time high or in BEV terms the “terminal 0%?”

2. Does the bear market decline orderly, in stages, or a catastrophic terminal collapse?

3. After the bear market terminal low, does the new bull market take off like a rocket or gradually collects its strength?

With little commentary on my part, now onto the BEV charts of DJIA weekly closing prices. But remember, before the bull market’s terminal 0% and after the bear market’s terminal low point, I have charted approximately 52 weeks of additional data.

The X-Axis is labeled in weeks as Excel does not do dates prior to 01 Jan 1900. From bull market top to bear market bottom took 6 years and 3 months.

This is a rather famous bear market. Horses pulled taxis on Wall Street and government was very small when this happened in 1906-07. It seems that this crash created the desire in high finance to have a central bank in the United States to prevent crashes from happening again.

This was the first boom-bust stock market since the Federal Reserve was created. World War One produced significant inflation via the Federal Reserve System that eventually found itself in the stock market and consumer goods. As in 2008, commodity prices in 1921 fell along with the stock market. But back in 1921 there were few “policy makers” to interfere with this deflation as it cleaned out balance sheets. That is always painful. Unlike 2008, the US Congress in 1919 did not make defending toxic credit paper a national priority and allowed the necessary deflation to occur. The pain was over in a little more than two years.

If you take a moment to examine the first two charts in this article showing all 123 years of the DJIA, we see a natural rule of thumb. With the exception of the 1929 stock market crash, once the DJIA fell -40% it signaled an all clear to start buying stocks again. In fact that is what people did in December 1929 after they saw a double bottom -40% declines in a 3 month period. The financial media of the time urged people to buy bargain-priced stocks. Remember this chart when we examine our current -40% lows of 2008.

Note on this rule of thumb: I have never seen anyone comment on this before in any financial literature. And I have spent many hours in research libraries reading decade old financial publications. But when plotting the DJIA with a BEV chart, the -40% rule just stands out and has only failed once, in 1929.

BEV charts display bear markets better than bull markets. Looking at the recovery from July 1932 to July 1933 the above chart shows a very weak recovery. The reality is that from July 1932 to July 1933 the DJIA increased by 154% even while the Great Depression caused bank closings, DJIA stock earnings were negative and US unemployment was over 25%!

July 1932 to July 1933 is the best year the DJIA ever had in its 123 year history. I suspect this historic bull move made money for only a very few. The 1929-1932,

-89% decrease killed off most of the 1920’s investment-banking industry’s customers. By 1932, the very thought of investing in the stock market, or borrowing money from a bank produced a sense of revulsion and dread in most people.

This was the second stock market crash during the Great Depression.

Note the beginning dates for the two charts above. I made the 1936-1939 chart its own bear market but also used the 1937 terminal 0% with the 1942 -51% DJIA decline. The -45% occurred in a world of soup-lines and high unemployment while the -51% decline happened in a world at war with full employment. Two different bear markets that share a common bull market terminal 0% point in 1937. It makes sense to chart these two -40% lows together in the above chart when looking at the 1942 low.

What I find amazing in the above chart is the V formation from September 1941 to March of 1943. The Pearl Harbor attack stock market decline started 3 months before Pearl Harbor. The actual bombing of Hawaii on 07 Dec 1941 only made a small notch in the chart. The sharp V bottom reversal happens two months before the Battle of Midway. There was no way Wall Street could have known that 3 American Aircraft Carriers would have had their way with the Imperial Japanese Fleet! It is amazing how prescient the stock market has been in the past on major events.

Here is the Post Vietnam War and then developing Watergate Scandal Bear Market.

Our current market plotted on a BEV chart is one nasty chart pattern. Watching CNBC on Friday 10 October 2008 anyone would think that the DJIA was having its worst week ever. But was it? No better way to quantify a bear market mauling than with a BEV chart. I took the data for 1929 & 2008 and aligned their terminal 0% point on the same starting line, row 6420 on my Excel file. I also included their previous 52 weeks prior to their terminal 0% to see the last year of their bull markets. The result is below.

In this race of shameful fiduciary irresponsibility, it does seem that the 1929 bear is the clear winner. However, back in 1929, Wall Street did not have a Treasury Secretary blasting the market with a congressional-approved financial “bazooka” or a Chairman of the Federal Reserve flying over Wall Street “dropping bales of $100 bills” from his helicopter to maintain “positive inflation in financial assets.” Give a “policy maker” a few trillion dollars to do something and something will happen. Last week’s performance in the DJIA shows exactly what those trillion dollars purchased for the voters, about -20% on the DJIA.

I expect a bounce before the ground opens up underneath the market in the months to come. Look at that double bottom just above the -40% line in 1929 just before the bounce from December 1929 to March of 1930. It looked good to Barron’s, Forbes, and the Wall Street Journal as they signaled the all clear to investors; just before the floor dropped out. Again, look at the first two charts in this article. In 1929, for the only time since 1885 to present, the -40% bear market low proved to be a lethal bull trap.

Personally, I think 2008 is a market with some catching up to do with 1929. The “policy makers” using bazookas and a fleet of black helicopters blasted hundreds of billions of dollars at the market last week, but “policy” couldn’t keep the 30 stocks that make up the DJIA from falling 20%. That is some serious disrespect.

Dude – it was as like those dollars were totally worthless or something. Wow!

There is a good chance that 2008’s bear will give the 1929 bear a run for his money. This may be the second time that a -40% will prove to be another historic bull trap. Washington, Wall Street and yes the American voters are corrupt all the way down to the bottom. The financial markets and the US dollar will not be far behind.

As a public service, I will provide a weekly updated GIF file of the 1929/2008 Bear Race to the bottom to any blogger who wished to make it available free to the public.
Mark J. Lundeen
12 October 2008