The Constant Dollar Dow and the Illusionary Bull Market

Work grew boring; I took a break and watched about ten minutes of CNBC market coverage. I walked back to my cube understanding why the Cialis bottle has a warning about erections lasting longer than four hours. They had a big, giant odometer graphic on their screen with 10,000.xx in lurid, red numbers. It was the most important earnings season in YEARS!!!! They loudly announced.

This overblown hyperbole offers just another example of the American Media seeing the world as the world is not. Tyler Durden at Zerohedge.com patiently explains why the children at CNBC badly need a few minutes of time out rather than recess.

On a real basis (not nominal) the Dow at 10,000 ten years ago is equivalent to 7,537 today!

This means that if you pick a year, present the DJIA in constant dollars and compare across the years, the DJIA has fallen from 12,000 in 2000 to 7,537 today. So, if you start out in 2000, stick $10,000 in a fund that tracks the DJIA and check back in this AM… Pffffttth!!!! (Sound effect of horrified investor spitting coffee on computer screen). That leaves $6,280 of your American Dream.

Just to really twist the knife a wee tad, Durden shows us another happy chart to make our days. The DowGold Index reflects the number of troy ounces of gold to buy an index share of DJIA. In 2000, this price was 40oz. Today the price is 10oz. You can do the $10K math, while I wipe off the computer screen before my boss gets back.

David Goldman (AKA Spengler) explains why this surge in Gold is an ominous sign. In his post “Gold a Hedge and No More – Yet” he examines some of the disadvantages of Gold-bugging.

Even a rather wobbly reserve currency is a better asset than gold, whose price again crossed the US$1,000 mark last week. Gold is far less liquid than US Treasury securities, costly to store and insure, and above all far more volatile in price. Gold’s price volatility since January 2000 (the standard deviation of the daily price divided by the average) is 45%, almost triple that of the US dollar-euro exchange rate.

Spengler’s charts show that the price of gold divided by the US Consumer Price Index has gone from about 1.5 times CPI on or right before 9/11/01 to nearly 4.5 CPI. This means that the value of gold has increased dramatically compared to the prices of things that Americans typically buy. People simply do not trust the USD as much as they used to.

Then he compares gold Vs USD to foreign currencies Vs USD. The Euro has gained somewhat in comparison to the USD since 2000. The 40% appreciation over a decade suggests a gain of 3.4% per year. The Yen has treaded water. Gold has appreciated 250% since 1 Jan 2000.

All of this leaves me wondering exactly what DOW 10,000!!! actually means. Bench-marked against gold, not bloody much. We plow through one more thicket of arithmetic to strip this to the nub.

The charts at Zerohedge.com show the DJIA is at 25% of its 2000 value in terms of gold. The DJIA is at 63% of its value in terms of Year 2000 Constant Dollars. If Gold is considered a valued object of last reserve, this equals just about the 250% figure Spengler quotes in the post referenced above.

The USD has steadily hemorrhaged value against other standards of comparison. This is the only reason the Dow is anywhere near 10,000. Just think what it would look like expressed in Zimbabwean Dollars. Cramer couldn’t wait to buy! Buy! Buy!

So the financial reporters celebrate the skyrocketing DJIA. Politicians tell us the recovery is in full swing. In apposition to the official propaganda erupting from the TV screens, wise, experienced people quietly fill their vaults with gold. They could be buying the DJIA instead, but trade volume suggests they are not.

It’s a reason for the prudent man to worry but not panic. Panic time comes when the Peter Lynches of the world quietly buy survival gear and lots of canned food. In the meantime, anything Cramer tries to sell you is a screaming buy. Your eviscerated dollars won’t buy you a heck of a lot else.