In Terms of Real Stuff, The Dow's "New High" Is Pure Illusion

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The rise in equities does not mean stocks "buy" more commodities in the real world--they buy less.

If the new highs in the Dow Jones Industrial Average (DJIA) are so wonderful, why does one share of the Dow-30 buy less than it did 14 years ago? What does a nominal new high in the stock market mean in the real world? The only way to know is to ask if the purchasing power of a share of the Dow buys more than it did when the Dow was at lower levels.
If one share of the Dow (defined as one share of each of the constituent 30 companies) buys less than it did when the Dow was as lower levels, the nominal new high is a mirage in terms of increased purchasing power of equities.
Another way of assessing the real-world impact of a nominal new high in equities is to perform a relative strength analysis: did equities outperform essential commodities, or did equities underperform these essentials? If the Dow underperformed, then a new high is an illusion: if equities buy less stuff in the real world, the nominal new high is misleading.
Longtime correspondent Harun I. recently shared a series of charts which reveals what's real and what's false about nominal new highs in the Dow:
Wonderful post, What's Real? What's Fake? (December 16, 2013). Below you will find some charts that may answer: What is real?
RS charts are not new to us, but they need constant study. Nobody eats, clothes, shelters, heats their shelter or fills their gas tank with equity shares. Therefore, when we convert those shares to currency in order to purchase things that are generally useful, their real value is revealed. Purchasing power cannot be faked.
There are several questions that can be explored, however, today I wish to point out the most obvious.
The trend in commodities relative equities over the period ranging from 1970-2000 was down. This indicated that the Dow outperformed commodities, or put another way, was able to purchase more per unit during this time. It is useful to remember that, as you and many others have pointed out, that during this time debt expanded as well. Two wage earners were required per household to produce a standard of living that once required only one wage earner. This effectively was a 50% loss of purchasing power.
However, the fact that household debt expanded to the extent that it has in order to maintain a particular standard of living with even two wage earners suggests an even greater decline in net purchasing power. But I digress.
The downtrend lines drawn on the charts below indicate secular trends that were in place for approximately a thirty year period, much like the decline in interest rates. With equities at new nominal highs, there are many who argue that the worst is behind us.
However, as I point out on the first chart (Gold/Dow Ratio), the amount of debt that created the secular bull market previously is dwarfed by the amount of debt that it has taken to create what may be a normal correction in what appears to be a secular bear phase. Despite new historic nominal highs, despite parabolic increases in public debt, not one chart displayed indicates the Dow as having recovered its purchasing power which peaked roughly in 1999.
If we are to believe that the worst is over, we must at the very least answer a few basic questions:
--How much debt is required to get back to the peak in equity purchasing power in 1999?
--Assuming the next leg down is the same as the previous leg down, how much debt would be required to produce such a move?
Conversely, if they are wrong, if the commodity cycle has reversed and the bear phase in equities resumes, how much debt will be incurred while fighting the commodity cycle all the way back to its historic highs?
In either scenario, who is going to take on what will be stupefying levels of debt (after all, it is a geometric progression), and how will it be paid back?
What is real? These charts that lay bare the falsity that "everything is just peachy" are real. Central bank activity is real. Their activity allows nations to bid for commodities for which they produce too little to pay for outright. They have created multigenerational obligations that will likely never be repaid. Keeping commodities well bid based on improbable (impossible?) promises is causing real global instability.
The Fed is leverage 72 to 1. Either way these charts break will represent reality, a reality that will become increasingly unstable.
As for the status quo’s defense of the farce being perpetrated, they will do what we all have observed in children caught doing something naughty. They will lie. It may be understandable in children but in adults selected for national leadership it is gravely disturbing. From Nixon’s, “I’m not a crook”, to Clinton’s, “I didn’t have sex with that woman”, and Nancy Pelosi's defense of the ACA, "the more we see of it the more we will like it" (paraphrased).
It is all very disturbing. Whether there exists a pathological disconnect with reality, intentional deception, or a tendency to revert to childhood psychological defense mechanisms, such behavior from those entrusted with so much is a blaring warning signal.

Thank you, Harun, for an insightful assessment of value and the unsustainable absurdity of a political and financial system dependent on debt, propaganda and falsehoods for its survival. Here are the charts, with comments by Harun and myself as noted.

Federal debt:

The rise in equities does not mean stocks "buy" more goods in the real world--they buy less. So much for "new highs"--the nominal new highs in equities is pure illusion in terms of purchasing power.

