A Tale Of Two Charts (And Two Economies)

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

These two charts depict the same index (DJIA) over the same time frame, but they reflect two stories and two economies.

Long-time correspondent Harun I. recently submitted two charts of the stock market that suggest two different stories--and these two stories suggest two different economies.

The first story is the one the Federal Reserve wants us to believe: the economy is expanding smartly without inflation or deflation--in effect, a Goldilocks economy that is enabling expanding profits and margins, which have pushed stocks ever higher.

In summary, this is the happy story.

The other story is the Fed's nightmare scenario: the stock market's expansion is exhausted and poised to decline. This story is one of an economy that never expanded in meaningful fashion, and a stock market rigged to rise by unprecedented intervention (i.e.manipulation) by the Fed.

This is the not-so-happy story.

These two charts depict the same index (Dow Jones Industrial Average (DJIA) over the same time frame, but they reflect two stories and two economies. These divergent stories are possible because the data supports two parallel universes: one in which the booming market is held up as evidence the overall economy is expanding to everyone's benefit, and the other a manipulated market that has expanded not as a reflection of growth but of a staggering loss of purchasing power of the U.S. dollar and a central bank transfer of wealth from the many to the few who own the majority of financial assets.

Here is Harun's commentary:

Below are two charts of the DJIA. The periodicity is yearly, i.e. each bar is one year. One is arithmetic and one is log. They present two dramatically different perspectives.

The log chart puts gains into a relative context and I use them extensively. However, the one drawback I find is that they are a poor indicator of psychology when using the bars to gauge sentiment.

The log chart indicates nothing unusual but the arithmetic chart indicates that we should be asking ourselves whether last year’s bar suggests a high probability of exhaustion. The log chart allows the Fed and others to claim, “see, no ‘flation”, i.e., no inflation or deflation of any sort.

Yet when we look at the relative strength charts and see that when measured against gold and equities, commodities are, in many instances, at all time lows.

The cheers go up--if you are of the small percentage of people who own these assets (gold and equities). But if you are one of the 99.90%, everything has gone up except your paycheck; 1 out of every 6 are on food stamps. In the case of the majority, inflation is everywhere. If you're in the one-third of the working age population that is unemployed, there is no hope in sight.

The arithmetic chart, on the other hand, shouts, "Warning, something is really wrong here!" It says that either the wealthiest people (those who own equities) are really excited about the economy's growth opportunities, or they are fearful and taking advantage of the transfer of wealth being orchestrated by the government via the Fed.

One can choose which narrative best fits. To paraphrase former president Clinton, it just depends what on your definition of is, is.

Thank you, Harun, for explaining the two narratives the charts tell. I suspect the divergent stories will be compressed into one narrative in the next few years: either the overall economy matches the optimistic forecast of the stock market, or the market declines to the recessionary stagnation of the Main Street economy.

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LawsofPhysics's picture

Exponential equations can be a real blessing (creditor) or a real bitch (debtor).

In any case, it is the issue of scarcity and moral hazard that always results in the guillotine.

Hedge accordingly.

nope-1004's picture

We are living in the middle of the largest CB asset bubble of all time.  So painfully obvious that equities and CB "stimulus" (or devaluing) track together.  The history blogs will be interesting once this puppy blows.


SamAdams's picture

Looks strangely "Weimar-ish"....

Doña K's picture

When would the stackers be rewarded?

Bananamerican's picture
  Matthew 6:19 "Do not store up for yourselves treasures on earth, where moths and vermin destroy, and where Central Bankers break in and steal.
bobby02's picture

Yet another submission spun out of whole cloth: From one BGO, that arithmetic and exponential functions result in different pictures, we get an entire infomercial.


I realize that clicks are money, but such tripe should come with a warning label, if not correct identification of purveyor of said filth, ex ante clickum

maskone909's picture

so how much $FB so YOU own?  LMFAO

dontgoforit's picture

Now those are charts of two different colors.  Where's the third one?  The one that deciphers the first two - the real one?  The one that precludes Star Wars as the opening salvo for chart #2.

Squid Viscous's picture

Just keep taking the "dogs" out of the DJIA, all fixed ... next stop 20K... that was easy!

pound the vix's picture

Both these charts match the increase in world fed balance sheets

maskone909's picture

ot but chart related...

gold and the dollar showing a little divergence.

you would expect gold to sell off on dollar strength.  wacky world of central planning

Xibalba's picture

Draghi and Abe just taking turns propping up the dallah

Xibalba's picture

Zimbabwe wants their charts back. 

what's that smell's picture

puny humans!

skynet laughs at your silly charts and rationales!

forget what you know and think you know and BTFD!

oneshotklink's picture

Why would I BTFD when I can wait a few days and BTFATH? Hmph.. sucker...

buzzsaw99's picture

i've seen this leveraged m&a and stock buyback movie before. it doesn't end well.

maskone909's picture

back in 2009 i was swing trading pier one imports and las vegas sands.  i had no fucking idea markets would abandon what little fundamentals we had left.  this reminds me of that zerohedge article that descibed markets as an oscillating coin, rapidly increasing vibrations just before it slammed to the floor.  well the floor is getting closer and closer

RockRiver's picture

If the markets are all rigged, as many suggest, how can we know when the uptrending will stop? I think we need to ride this horse as long as it's running. I won't evacuate the S&P until I see real signs of topping on the charts.

Lower highs and lower lows on the intraday charts....Taking out the lower wedge line at roughly 1850...Things like that.

Liam Allone's picture

If you wait for the top, you'll get creamed.  Not enough market liquidity for everyone to get out.  Do you somehow think you are smart enough to shave it that close?  I know I am not.  The only sensible thing to have money in is real things - not paper.  In a crash, the paper won't be good enough to wipe your arse with.

edifice's picture

Freshly-printed FRNs are quite painful to wipe with. Old used ones (thorougly washed, of course) are preferable.

Liam Allone's picture

Classic Elliott Wave #5 nearing completion on the arithmetic chart.  Reversal is imminent.  The magnitude of wave 3 and 5 show that the first wave of the reversal will be collosal.

So there are two possibilities. 1) Wake up collectivey to the necessary solution (www.eonomiccurs.com/WealtPump) or 2) Take a collective beating; the biggest in a century - unless you own a lot of gold or silver. 

Be afraid - be very afraid.

RockRiver's picture

I think the 5th wave is possibly ending with a terminal wedge that is very mature as well.

ebworthen's picture

"...a staggering loss of purchasing power of the U.S. dollar and a central bank transfer of wealth from the many to the few who own the majority of financial assets."

This is why they manipulate PM's so much, which are still up much more than "they" would like to maintain the illusion.  No coincidence that the poor man's Gold (Sliver) has been punished the most.

p.s. - JD.com (Amazon of China) taking flight with it's IPO, to the moon!