Bull Market in Stocks, Bear Market in Gold? Only on TV!Mark J. Lundeen

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

Mark J. Lundeen
Mlundeen2@Comcast.net
01 July
2011

Remarquable démonstration que, par exception, je vous poste ici tant son intérêt est manifeste, c'est vraiment un superbe travail...


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 20^th 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.


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 others have
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
Mlundeen2@Comcast.net
01 July
2011