The Dow Is Crashing!
On October 4th 2006, the Dow broke its old high of 11,750 set back on January 14th 2000, and from then on all you heard from the financial press was "Dow sets a new, all time, record high"… at least that's all you heard until the correction on February 27th, 2007.
I just don't get it. How can anyone at this point in time (including the financial press) believe they are actually making gains being invested in general equities? On February 20th, the Dow hit its "brand new, all time, record high" of 12,795, and at the writing of this article hovers at 12,560, 6.9% above its 2000 high.
A 6.9% gain over the entire 7-year period… hasn't anyone heard of inflation? Don't investors know that if their portfolio doesn't outpace inflation they are actually losing ground?
The Dow is actually crashing, but if you have not yet educated yourself on the insidious ravages that inflation can have on your portfolio, you can't see it. This is a blind spot investors must be mindful of, and guard against, if they are to prosper.
Anytime that it looks like everything is going up, stocks, bonds, real estate, commodities, and virtually every kind of investment there is, you have to stop and ask yourself, "why?" The only reason the Dow looks like it is going up is because the Fed has pumped so many more dollars into the currency supply, that all asset classes are rising.
Under these conditions, the only way to see where true value lies is to eliminate the dollar from the equation… you have to measure each asset class, not with the dollar, but against another asset class.
Now here's the story in pictures that proves beyond a shadow of a doubt that the stock markets are crashing. You’ve heard the saying "one picture is worth a thousand words". Well, one chart is worth a million numbers, because a chart is simply a picture of at least two sets of numbers, in this case, the price of an item and the date that the item was at that price. Later, I use charts that are a picture of three sets of numbers, the date and the price of one item, divided into the price of another item. These "ratio" charts are my favorites because they reveal true value, and the true direction something is headed. I love charts.
So to get a picture of what's going on with stocks, I took the Dow as a proxy for stocks and measured it against everything else I could possibly think of. To do this I took the Dow and divided it into the price of the other asset I am measuring it against. If the Dow is rising faster than the investment I am measuring it with, the chart will be rising. If the investment that I am measuring the Dow with is rising faster than the Dow, then the chart will be falling.
When I say buy or sell the Dow in this article, I'm just talking about value. I know that you can't actually buy or sell a share of the Dow. If you want to do that, you've got to use the Dow ETF (exchange traded fund) known as the Diamonds (stock symbol DIA)… In my opinion however, it's not a very good idea right now.
Here's the Dow Jones Industrial Average the way you're used to seeing it. It appears to have gone up because it is measured in dollars. However, it's up in price only… not value! And now I'll prove it with the following charts.
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