Beware The Dow Jones Nominal Record High

Euphoria in the stock market. The reason is obviously this gigantic move in the US stock indexes, mainly the Dow Jones Industrials Index, breaking into historically record high territory. Let’s quickly refresh our memories:

  • In 2000, the Dow Jones peaked at 11,722.90
  • The index crashed to 7,286.27 two years and a half later
  • It started a rally to peak at 14,164.53 in the summer of 2007
  • It crashed to 6.547,05 in March of 2009
  • Today it touched its highest nominal value ever: 14,320

Enough reasons to think that the risks of an economic crisis are ” passé, ” correct? Not so fast, there are a couple of things to consider here. Let’s look at what is happening from several points of view.

First, we stressed the word ” nominal ” several times. Although the official figures only reveal “mild” and “healthy” inflation, in line with the objectives of the central bank (in this case the US, but it applies to Europe as well), it is worth looking at the Dow Jones index with another denominator. Every human being that is willing and prepared to use its precious brains and common sense logic knows from daily life that relevant price inflation is much higher than 2%. What was the price of the same shopping cart in the grocery store or at the gas station 5 years ago? The answer is more than obvious. So what matters for people is an objective measure. Therefore let’s use cereals and bakery goods as a measure for the Dow Jones. Chart courtesy: Bullionvault.


The Dow Jones is nowhere near its highs. In a similar fashion, it is worth looking at the Dow Jones priced in gold.


Record high? Which one? Within this long term downward spiral, there is indeed some sort of relief. Was September 2011 the final bottom of the downward trend? Nobody knows, but let’s look for further evidence for some clues on the answer.

Second, what is the macro-economic point of view revealing? Zerohedge posted a comparison of key macro-economic indicators: the Dow Jones peak of 2007 vs today. The figures are US based.

  • Regular Gas Price: Then $2.75; Now $3.73
  • GDP Growth: Then +2.5%; Now +1.6%
  • Americans Unemployed (in Labor Force): Then 6.7 million; Now 13.2 million
  • Americans On Food Stamps: Then 26.9 million; Now 47.69 million
  • Size of Fed’s Balance Sheet: Then $0.89 trillion; Now $3.01 trillion
  • US Debt as a Percentage of GDP: Then ~38%; Now 74.2%
  • US Deficit (LTM): Then $97 billion; Now $975.6 billion
  • Total US Debt Oustanding: Then $9.008 trillion; Now $16.43 trillion
  • US Household Debt: Then $13.5 trillion; Now 12.87 trillion
  • 10 Year Treasury Yield: Then 4.64%; Now 1.89%

Dow Jones peaking because of an economic recovery? Which one?

Third, what is happening in people’s mindset. As Zerohedge wrote in the same article, the consumer confidence index stood at 99.5 in 2007 while it stands now at 69.6. Moreover, Wolf Richter from writes:

“Americans across the board think that the economic outlook is grim,” the report explained, pointing out that 59% of Americans, given their declining real wages, if any, think that the US is already in a recession — readings that “haven’t changed much in recent months.”

Could it be then that the stock market (always 6 months ahead of the economy) is simply forecasting a recovery? Could it be that the declining dollar gold price is confirming that forecast? Never say never. Although we have some golden balls over here at Gold Silver Worlds, we do not have any crystal ball. Still it seems unlikely that the recovery is for real, given the unprecedented credit expansion. The creation of inflated asset bubbles is more likely.

With the assumption that the monetary inflation will result in price inflation of one or several assets in the (near) future, we thought it was interesting to take history as a guide. The following two charts go back to the Weimar hyperinflationary period from the 1920’s. The message here is not that we are convinced that hyperinflation will hit, although our assumption remains that at least runaway inflation is very likely (if our political leaders that their current course).

The first chart shows that the German stock market was rising right before runaway inflation started. As we all know, Germany had an unprecedented credit expansion during and after the world war, to finance the war itself and the recovery afterwards. Chart courtesy: Business Insider.


In the period before the exponential phase of inflation started, the gold price was rather stable after a strong increase in the year before. It remained stable for more than a year. Chart courtesy: Casey Research.


There are differences with today’s situation. The globally interconnected economy and the world reserve currency are fundamentally different now vs then. The main message of the comparison, however, is this: monetary inflation results in price inflation and currency erosion. It starts slowly and is not visible for a long period of time; it accelerates and gets out of control “out of a sudden.”

One last insight is worth sharing. The US will need to decide on its debt ceiling in the very near term. The signals point to a continuation of the easy solution: more debt as a solution for increasing deficits. While there is a one-to-one correlation between the gold price and the debt ceiling, it should be noted in most cases a correction in the gold price occurs first. In almost all instances in the past 12 years, the gold price rises at an accelerated rate after the debt ceiling was increased. Chart courtesy: Goldchartsrus.


Do you have another opinion? Or do you want to add an additional insight? We are happy to see your comment(s) appear in the Disqus section below!

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