Since its creation in 1913, the Federal Reserve's management of the US dollar and credit system in the United States has been one of the major forces behind the movement of share prices and market expectations in the stock market. I am not suggesting that social forces and technical breakthroughs in science and industry have had no influenced stock price movement. They certainly have. But never forget what Martin Zweig used to say - "don't fight the Fed." That has been true for many decades.

I thought it would be interesting to examine a chart of the Dow Jones Industrial Average's dividend yield, along with the Growth in the money supply as measured in Currency in Circulation (CinC). I also examine the prehistory of the 1982-2000 Wall Street bull market.

The first data point on this chart is for $3,960 million dollars. In 1925 the United States of America only had $3.96 billion dollars in pocket change. That is after all what CinC is, the coins and paper dollars bills people use as money. In the 14-Feb-2005 issue of Barron's, CinC is reported to be $750,277 million dollars, or $750.27 billion dollars. For every dollar in circulation in 1925, there are now 187 dollars circulating in 2005.

So what?

I think the best way to explain what is happening to the dollar is for you to understand that your dollars are shares in a company called The United States of America - because that is exactly what a Federal Reserve Note (dollar) is. However there is a problem for America's little shareholders. The CEO and board members of The United States of America keep declaring stock splits but never inform the small share holders (that's you) about it. The big boys always keep the new shares {Federal Reserve Notes (dollars)} to themselves. As you can see, there has been a 187 to 1 stock split in the Federal Reserve Note (dollar) since 1925. No, the new shares in American have not been distributed to its rightful share holders, and they are much poorer for it, but yes the CEO and board members of the company called The United States of America are doing just fine. This happens with every currency managed by a central bank with the power to dictate interest rates. The Euro will not prove to be long term solution to anyone's dollar problems. The European Central Bank will see to that.

This would be a major scandal for any company whose shares traded on Wall Street whose management was discovered doing this. People have gone to jail for much less! But, we are talking about government, central banking and "monetary policy." The normal laws protecting people from thievery don't apply to the "policy makers" or to their "policies."

"Monetary policy" is taught in government funded Universities and colleges to undergraduates. Without "monetary policy" school loans of the tens of thousands of dollars per student per year would be impossible, and the universities know it. So for the institutions of higher leaning, what is there not to like about "monetary policy" if the "policy makers" give them a generous taste of the action. College administrators see nothing wrong in encouraging students to become burdened with enough debt in school loans that a house in a bad part of town could be purchased for a similar amount. In return for assuming a massive debt load, students are taught never to spend their own cash for major purchases when debt is so easily available. College level education teaches that "monetary policy" is a necessary service; a completely normal function that governments and central banks provide for a "modern capitalistic economy." A freshman in college will not pass his course in Econ 101 if they don't know that. But I disagree. People should avoid debt as best they can and save their money to buy the things they want. That goes for an education or a home. And central banking is a system of mendacity and thievery that has done more damage to all the little American shareholders, educated or not, than they know.

I want to offer some information in this article for your consideration, to show you that the effects of "policy" have been and will be detrimental not just to holders of US dollars, but to people who have traded their US dollars for shares traded in the American stock market.

The above chart records eighty years of history for the dividend yield of the Dow Jones Industrial Average. Above we see the Roaring 20's bull market; the depressing 30's bear market; two market events that were driven by "monetary policy." World War Two, the Cold War are also in the chart above, as is the current mania in the stock market. There is a lot of stock market history on display here.

For your information, bull markets can be identified in the above chart by the falling of the Dow's dividend yield from some point above the 6% line, down to the 3% dividend line. Bear markets can be seen with the rise in the Dow yield from 3% up to something above 6%. The higher and longer the Dow dividend raised above 6% in the above chart, the deeper the bear market. The 1932 Dow dividend record high of 10.38% was made at the very bottom of the Great Depression. What a horrible time that 10.38% Dow yield represents. The stock market was seen as poison in 1932 and there were damn few buyers to the many sellers in July 1932. But like it or not, when things really do get bad, the smart money comes into the market to buy the high dividend yielding stocks at greatly reduced prices. I would not blame you if you cut out this chart and taped it on to a wall. It might just help you to time your decision when to switch from gold investments back to common stocks in the years to come.

