Guest Post: The Most Important Chart In TheWorld

Tyler Durden's picture

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

Fill your bowl to the brim and it will spill.  Keep sharpening your knife and it will blunt.  Chase after money and security and your heart will never unclench.  Care about people’s approval and you will be their prisoner.  Do your work, then step back.  The only path to serenity.
- Tao Te Ching

It is not the consciousness of men that determines their being, but, on the contrary, their social being that determines their consciousness.
-  Karl Marx

Keep away from people who try to belittle your ambitions. Small people always do that, the really great make you feel great too
-  Mark Twain

The Most Important Chart in the World
Back in my Bernstein days, I never really took a large amount of presentation materials to most of my meetings.  However, there was one chart that I always printed out and brought with me and I called it “The Most Important Chart in the World.”  It still is.  The chart I am referring to is the ratio of the Dow Jones Industrial Average: The Gold Price.  In a nutshell, charting this ratio demonstrates the “real” return on stocks adjusted for inflation or currency debasement.  As we all know, the Zimbabwe stock market essentially went up to infinity during their hyperinflation but did anyone get rich from that?  Of course not, the shares were denominated in a currency that was on its way to worthlessness.  At the moment, with many U.S. stock indices hitting new post-2008 highs there seems to be a general view that stocks as an asset class will do well in an inflationary environment.  As a result, whenever there is actually QE or even the mention of the potential resumption of Fed balance sheet expansion there is a rally in equity prices.  In fact, I think the entire investor class in the U.S. has been lulled into a sense of sleep and complacency at the moment.  There are two things I want to point out to people when they are considering whether to increase exposure to equities broadly or not.

1.  Allocation of Portfolios from the BRICS and Europe:  When you look at how well U.S. Treasuries and German Bunds have done this year, it becomes pretty clear that investors have shifted massive amounts of bond capital away from the formerly high growing areas of the world (that are now in serious collapse) into those nations perceived as “safe havens.”  While Germany doesn’t have its own currency, the U.S. obviously does and given concerns surrounding a Euro breakup and the extreme difficulties in the Chinese and Indian economies, many investors have decided the dollar is the best house in a bad neighborhood, at least temporarily.  This has led to a flight to U.S. equities generally, but also specifically into large cap U.S. centric names with dividends.  This is THE crowded trade of 2012 and three prime examples are Wal-Mart (WMT, +22% YTD), Target (TGT, +26% YTD), and Home Depot (HD, +36% YTD).  If you ask me, this trade is extremely long in the tooth.

2.  Strong Performance Concentrated in a Few Stocks:  I have hit on this theme many times before, but the key point is that if you weren’t in the right names this year there is a good chance you have underperformed the market significantly.  While you can say that this is normally the case, this year has been far more extreme as is evidenced by reports of horrible hedge fund performance this year relative to the benchmarks.  Apple (AAPL), of course, is the prime example.  This giant now sports a market cap of $623 billion and is up 65% YTD.

An Inflation Hedge?
The point I am attempting to make above is that those are the two main reasons for U.S. stock outperformance this year.  More than anything else, it has been about reallocation of global portfolios away from former high flying regions into those regions that are deemed safer.  I believe this has been exacerbated by the fact that the relative performance of the U.S. economy versus the BRICs caught a lot of people off guard.  That being said, I also think that the complacency that exists today is partly a function of investors’ belief that stocks will provide a good hedge against rising inflation and so why sell.  After all, if the Bernank is going to print at the first sign of weakness I should be sitting pretty with my stocks.  However, is this a correct train of thought?

My view, and one that was borne out in the last big inflationary period in the 1970s, is that high inflation is not good for stocks.  Not even in nominal terms.  PE ratios shrink as there is little real investment, confidence is shattered and the outlook becomes cloudy.  Some companies have pricing power but many do not.

Here is the chart of the SPX from 1970-1980.

See that.  Nothing done.  That’s ten years of zero, but with some really nice tradable swings.  The reason I bring all this up now is because we are likely to see a significant upswing in inflation as we head into 4Q.  Gasoline prices have been on a tear as of late and are now showing +9% on a year-over-year basis.  Recall that prices at the pump only adjust with a lag, so this will be impacting people for weeks to come.  The bigger issue though will be food.  Largely as a result of the severe drought in the U.S., corn and wheat prices have jumped 50% in the past two months.  This will affect consumption one way or the other.  The reason I am really concerned with the food situation is that the lag on passing on that is even longer, so we really haven’t seen any of it yet.  Furthermore, consumer product and food companies have already utilized almost every trick in the book up until this point.  Shrinking package sizes, putting less in the same packages, etc.  So I envision a scenario coming where the food inflation will be much more overt and in your face and this will further depress psychology.  Particularly amongst the newest members of the food stamp club, who were formally part of the vanishing middle class.