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zjxn06's picture

Jump down turn around pick a bale of cotton.

Ticker symbol BWEL

Largest cotton farmer in the world.

Owns a lot of water rights too.

GetZeeGold's picture



Plastics are so 60' today are into cotton and bitcoins.


It helps them feed their tulip collecting addictions.

Woodhippie's picture

You know, I am really trying to understand this bitcoin.  One minute you can buy a pack of gum with a bitcoin, the next you can purchase an ounce of gold, then tomorrow you get a happy meal.

Add to that the fact that most people don't have a CLUE on how to "mine" them.  I really have been trying to grasp it all, feeling that anything that goes against Central Banks is good for the people, but I can't put my "money" in something that is this hard to understand.

At least with tulips most people can grasp the idea that when you plant a bulb in soil and water it, you most likely will have a tulip.

I am a stacker that understands the others that post here about using bitcoin for purchases and stack for wealth preservation.

For some reason I just can't get my head around bitcoin.


new game's picture

there is nothing to get your head fiat in cyberspace-get your head around that...

Boris Alatovkrap's picture

Ah, but head will roll when all digital money in Bank-o-sphere is chase hard asset. Run cover as bio-waste is enter vortex of spinning blade.

rubiconsolutions's picture

Don't feel like the Lone Ranger, I can't wrap my brain around BTC either. Talk to me when the waitress at the Waffle House can use it without having a server farm to mine the damned things or my retired father can use them easily to buy a gallon of milk and loaf of bread.

SAT 800's picture

Yes, but is there any reason to try to get your head around it? I would be amazed if anyone even remembers Bitcoin ten years from now; like most elements of popular culture, it's not worth your time to study.

Woodhippie's picture

Exactly!  I was talking to my Dad about bitcoin and he asked "well, when you buy it, how do you get it"?  I said well, you have a digital wallet.  He said, "doesn't digital mean ones and zero's"?  I said," well, yes but it has something to do with "block chains".

He told me to quit being a blockhead.

I suppose when they make it easy enough for him, I will adapt also.

Toolshed's picture

All you need to know is that bitcoins do not really exist in the tangible world and nothing exists in the digital world that cannot be hacked or manipulated.

NaN's picture

The book on Fisher Black contains this bit of wisdom: the more efficient a market, the more volatile it is.

Add in the fact that BTC has no central bank and no institutional ownership, it is the perfect vehicle for speculation.

DaddyO's picture

Ah, the mystical world of phantom inflation...

End the FED!!!


max2205's picture

Come on dammit. ..These charts are upside down

Quinvarius's picture

They have been sitting on commodities in the futures market, not bidding on them.  What do you think Farm subsidies are for?  They crush the price of food in the futures markets to the point where farmers can't make a profit.  Then they pay them just enough so they don't go out of business in subsidies.  If you think that is wrong, remove the subsidies and watch what happens when farmers need to make a market profit to keep going.

The entire Fed and Treasury manipulation scheme is designed to steal labor and commodities from the public.  All you have to do is take one look at what they did to the miners, pushing gold prices 30% under the cost of production with BS paper trades they can never make good on from their own pockets, to understand how much the bankers and the government care or understand the health of the economy.  They are arrogant psychopaths who know nothing but "take".  Wrecking an economy is EASY.  That is why the Fed has a dual mandate for employment and stability.  The employment part is not because they can create jobs, it is because they can easily assist the bankers in destroying all of them.

q99x2's picture

The Stock market indexes are the result of agreed upon prices. If the FED (the private banking cartel also known as global financial terrorists) have the ability to counterfeit money then the indexes are what the FED agrees them to be.

Zero Point's picture

Ever Hear of operation Bernhard?

Germans perfected counterfeiting in WW2.

Serial number codes broken and the works. They actually made British pounds.

Originally they intended to destroy the British economy, but then found it was far handier to use the money to fund black ops.

Gee.... I wonder if operation Paperclip picked up anyone involved in that little caper?

Especially given the fact that the Germans actually printed US hundreds (only one side) for a run, then mysteriously stopped printing, and dismantled the press.

Whyever would they do that I wonder?


I mean.... I'm sure all the US currency in circulation on the black market on foreign soil is legitimate, no way would the CIA pass off forgeries to drug and gun dealers.

Oh. And I'm sure all the bonds in circulation are perfectly legit as well:

wagthetails's picture

the only problem is that the next analyst can use to the same charts to make the case that the Dow is actually cheap.  BUY BUY BUY!