The one thing I want you to focus your attention on is the 3% Dow dividend line: look at it closely. From 1925 to 1987, when the Dow Jones dividend yield kissed that 3.00% yield line on this chart - the bull market was over. In 1929 the 3.00% Dow dividend was the kiss of death just before the Dow fell 89%. In 1961 the Dow dividend fell to a 2.99% yield and signaled the start of twenty one tedious years in stock market history. The Dow was mired in a trading range that only on a few occasions produced any significant retail investment demand. Dividends, or the lack of a good dividend, were important considerations forty years ago to investors.

As you see in the chart below, in twenty one years the Dow moved from a weekly closing price of 722 as recorded in the 14-Aug-1961 issue of Barron's to a weekly close of 788 in its 16-Aug-1982 issue. Only 9.06% in capital gains in 21 years - capital gains meaning more dollars out than dollars in. But the unavoidable consequence of "monetary policy" is that over time, all dollars are not created equal. Federal Reserve Notes (dollars) buy less over time. The reality is that the smaller $722 dollars in 1961, bought much more than larger $788 dollars could in 1982. Looking at the price of Barron's itself; in August of 1961 it cost $.35 an issue. Twenty one years later in August of 1982 the price of an issue of Barron's had risen to $1.00. With the exception of stocks purchased in the NYSE, I would expect that most goods and services priced in Federal Reserve Notes (dollars) experienced similar, or greater prices increases while wages and "investment" lagged behind.

Under the management of the US dollar by the Federal Reserve, and with the complete blessings of the US Government, Americans were then, and still are, just as likely to get taxed on their actual losses in the stock market as they are on their phantom gains. That is part of "monetary policy" too.

Today's investors don't understand how important a decent dividend is. A good dividend will become an important consideration for today's investors too. If the Dow and S&P don't soon return to a bullish upward trend, retail investor's frustration in the market will force them to sell as they did in the 1960's. Stocks have to do something to keep the attention of the retail investors. No dividends, no capital gains, no investors! Look at the above chart again. As we can see in the above chart from 1961 to 1982, unless someone was in a hot stock, they were assuming risks that had no potential for a consummate real return.

The below table gives the performance of various groups in the old Barron's Stock Averages and Currency in Circulation (CinC) during the 21 year period spanning from Aug 1961 to Aug 1982. Remember, the gains are from a 21 year, low dividend period and paid in a dollar whose purchasing power was constantly being eroded by "monetary policy." The losses are worse for that reason too. As you can see, only the gold mining companies and drug stocks exceeded CinC.

It is safe to say that any group that did not exceed CinC, but still showed an increase in its dollar amounts 21 years later, caused a very real lost in purchasing power for its investors. These phantom capital gains also produced tax revenue to the government on those very real losses. The drug group exceeded CinC by only a small margin, so after the payment of capital gains taxes, those people who invested in drugs would be lucky if they broke even. Only the gold mining shares produced a real after tax capital gain for their investors from 1961 to 1982. The above table spans a period I have noted for its low dividends and high CinC increases.

As the dividends forty four years ago were so small and capital losses after 1961 became as much a possibility as capital gains, whatever retail interest the market had in 1961 eventually lost interest and did not return for decades, much like gold and gold shares for the past 25 years. People forty years ago put their money in a bank or US Savings Bonds. So what happened in 1982 that changed the stock market that allowed the Dow dividend to sink well below the 3% line and stay there for over thirteen years?

From the start, the great bull market of 1982 to 2000 was a consequence of "monetary policy." I need to give a little history to explain the background of the current retail interest in the stock market.

Early in 1970, President Nixon had a television news conference to introduce the new Federal Reserve Chairman, Arthur F. Burns (Fed Chairman 01 Feb 1970 - 31 Jan 1978). Mr. Nixon was proud to have Mr. Burns chair the Federal Reserve as Mr. Burns promised to create lots of money and so make the economy expand and make people happy. That is almost a direct quote from Mr. Nixon. The president was only partially right. Mr. Burns, as you can see above, only succeeded in almost doubling M-1, but the economy suffered greatly from what he did. Difficult for people today to realize, who now associate loose monetary "policy" with lower interest rates, but this was not the case in the 1970's. See the following articles published in Barron's from this period. There are more, but these are the ones I noted.

Here as some old Barron's articles on banking and inflation.

The Burns administration of the Federal Reserve proves that the Fed is not all powerful if the markets using its Federal Reserve Notes (dollars) refuse to cooperate, as they did in the 1960's and 70's.