So to me, stocks broadly will not provide the protection assumed by many at the end of the day.  The only way I could see it happening is if we totally destroy the value of the currency (very possible, but I do not see evidence of that trade being in effect yet).  There is one major component missing to the “dollar becoming worthless” event.  One way it could happen would be an outside force dumping dollars (treasuries) aggressively without regard for price.  The second, and more likely scenario, would be a further expansion of the Fed’s balance sheet (QE) but this time directed at the public at large.  The key thing so far has been that the Fed’s actions have really only benefitted speculators as they have borrowed cheaply and purchased assets (hence the rally in markets).  The real inflation will come once the money is handed out at the street level.  This may be coming and if it does, I don’t suspect the names that have benefited so far this year will be the stocks to be in.  Yield chasing will be shunned and inflation protection investing will be en vogue.  I would start to prepare for this eventuality.

Back to The Most Important Chart in the World
Sorry, got a little sidetracked there.  So, the key thing with the Dow/Gold chart is that it perfectly mimics the various social moods and massive secular trends that exist in the economy over very long periods of time.  It is just as effective in periods of deflation as in inflation in telling you the true story.  Let’s take a closer look and examine what it has looked like from 1920-Present.

Monthly Chart of DOW/Gold 1920-Present

What this chart shows you are secular swings in the economy.  You see how stocks ran up in real terms into the 1929 crash and then plunged versus gold.  You see how they ran up in the next great post- WW2 period into 1968 when they once again plunged versus gold.  Then you can see the great secular bull market in stocks from around 1982 to the bubble peak in 2000.  In both of the prior two periods (one deflationary and one inflationary) the DOW/GOLD ratio got down to about 1:1.  It has been my contention for many years that we will see that same ratio once again.  That would imply another roughly 75% drop in stocks to gold and I expect that this next leg is beginning now.

Dow/Gold Two Year Chart
Of course for active investors and traders, timing is important and you can have massive counter trend rallies within a larger, secular trend.  I believe we have just completed one of those.  As you can see in the chart below, the Dow/Gold ratio has just had a massive 44% rally in past year or so, but it looks as if it may have formed a serious top.  Incredibly, it is one of the biggest counter-trend rallies of the entire secular bear period for stocks since 2000, registering at around 44%.  While very painful for those who didn’t see it coming, it is no coincidence that it happened in an election year.  My sense is this chart is currently in reversal mode and I think the ratio could hit between 4-5 from the current 7.8 over the next 12-18 months.  That is a huge opportunity if I am correct.  As always, decide for yourself.

Dow/Gold Two Year Chart

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JeremyWS's picture

SP chart looks awfully familiar??

Peter Pan's picture

Either the S & P has to plunge or more likely gold ill surge to meet tht 1 to 1 ratio. Thn again both movements could be in play.

Stoploss's picture

Judging by the wave of gold bashers that have just hit the airwaves making sure everyone knows gold will be caught in the liquidation with everything else.

Ready and waiting..

AldousHuxley's picture

most important in the world?

this is ameri-centric view as if capital markets do not exist beyond DOW JONES which is actually full of old inefficient monopolies.


once americans wakeup to the reality that in the past 30 years,

  • arabs created metropolitan financial capitals in the middle of the desert
  • asia became modernized dominating many institutions
  • half of millionares in europe are Russians

they are up for a rude awakening of that America is now lagging behind in terms of technological, social, financial progress.


watch out republicans HATE progressives to keep the shitty society all for themselves.


NOBODY WHO HAS TRAVELED OUTSIDE OF AMERICA  still believes MSM's brainwashing that USA #1.

Muppet of the Universe's picture

True, but the dollar is still the WRC and the U.S. markets are king.  Above and beyond that, I'm quite sure that people will make the chart come true - A self fulfilling prophesy if you will.  If you would care to notice the Gold Platinum ratio...  Yea.  Ppl make these famous charts come true, and the more they adhere to fulfilling them, the more powerful they become. trip on that thought..

SeattleBruce's picture

"arabs created"

Oh yes, Aldous.  Americans and the rest of the world are 'lagging behind' those clever Arabs in the you think the wealth in the Middle East has been created in a vacuum?

Precious's picture

Well that would be fine.  24k fine.

malikai's picture

DOW at 1:1 for gold would be catastrophic for TPTB.

They will fight that at all costs.

LawsofPhysics's picture

I was kind of hoping for Gold 1:1 with the CDS market, just saying.  if you are going big, go BIG.

Divided States of America's picture

The markets maybe flat over the 10 years but for an algo and HFT, this is paradise. Of course, they are skimming the profits of those who are still willing to put money into this joke of a market. Hopefully, ppl will start waking up and leave so the bots can start cannibalizing themselves, and thats when Judgement Day begins.

economics9698's picture

1920s Coolidge and Harding cut spending, DOW booms, Fed expands money supply 62%.