SAT 800's picture

Well, it would depend on his audience. I suppose there's some argument you could make to a sufficiently ignorant person; but actually they use a different metric to estimate whether stocks are expensive or cheap and the US Market is currently expensive.

cassotto's picture

so the dow has to go higher to compensate for inflation?

SAT 800's picture

It never gets there; it's like waiting for the cart to catch up to the horse.

Rising Sun's picture

all the fucking ratios / macro / tech analysis in the world isn't going to help the shorts that are getting crushed


these ratio charts starting showing up in 2010 - 4 years later and shorts are still on the wrong side

SAT 800's picture

Yes; but the Longs who imagine that their reitrement savings are doing fine are on the wrong side also; that's important. I spend a lot of time telling people that these are not new market highs; that they must study purchasing power, not "numbers"; but Americans are largely immune to knowledge about currencies and their flucuations. Inflation is a slow enough process that people are able to "forget" about it. Most people are not actually very thoughtful. It makes wonderful propaganda to say that the Stock Market is making new highs; but if you've read up on the rest of the world, you'd know this is merely a symptom of inflation; and not a "gain".

Pareto's picture

The FED can change what things look like, but, the FED can never change what things are.  (James Grant, Dec 13)

Loan Gunman's picture

Yah brother who took the advice of his broker/friend and bought in the summer of 2009 has made oodles of money while me, fraidy cat me, has lost money buying gold, silver and puts.  No amount of white-washing can change that fact.

SAT 800's picture

And if your brother has enough knowledge to sell out now, he'll be able to keep his profits. If he doesn't, and imagines that he "should be in the market"; then he'll lose them again. Anything can be bought and sold; but it can only be done successfully when you know you're a speculator and you have a feeling for when most of the sheep have been pulled into the machine; and get out. If you imagine you have bought something of "real value" and you want to hold on to it; you're screwed.

NaN's picture

> If you imagine you have bought something of "real value" and you want to hold on to it; you're screwed.

Hmmmm, at least tangible assets that have real value won't go down to zero.

Toolshed's picture

I would say your only mistake was in buying puts.

DOGGONE's picture

This is the right way to inflation-adjust the DJIA -- use CPI-U. See here:

Thru last Friday:

The WSJ knows how, but nearly never does it:

Spungo's picture

This doesn't come as a shock. I think it was that had an article saying equities protect against inflation up until about 5% or 10%. If inflation is above this limit, commodities perform better. Commodities performing better than equities is also an indication that the economy is in recession.

realWhiteNight123129's picture

Easy Rising Sun: There is too much debt to GDP.

Debt = Financial asset of someone else.

GDP = circulation of goods and services and commodities.


There is too much debt to GDP = THere are too many financial assets in relation to present goods (commodities are present goods).

As for measuring the Dow, use cigarettes, because there are no cycles, just a permanent and continuous rise.


MeelionDollerBogus's picture

I've got a great idea! Add bitcoin to the DOW index!

/sarc /lol /wtf /btfath /fail

ZH11's picture

The above is a highly dubious bit of research.



  1. Where are the adjustments for the way in which the DJIA is calculated as an index?
  2. Where is the commentary on the effects of shares once being 1 in x thousand to now being 1 in x billions and the effect this has on the one share per company in the index test? In connection with the above the weight average question within the DJIA poses a real problem for this question.
  3. What about the obvious problem of the DJIA being less powerful over time as a global index e.g. the DJIA initially would have had the bulk of the world's biggest companies but post globalisaton, the 'big bang' and the advent of worldwide competition for listings in Asia and Europe, the DJIA isn't what it used to be.
  4. In connection with the above why not run the test against the S&P to account for a differently weighted index?
  5. Why is there no data on the graphs above for periods before 1975? The DJIA has existed from 1896, what happened in these years or are the trend lines unhelpful for the results that are being sought?
  6. If oil hadn't become more expensive against the DJIA the price of oil would have been completely false, a non renewable fuel against a derivative index should decline in the manner shown, why is there no comment/analysis of this.
  7. The global markets in necessity commodities have fundamentally changed in the period of examination, again why is there no comment on this?

Overall this is just more over laying of graphs to provide 'proof' for a theory formulated before any evidence was reviewed.

Yes there is inflation, yes that's a huge problem for everyone in the world, especially as it is concealed and people are told bare faced lies about its extent and effect, but the above is again a weak piece of 'research' that ZH usually does so much better.