As mentioned previously, QE announcements in Europe and America sent stock prices soaring. The 15-51 strength Indicator posted another new all-time high, closing over 70,000 points for the first time in its history. The same news pushed the Dow Jones Industrial Average over the action zone high, and officially into a territory known as irrational exuberance. The Average ended the week at 13,594, some 600 points off its all-time high of 14,165; a value it hasn’t seen since October 9, 2007.
Remember back then, there was a bona fide boom going on (the housing boom) and was on its way to going bust. Today, no such boom exists – unless, of course, one considers the rise in national debt, the expansion of the money supply, and “market” prices.
And that, my friends, is the problem. This “market rally” we are experiencing is called an inflation driven rally – a national boom in debt, along with a fiscal and monetary crisis. That’s why so many people don’t feel the “recovery” – because they’re not involved in it. Real recovery, simply, hasn’t yet happened.
Once again, the Dow hit its all-time high on October 9, 2007 – at 14,165 points. How can real recovery occur without first attaining this prior milestone? And further, doesn’t the term recovery insinuate that prior high-water marks are not only attained – but held and built upon?
There are some pundits calling this Dow rally as “the greatest 100% gain in market history.” These people, I assure you, are too smart for their own good. Look at the chart below.
The beginning scaling point of this chart is the DJIA’s all-time high. From there each indicator runs it own course. As you can see since then, the Dow has been unable to produce market returns – as GDP has consistently outperformed it. That might be one reason Dow Jones announced that they are replacing Kraft Foods with United Healthcare in its Industrial Average. (It represents just another great Market move by them, in a long and illustrious career.)
However, with or without that change, the Dow continues to provide accurate market indication. In the chart above, the Dow has been indicating recession since the 2008 Crash and confirms what many of us feel – there has been no recovery.
Call me crazy, but recovery can only be confirmed once the Dow leads GDP up, which in Nominal terms, is a valuation greater than 15,638 (shown above). Again, during an economic expansion the Dow should reach its prior high and then consistently build upon it. But the above chart illustrates anything but that case. In fact, the Dow looks scared to approach that level – unlike stock market strength and gold.
The reason for this is simple: worldwide Market conditions stink.
During inflationary times, like these, commodities (i.e. food, oil, and gold) rise in price at abnormal rates and steal spending dollars from other parts of the economy. That’s why tepid economic growth usually accompanies inflationary periods – because volatile prices stunt Real growth. And sooner or later, “the market” catches up with reality and corrections occur, and sometimes, markets crash like in 2008.
Now is a time for vigilance.
I would be remiss without mentioning the assassinations of four American patriots, including U.S. Ambassador Christopher Stevens, in Libya this week. My condolences to the family and friends of the fallen, in what has turned out to be a clash between civilization and barbaria.
War and political unrest is not good for markets, morale, and prosperity – and right now the Middle East is rife with it. These crashing markets will further pressure currencies, oil, and other commodity prices. Global economies are sliding into recession, and Europe’s financial condition is worsening. Don’t be misled.
During hostile markets investors reduce their risk tolerances by nature, even if the move is subconscious. A flight to quality (increased demand) in stronger stocks causes abnormal inflation in those stocks (due to their shortening supply), which can be seen in every chart with the 15-51i in it.
QE driven irrational exuberance is one thing. Real Market growth is entirely another.
There’s no reason to be confused what the stock market is telling us right now. In the last twelve months, the Average is up 22%, strength has gained 58%, and gold is down – yes, down – 6%. Here’s the year-to-date picture.
At these levels stocks are extremely over-valued, “the market” is hopeful, and gold is waiting for the other shoe to drop.