Twice as High, Exactly as Expected

by JDH on March 9, 2013

I will keep my comments brief today, because I have said it all before, and because here in Ontario the schools are starting “March Break”, so all children from kindergarten to grade 12 get a week off, so I will too. If you want the specifics, you can read my comments last week on How to play the coming (short term) collapse in gold.

The salient point, according to the media, is that the DOW has made an all time high. The chart proves it:


In nominal terms, the Dow is, in fact, at an all time high. However, if you go the the Federal Reserve Bank of Minneapolis Inflation Calculator and punch in Friday’s closing Dow level of 14,329, you will discover that in 2008 adjusted dollars that level equates to 15,641. So, to be achieve a real new high, the Dow needs to rise another 1,300 points, or over 9% (assuming you believe government inflation numbers).

A more accurate picture, I believe, was contained in an article on ZeroHedge documenting the Last Time the Dow Was Here, and I believe it is instructive (which is why I tweeted it). To quote:

With CNBC now lost for countdown-able targets (though 20,000 is so close), we leave it to none other than Jim Cramer, quoting Stanley Druckenmiller, to sum up where we stand (oh and the following list of remarkable then-and-now macro, micro, and market variables), namely that “we all know it’s going to end badly, but in the meantime we can make some money” – ZH translation: “just make sure to sell ahead of everyone else”, just like everyone sold ahead of everyone else on October 11th 2007, the last time stocks were here…

  • Dow Jones Industrial Average: Then 14164.5; Now 14164.5
  • 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 Outsanding: Then $9.008 trillion; Now $16.43 trillion
  • US Household Debt: Then $13.5 trillion; Now 12.87 trillion
  • Labor Force Participation Rate: Then 65.8%; Now 63.6%
  • Consumer Confidence: Then 99.5; Now 69.6
  • S&P Rating of the US: Then AAA; Now AA+
  • VIX: Then 17.5%; Now 14%
  • 10 Year Treasury Yield: Then 4.64%; Now 1.89%
  • USDJPY: Then 117; Now 93
  • EURUSD: Then 1.4145; Now 1.3050
  • Gold: Then $748; Now $1583
  • NYSE Average LTM Volume (per day): Then 1.3 billion shares; Now 545 million shares

Sorry for the plagiarism, but the point is clear: the economy is in significantly worse shape now than the last time we made a new high, and since that ended with the 2008 crash, how bad will this crash be?

True unemployment is almost double the last time; Fed debt is three times as high; almost twice as many Americans on food stamps. Those statistics do not bode well for the economy.

So why is gold in the dumper?

It’s not; the price of gold is twice as high as it was at the last peak, exactly as expected. Unemployment/debt twice as high, so gold is twice as high. Exactly as expected.

Yes, in the short term it looks weak, but so be it. It’s temporary, so we’ll ride it out. I realize I may be “riding it out” for a year, or two, but that’s fine; we know the inevitable result.

Thanks for reading my brief remarks; perhaps I will be more verbose next week.