A New Dow High?

While the global bond markets have begun to correct their 35 year bull market, the major U.S. stock indices, including the Dow, NASDAQ, Russell and S&P, have rallied nicely.

Official U. S. national debt is approximately $20 trillion as of December 2016, and has approximately doubled every 8 years at a 9% compounded rate for over a century.

       Year         Official Debt

2016          $20 trillion

2024          $40 trillion

2032          $80 trillion

2040        $160 trillion     (What Could Go Wrong?)

DEBT HIGHER – S&P HIGHER

Examine this 27 year graph of official national debt and the S&P 500 index, both on log scales. They increase together. Debt increases, more dollars surge through the economy and those dollars are plugged into stocks, bonds, and higher consumer prices.

Examine this three decade chart of crude oil on a log scale. Prices increase exponentially and are near the bottom of the range as drawn.

Examine this three decade chart of gold on a log scale. Prices increase exponentially and are near the bottom of the range as drawn.

Examine this three decade chart of the ratio of the Dow to Crude Oil. The ratio is near the high end of the range. A correction back to the lower trend channel suggests higher crude oil prices and/or lower Dow. Because the U.S. stock market is overvalued by any number of measures involving price, earnings, book value, ratio to GDP and more, my expectation is the Dow will decline in 2017.

Read: The Jaws of Life: The Most Hated Bull Market In History

Read: VIX and Stocks Surge

Read: NYSE Margin Debt

Read: Dow is Most Overbought in Over 20 Years

Read: The Second-Most Overbought Market Since 1980

Read: SPX Chart is Flashing Red!

Examine this 100 year chart of the ratio of the Dow to gold. Global debt growth is outrageous and clearly out of control, central banks overtly encourage consumer price inflation, bond monetization and QE have become normal, the Dow sits at all-time highs and gold has fallen 40% from its highs.  The reasonable expectation is the price of gold will rally substantially, and probably the Dow will correct in 2017.

CONCLUSIONS:

  • U.S. stock markets are making new highs regularly even though bonds are falling. Expect a substantial correction.
  • Central banks hate to see stocks and bonds falling. Expect more QE.
  • Central banks do not want higher gold prices but the coming financial crisis will focus their worries elsewhere. Expect gold to rise much higher depending on the degree of fiscal and monetary craziness, debt growth and QE “money printing.”

DISCLOSURE (sarcasm):

This article was not influenced by supposed Russian hackers, CIA leaks, John Podesta emails, or “fake news” reported by the NY Times or Zerohedge about democrats, republicans, HRC or Trump.

Read Karl Denninger on Russian Hacking

 

Gary Christenson

The Deviant Investor

6 thoughts on “A New Dow High?

  1. As is the case with ManAboutDallas, I remember the long wait for the Dow to make the “sure thing” level of 1000.

    I was “lucky” enough to have started “investing” in 1967 with a few thousand dollars and absolutely no idea of what I was doing. The tutorial in market reality was expensive in terms of net worth, but immensely valuable in lessons learned about what not to do and whose “authoritative” statements not to believe. But sometime around 1968, by sheer luck I found a copy of Security Analysis by Graham and Dodd, being remaindered for 35¢ at an Ann Arbor Public Library book sale. On first reading I somehow realized that it was the “right stuff” (the “somehow” is because I was completing a doctorate as an evolutionary biologist and had no business background). While everyone was waiting for Dow 1000 to come, simple principles of value investing made it possible to make and compound profits from a small starting base.

    By the way, a non-trivial part of those compounded profits came from buying gold at $35 to $42 per ounce when Nixon closed the gold window in 1971. Those purchases were turned into roughly 15X profits within much less than a decade.
    I don’t know if the multiplier on gold and silver, and their miners, will be as high this time around, but the positive possibility there appears higher than that on waiting for the Dow to hit some round number. Using the term loosely, shorts (i.e. negative hedges, not literal shorts) make up a large portion of our holdings at this time.
    Robert B. Eckhardt


  2. Gary-

    This elegantly and lengthily argued piece by Jim Grant strongly supports the thesis that you have developed here:
    http://www.zerohedge.com/news/2016-12-27/things-make-you-go-hmm-death-petrodollar-and-what-comes-after

    And this decision by the Shanghai Gold Exchange should tend to blunt middle-of-the-night dumps:
    http://www.kitco.com/news/2016-12-28/Shanghai-Gold-Exchange-cuts-transaction-size-to-limit-price-moves.html

    In a time when markets as traditionally defined no longer exist, one cannot predict a top for the Dow. But one can buy SDOW (or similar hedges) incrementally as the party continues until someone barfs in the punch bowl.

    In the meantime, Toshiba will prove to be not the only company to revise its reported earnings more in keeping with past reality.

    For my own part, I cannot see any reason not to keep buying in the face of any further gold price drops. I tend to be motivated by rational exuberance.

    Robert B. Eckhardt



  3. They’re laying the same trap at Dow 20,000 that they laid at Dow 1,000 back in late 1972. Consult any chart of the Dow for 1973-1974 to remind yourself of what happened next. Prepare for 20x the pain this time.


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