The Dow is Crashing!



Aug 2, 2020
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Here's something to think about and is certainly appropriate for today. Back in October of 2006, the Dow Jones Industrial Average broke its old record of $11,750. The media reveled in glee. Things were good. Everyone seemed to be making money in the stock market, but behind the mirage, something insidious was going on. While most people thought they were getting rich, a few wise souls knew they were losing more and more money every single day they stayed invested in the market. They knew that the Dow had actually peaked back in 1999-2001. Because they were smart investors, they left the stock market and put their money elsewhere. So, what was it that these savvy investors were aware of that everyone else wasn't? I'll tell you.

Let me try to explain this in the most simple terms I can. Let's pretend that you lived in Zimbabwe in 2007 and were invested in the stock market over there. You had all your money in Zimbabwe companies. One day, you began to notice that the "value" all of your investments were rising, no matter what you were invested in. Everything was going up. While you were thrilled with this revelation, you were also suspicious of what was going on. "How can everything be going up?" you asked yourself. "If one area is rising, shouldn't another be falling?" you questioned. In a typical and healthy market, when one sector is rising, another is falling because of the exchange of currency between the two. It's sort of like a see-saw. In a healthy market, stocks, bonds, real estate, commodities, and everything else would be rising and falling opposite one another. When stocks are hot, investors take their money out of bonds to invest in the stocks and vice-versa. When everything is rising at the same time, it can only mean one thing - inflation. Or, otherwise known as money printing. The more money that's thrown into an economy, the higher the prices of investments will rise. The problem is, the higher the prices of investments go, the lower the value of the currency will fall. If, in 2006, it took one hundred Zimbabwean dollars to buy one share of a stock and then in 2007, it took one hundred thousand of those same dollars, something fishy was going on. Most likely, it meant that there was far too much money being injected into the Zimbabwean economy, driving down the worth of its currency. Now there was the real see-saw - the balance between investments and currency. When one goes up, the other goes down.

Does this story sound familiar? Have you ever experienced all asset classes rising in tandem right here in the USA? Of course you have, it's happening right now. Because of various reasons, the Federal Reserve has printed massive amounts of money and has pushed it right into people's pockets, whether they wanted it or not. And all of this money printing has created inflation. We're seeing it everywhere.

Right now, the DJIA (Dow Jones Industrial Average) is sitting right below $35,000. As investors, how can we determine if this is a good or bad thing? How can we find out if our investments are actually becoming more valuable? Well, one way to do that would be to measure the dollar verses other asset classes. Measure its purchasing power against real "things." If the same people are growing soybeans and the same people are eating the same amount of them, the value of those soybeans doesn't change. If it takes $1.99 to purchase a pound of soybeans one day and $3.99 the next, something changed. If everything else is stable and there are no weird disruptions, I'd say the value of the dollar dropped. You can measure the value of the dollar against a lot of things. All sorts of commodities, real estate, stocks, oil, gold - lots of stuff. The value, or worth, of these hard assets doesn't often change. The value of the dollar does though. To measure the Dow to see if it's been gaining value, all you need to do is divide its price into the price of other asset classes. Back in the first decade of this century, a few people did that and realized that the Dow has been crashing for years. While most investors thought they were making money hand over foot, they were actually losing it due to inflation. They had no idea. From 2002 to 2008, the dollar has lost over 35% when compared to other currencies around the world.

When comparing the price of the Dow to the price of gold, think about this: Back in 1999, it took 45 ounces of gold to purchase one share of the Dow. In 2008, it took fewer than 15 ounces. Did the value of gold rise? No, that stays fairly stable when measured against other hard asset classes. It was the price of gold when compared to the value of the dollar that changed, meaning, the value of the dollar dropped a lot. During those years, the value of the Dow Jones had dropped by 67%, all the while, rising in cost in dollars. Strange? Strange. That's inflation for you. Again, it's insidious. It sneaks around and it's difficult to feel. Except at the food store and when paying bills. Then it's very easy to feel.

During the first decade of the 2000s, the Dow has dropped against many different commodities, from 40% all the way up to 85%. When measured against gold, commodities, agriculture products, crude oil, industrial metals, silver, the story is the same. The Dow plummeted and the "stuff" rose. Really though, the stuff stayed the same and the Dow dropped.

This post is part of a series: Guide to Investing in Gold & Silver by Michael Maloney
The Dow is Crashing! was posted on 06-03-2021 by CaptainDan in the Economics Forum forum.

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