Many respected commentators are heralding the recent "euphoric" Dow rally and
historic highs as the prelude to a "Goldilocks" economy.
Goldilocks is wearing a wig! In reality, she is not as good as she looks.
Let's peel the onion on the Dow Jones' record high.
If you believe the media spin, you may believe that the Dow has reached a new
high.
Story Continues Below
You're in for a shock — a really gigantic shock when you talk in terms of
"real" money!
Don't Believe the Hype
Most of us tend to believe published statistics. So a Dow that has risen to
12,118 (Oct. 23, 2006), up 13.2% this year, is a notable rise.
But remember — the Dow is only up only 3.1% from its previous peak of 11,750
(January 2000) almost seven years ago. Put another way, that's an average of
only 0.5% a year since it previous peak in 2000. (See Fig. 1 below.)
In fact, short-term Treasuries have outperformed the Dow comfortably over the
past five years — so much for boring old Treasuries.
This somewhat sobering realization is only part of the problem.
Imagine how little the average Dow return has yielded when discounted for
inflation, let alone tax.
If the Dow simply kept up with CPI inflation, it would be at some 14,000.
(And remember, that's official CPI. As we at MoneyNews and Financial
Intelligence Report have alleged, the CPI understates the "true" rate of
inflation.)
Editor's Note: Inflation is even higher than the government reports.
To read more about the government's manipulation of inflation data, check out
our report, "The Inflation Lie."
Go here now.
'Stealth Inflation' Trumps All
Taking "stealth inflation" at only some 3% above the CPI, the Dow would have
to be at 16,000 to equal its January 2000 peak.
Measured in terms of other currencies, themselves depreciating (against gold
or "real money"), today's Dow is still 25% and 32% below its January 2000 peak,
in terms of sterling and euros respectively.
Worse still, how has the Dow done when measured in "real" money — gold?
Assuming you invested the proceeds from the sale of one ounce of gold in the
Dow on Oct. 27, 2000, (before its last peak) and sold the Dow at its so-called
record price yesterday, you would receive dollars that would buy you only a
fraction more than one half an ounce of gold!
In terms of gold, or "real" money you would have LOST some 45.5%! (See Fig. 2
below.) The Dow would have to stand at 23,000 to equal its 2000 peak on a
gold-priced basis.
This is a dramatically different looking result from that shown in Fig 1. It
does not look anywhere near so good, either for investors or for the major
market professionals and the government.
So why do stock markets appear to look so good, when we read and listen to financial commentators and market practitioners, who all have a vested interest in a "good" market?
Well, you have often heard MoneyNews say that governments will do almost anything, including lying, to stay in power.
But, you may say, the stock market is not controlled by the government, so what's the big government lie this time?
Well, while the government may not "control" the stock market, they can "influence" the most high profile market index in the world, the Dow.
'Painting the Tape' Paints a Blurry Picture
In fact, as the Dow is based upon a weighted compilation of only 30 stocks, it
can be relatively easily influenced by what is known as "painting the tape."
This when a government, seeking to make political profit by illusionary gains or
losses in price, buys high or sells low.
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A genuine investor aims to make financial profit, through real gains in price by buying low and selling high.
A classic example of this would be the efforts of major World Bank member governments to announce sales of their gold reserves, in order to politicize, or, as they described it, to "demonetize" gold (real money).
Under encouragement from member governments, especially the U.S., the British government even pre-announced its sales, thus eroding the price, before selling tons of gold and driving the world price of gold yet lower and "burning" all the politically cynical holders of gold, at least in the short term.
This futile and unpatriotic political move cost the British taxpayer billions of dollars. In the long term, of course, it failed as reality prevailed and now gold is far higher in price.
Why does the U.S. government need to paint the Dow tape?
First, in face of an election, the scandalous futility of the Iraq war is causing the government serious concern. There is talk of a change in tactics in that regard.
In addition, an apparently flat stock market adds to election concerns. So what
better than to give the appearance of a change in direction in that regard?
By "influencing" the stock market index that has both the fewest stocks and the
highest profile (the Dow), the government can "create a feeling" of stock market
euphoria that leads to voter loyalty.
The influence is exerted by committing large amounts of money to selected stocks
at the market highs pushing them higher through sophisticated, discreet
transactions, executed by the major investment houses or market operators.
This draws in further unwary investors, who are frightened of apparently low
prices leaving them behind. The index rises, even in other stocks and general
market psychology turns bullish.
Get to the Truth
The proof is in the pudding. Only a handful of stocks are leading this Dow rally
— and market volume is thin, making the manipulation easier.
Finally, some sophisticated investors are catching on, pointing to the fact that
the recent market rise has been so narrow.
It is not reflected to the same extent in the other broader indices such as the
S&P and the Wilshire 5000, both of which have been dragged up by the general
market sentiment inspired by the raise in the Dow.
It is interesting to note that the S&P is still 6.7% off its March 3, 2000, peak
and the broad market Wilshire 5000 is still a whopping 11.4% off its March 3,
2000, high. (See Fig. 3 below.) And this all ignores inflation and "real," or
gold, measurement.
By painting the Dow in "fool's gold," the government appears to have been
successful in grabbing financial headlines that could prove golden in the coming
elections, but many investors will be disappointed when the cold winds of
reality burst upon the financial world.
Regular MoneyNews readers will have already been forewarned.
Editor's Notes:
