Glorious Rally, Bounce, or Dangerous Crack-up Boom?
The lead in to triskaidekaphobia had nothing on the market yesterday with the Dow pounding out a wonderful 283 point gain. Emails from euphoric bulls are again crowding the inbox this morning as the jubilation continues almost non-stop. "Good Times are here! You're missing the boat!" seems to be the common thread.
Well, that may be, but again, I'd like to inject just a touch of reality - the purchasing power parity of the Dow. I've said it before, but at times like this it's worth repeating, that on a purchasing power basis the Dow is not yet back to where it was in 2000. Purchasing Power Parity is a simple enough concept. It's like denominating stocks (or anything else) not in terms of paper (which has suffered severe purchasing power erosion due to inflation), but in terms of loaves of bread, pounds of butter, or other real goods.
The easiest way to figure what the Dow needs to do in order to achieve in order to reach purchasing power parity with 2000 is to take the link to the Federal Reserve inflation calculator (in the left menu) and put in 11,723 for a starting value in the year 2000 and put in 2007 for an end date. By the Fed's calculator of inflation, that means the Dow would have to hit 13,989.99 in order to buy as many loaves of bread today as a "Dow's worth of money" would buy in 2000.
But wait! Does this pass the 'reasonableness test'? If you put in 2006 for a start and 2007 for an end date, you'll see the Fed calculator presents you with 1.93 of change -- in other words, the Fed calculator uses a 1.9% inflation rate for that year.
The problem is, of course, that the Federal Reserve inflation number is highly suspect. John Williams' highly respected "Shadow Government Statistics" has a dandy little chart here that shows annual consumer inflation has been running an average over 9% since 2000, while the government figures for the period average about 3 1/2 percent. You'll also notice that the inflation rate has been supported by a massive increase in M-3, the broadest measure of the money supply at recent annual rates in excess of 12% annualized.
This brings to the fore two hugely important investor questions you need to ask yourself. The first is this: If the actual inflation reported by the government guides us to look at a current Dow of 13,989.99 would be necessary to just equal the 2000 level, then what would an actual consumer inflation at two-and-a-half times that level imply?
It's always dangerous for me to set about working with a calculator too early in the day, so I'll keep in incredibly simple: 13,989.99 minus 11,723 means the Dow has to rise 2,267 points over the period under the government figures. But a rise of 2 1/2 times that would mean a rise of (2,267*2.5) or 5,667.50 points.
That would put the consumer inflation adjusted Dow at 17,390.50 to equal consumer purchasing power of 2000!
Now please, don't go calling me a bear, and don't waste your time writing in about dividends (as they had those in 2000, too). The point I am making is that a dollar doesn't buy a dollars worth of anything any more. As if to underscore that very point, I'd offer that the Dollar has just hit new lows against the Euro and a market basket of other world currencies.
This may seem like a terribly 'bearish' perspective, but again, I'd offer that looking at investments on a constant-dollar basis is neither bullish nor bearish - it simply reflects one additional level of analysis in an amazingly complex financial world. Would you rather have what $1.00 would have bought in 1913 before the bankers took over money, or what $1.00 buys today? The purchasing power of a dollar in 1913 would cost $20.76 today by the Federal Reserve calculator which underscores the point. A dollar is worth 4.816955 cents compared to 1913.
Not that I'm alone is this view. My friend Michael Nystrom over at BullnotBull has a dandy article on Bubble Morphology, which as I pointed out yesterday, has market's valuing the Dow like an apartment building in a period of high inflation, rather than a cash-flow producing device.
I expect few people to agree with this outlook, so you can take your pick of three ways of looking at it:
The Dow is at a new all-time high and inflation be damned. (You're a bull)
The Dow is at a 99.1% retracement/double top on a government statistics basis. (You're a realist)
The Dow is at a 79.7% retracement level basis actual consumer inflation. (You're wtaching for an 80% retracement to complete the move?)
Reader Question
A good question from a reader today:
"Dear George,
How does one square peak oil with the coming Trans-Texas Corridor, a four football fields wide car, truck, train pathway? Where is the oil going to come from to support all that happy motoring in our energy scarce future? Do the TPTB know something the rest of don't in terms of a new energy source or will only the privileged elite have access to gasoline and diesel fuel? Restrictions on travel he we come?"
Dear Reader: This underscores two harsh realities: The first is that brains are not evenly distributed throughout the Universe. If they were, the cognoscenti would have noted that yes, the price of oil is over $76 and likely to remain north of $70 until we get a 'good' depression.
However, Mexico is setting up to implode and the decline of their massive Cantarell oil field, along with guerilla attacks on energy supplies, will eventually force all but a small portion of the population to move elsewhere.
Meanwhile, a few people in Canada are coming to the realization that they're about to be annexed (which shows the future value of trees and tar sands) into the USA-Mexico under the SPP / ,deep integration agenda of the NAFTA/Corporate elite which are trying to 'cost reduce' the middle class out of existence.
Of course that's going to happen anyway. The American consumer is already tapped out - and people who are surprised by the "surprise decline" in retail sales released this morning, just aren't paying attention to their own checking accounts or prices at the store.
So as the leaders of Mexico, the US, and Canada meet next up north (guarded by the US Army in Canada, which will be a treat to see) there will be little or no LameStreamMedia coverage for reasons having to do with corporate agendas, as much as anything I expect.
But, if SPP and oil don't get us, there are still $50 billion of adjustable rate mortgages resetting to largely unaffordable levels come October - say bye bye Alt-A -which will force more homeowners into foreclosure. And, on top of that, don't forget that the Alternative Minimum Tax creep will arrive to bite this year. Thank the Republicorps for that one, too.
There, aren't you glad you asked?
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