Mr. Burn's expertise in "monetary policy" murdered the $.05 "Nickel Hershey Bar", annihilated the $.15 cent McDonald's hamburger, torched the $.25 gallon of gasoline and the Cent Sign on keyboards everywhere became extinct. As you can see, I had to use the $ sign to write about things that use to cost pennies - thank you Mr. Burns and your fellow "policy makers!" Before he was done, the $8.00 an hour wage went from providing a comfortable living for entry level skilled labor, to pay below the poverty line for unskilled labor. Prices were rising, gold and silver were climbing, and the dollar was having problems with payments for goods and services in Europe. Strange to think that slightly less than a doubling in a little line labeled as "M-1" would create such horrible consequences, but it did. There is more to learn from this chart.

After Burns resigned, Mr. G. William Miller was Chair at the Fed for the next 17 months, but not much changed. Then Paul Volcker (Fed Chair 06-Aug-1979 to 11-Aug-1987) became Chair on the Federal Reserve. With the "reserve currency" in dire straights Mr. Volcker took action. The action he took is clearly visible on my chart of M-1. The money supply stopped increasing and interest rates soared. The resulting high interest rates were very stressful on everyone, including then President Carter, who I am sure in part blames his losing the 1980 election to Paul Volcker. He would be correct in doing so. But in defense of Mr. Volcker, he really had no choice if the Federal Reserve was to keep the "reserve currency status" for the Federal Reserve Note (dollar) he was managing.

The over twenty percent prime interest rates produced a foul tempered electorate looking for revenge and all eyes were on the current President during the 1980's presidential election. Remarkably, for some reason the recession and high interest rates were never properly pointed at the Federal Reserve by even the outgoing President Carter who took the rap for Volcker. Soon to be President Reagan never lost an opportunity to blame Carter for the economic problems of the late 70ies. Before Alan Greenspan, "monetary policy makers", like mafia godfathers, wisely never sought "Rock Star" status.

From the start of his Chairmanship at the Fed in August of 79 to the first week of January 1982, Mr.Volcker kept his foot on the monetary brake pedal. This killed all inflationary expectation in the prices of goods and services.

But then in the second week of January 1982 - M-1 increased by 86 billion dollars as reported in Barron's. That was an increase in M-1 of an incredible 23% in just one week! Look at the chart or check out my figures in those old issues of Barron's. An increase in M-1 of an incredible 23% in just one week!

This is some serious "policy making!"

Unlike the increase in the money supply during the Burns era, where more money before January 1982 made things like food, fuel and rent more expensive and thus made more people feel more poorer. The increase in more money starting with Volcker era and continuing with Greenspan was destined to go into financial assets. This included bonds, stocks and even single family American mortgages packaged by Fannie Mae and Freddie Mac. So more money after January 1982 made more people feel more richer. More, more, more money has been the "policy" since the Federal Reserve was created. But it was during the administration of the Federal Reserve by Burns and then Volcker that the worlds markets were beginning to rebel against "monetary policy."

The Dow started its bull run to over 11,000 in August of 1982. It now had a dividend yield of +7.00%. The Prime Interest Rate started to drop in October of 1982 and US Treasury bonds had a current yield of over 14%, they were the buy of the 20th century. Twenty three years ago, only the brave were willing to buy US long term debt as they were perceived to be questionable bonds paying junk yields. A 14% current yield on any bond is a junk bond, AAA rated or not.

I don't think any of the above was planned that way by either Burns or Volcker. Burns never intended to manage the Federal Reserve Note (dollar) so poorly that it would be refused in Europe. Volcker never intended to start the events that would someday drive DJIA to over 11,000 where it would only yield 1.30%.

But like little children let loose in an Enron owned and operated power plant's boiler room, "policy makers" would turn this valve, throw that switch and then see what would happen. This is the core discipline in the science of "monetary policy" - let's do this and then see what happens! Eventually we all find out and then run the sitting president out of office. If the Fed really could target where the money they create would go, or craft events so that all outcomes were beneficial, you can be sure that Arthur Burns could have started a bull market like Paul Volcker gets credit for. But he did not because it could not. Mr. Burns opened the monetary spigot and all hell broke loose. Mr. Volcker closed and then opened the same monetary spigot that Mr. Burns did, but he was just damn lucky that events turned his way.

Mr. Volcker left the Fed on 11-Aug-1987, the same day that Mr. Greenspan took over "monetary policy." Mr. Volcker's timing for his retirement from the Fed could not have been better. Now go and look at the Dow Dividend Chart again. In the 23-Feb-87 issue of Barron's, the Dow Dividend hit the bull market line of death of 3.00%. For the next six months the Dow dividend yield would continue to fall until it reached a 62 year record low of 2.52% just days after Alan Greenspan took over the Fed. About seventy days after Volcker left the Fed, the NYSE had the "Crash of 87" where daily drops in the prices of shares in October 1987 exceeded the worse days in the Crash of 29! The Crash of 87 was a trauma from Asia to Europe.

Ted Koppel of ABC News had a special with Kermit the Frog and Miss Piggy to explain what had happen. I'm not kidding you! ABC News used Kermit and Miss Piggy to explain the Crash of 87 on an ABC News 8PM Prime Time Special. Miss Piggy was scared, but Kermit, always the brave frog, assured her that all was well. That people don't remember the Crash of 87 only goes to show that the great lesson of history is ---I forget. Now back to my line of thought on dividend yields.

In the Autumn of 1987, the Dow dividend started a rise in yields that should have continued to somewhere over 6.00%. The Dow dividend was never allowed to fully correct as the Greenspan Fed drown the financial market with "liquidity." I think that Mr. Greenspan should give thanks to the inertia that the Volcker Fed had created - where the Fed's new money was flowing into the financial markets instead of food, fuel and rent. I believe that had Mr. Greenspan followed Mr. Burns he would not have stayed at the Fed for eighteen years.

Now in 2005, the Dow has been paying bubble dividend yields for an unbelievable 13 years; 1992 to present. Looking at my chart showing eighty years of Dow dividend yields, you can clearly see when Mr. Greenspan became chair at the Federal Reserve. The bottom in the Dow dividend yield during this stock market bubble can be found in the same issue that records the Dow's record high weekly closing price, the 17-Jan-2000 issue of Barron's. This issue of Barron's records the Dow dividend at an incredible 1.30% and the DJIA at 11,722.98. Five years later the Dow is approaching its old highs, but with the current dividend of only about 2.25% there just can't be that much upside in the stock market these days.

As in the early 1960's, stocks are not spinning off much in the way of income to shareholders and current retail investor's expectations of double digit capital gains are fading. One day the retail investor's expectations of what they will get in capital gains will fall in line with historical reality of low Dow dividend periods of the stock market. There is coming a time when investors are going to start leaving the market. Panic selling should be expected in the months or years to come as the Dow approaches the +6.00% dividend line.

Reasonable people following the financial markets know that US interest rates are going much higher in the years to come. Interest income from debt is going to attract the attention of people now in the stock market. Also, market history strongly suggests that gold will gather a much wider following than it presently has. I would avoid any investment in shares except for unhedged companies mining precious metals. Look at my table above showing the relative performance of the Barron's Stock Groups from 1961 to 1982 where gold mining was the only stock sector that clearly beat CinC inflation. I see compelling reasons for gold and gold shares to outperform the market again for a long period of time.

How far can the Dow fall?

Lines 1-4 in the above table are based upon the DJIA (Dow) being able to maintain its current payout of $241. Each line shows how far the DJIA would have to fall in price to yield the given dividend. Line 4 gives us the DJIA at the highest dividend yield during the Great Depression in July 1932; remember this value of the DJIA assumes that the current DJIA's payout is not reduced.

Below is a chart showing what happened to the DJIA's dividend payout during the Great Depression's bear market. During the 1929-32 bear market, the dividend payout of the DJIA dropped by 80%.

Line 5 in the above table shows what would happen to the DJIA if its current dividend payout dropped 80% as it did 73 years ago.

Line 6 is not a prediction of what the DJIA could actually fall to, but rather a comparison of what the $464 of DJIA in 2005 would buy in 1929 dollars. I divided the dividend payout on line 5 by 187 to bring these 2005 dollars in line with the 1929 dollar. Remember there are 187, 2005 dollars for every one 1929 dollars. I understand that this is not a precise comparison in value of the 1929 dollar to the 2005 dollar. But doing this produces a more realistic understanding of what "monetary policy" has done to the dollar in the 92 years since the US Congress created the Federal Reserve System. I am not someone that is going to pretend that a 2005 dollar is worth as much as a 1929 dollar. The 31-July-1939 issue of Barron's has an ad for a 1.5 ton Dodge truck selling for $825 dollars. Dodge 1.5 ton trucks cost a little more than that these days.