1950 and 60s, federal spending around 18%, 1960s Fed expands money supply, war.

1990s Clinton cuts federal spending, Fed expands money supply 107%.

Any questions? 

This shit is not rocket science.



LawsofPhysics's picture

"This shit is not rocket science."


If you are talking about the part where the Fed expands the fiat (backed by nothing) money supply while earning interest at the expense of the taxpayer. Then yes, the path to prosperity is very fucking clear.  End the Fed and execute the owners for their treason.

AldousHuxley's picture

americans are busy giving tax breaks to those who benefit most from Fed's money printing.....


US is becoming hopeless while developing countries offer much better future vision.



malikai's picture

While we're at it why not put all the unfunded liabilities in there too?

Gold at $1,000,000/oz, shall we say?

AGuy's picture

"Gold at $1,000,000/oz, shall we say?"

When gold gets anywhere near that valuation, it will zoom right past it on its way to $1T/$5/$10T... per ounce. That's assuming that you can find a seller that will trade you gold for worthless US dollars at those valuations.

DanDaley's picture

Remember that in Weimar Germany, the exchange rate was 4.2 trillion marks / dollar.  Not so farfetched.

crkennedymd's picture

There should be a +100 option for a sentiment such as that

SeattleBruce's picture

Is this just before it gets confiscated by the USG (and other government/quasi-governments)?

sdmjake's picture

Have been holding/stacking/trading for years watching this ratio fall. Not greedy and will settle up at 3:1.

Midas's picture

I have heard this 1:1 ratio many times and I must admit I am not a believer.  I think it is just a historical coincidence, after all, how many times has it happened, three?  At least the line about gold:silver trading at 15:1 has a basis in geology.  Does anyone have an argument why the 1:1 SHOULD happen again?  I am not hating on gold, I own gold and will own it until they stop flooding with fiat and a ZIRP.  I will however buy stocks when P/E ratios reach typical bottoms of bear markets, maybe 5?  I don't know what the ration of gold/dow will be when that happens, but if it is 3:1 or 4:1 I am not going to worry about it. 

Think for yourself's picture

simple overshoot, industrial/electronic uses of silver and depletion of above-ground reserves? Meanwhile, gold just gets stacked up...

Muppet of the Universe's picture

I saw your profile pic and gave you a thumbs up without reading.  and im going to keep it that way, and stare a little while longer.

akak's picture


DOW at 1:1 for gold would be catastrophic for TPTB.

They will fight that at all costs.

TPTB make their plans, and God laughs.

Pubcoceo's picture

it will happen but where will it happen 6000? 3000? most people dont realize gold can even be more important as a store purchasing power in a deflationary depression, but 1:1 will happen, i think sooner rather than later...


No More Bubbles's picture

They'll be 1 to 1 when they both his 2000.....

Precious's picture

Looks pretty bearish for gold.

Precious's picture

Buy at the exact bottom.  Ambitious.

serog's picture

The exact bottom was centuries ago.  So yeah, that would be ambitious.  My game is consistent allocation and could give 2 shits about today's, yesterday's or tomorrow's price.

Hard Assets's picture

My dear old grandmother stashed away $100 bills for an eternity during the '50's and '60's with the very ambitious plan of giving each of her 13 grandchildren a $100 bill when they got married. She did, she was very noble, very caring, a heart of gold.

Only one problem with her plan. If she had put 2 1/2 oz. of coin in the box instead of a $100 bill, imagine the difference ! I'm thinking $100 of currency A or 2 1/2 oz. (x $42 ~ $100) of currency B.

My son, who is in the "gold is a rock" club (worser than "you can't eat it" club) got a demonstration one day. I put $42 in an envelope and a shiny new Eagle into a shoebox. I said my grandmother gave it to me as inheritance but one stipulation. I had to pick one 'gift' for myself and give one to charity. I opened the shoebox and showed him the 'gifts'.

I asked him, "Which gift should I pick"

He said, "So what?"

I said, "So what? You put $1,700 in an envelope and a 1oz. coin and open it in 60 or 70 years and see what you have !"

He said, "So what, big deal ! I will put my money into the stock market and over the LONG haul I will be better ahead than your commodity inflation baloney."

I said, " Gold will be around in 60 or 70 years, the stock market won't !!"

He said, "Yeah ok, Dad"

I went and mixed another drink.  


Hard Assets's picture

Another quick story that I had with the 24 year old young lad about 3 years ago.

I have read a couple books about the demographic budge rolling thru the planet several years back so I could see this slow-motion train wreck coming. We were yacking about this blob rolling thru and when the "Baby Boomer" era entered retirement, s*it was going to fly. I gave him the 'top ten' reasons while he sat in his chair flabbergasted.

He said, "Well how the hell did this happen?"

I said, "How the hell did what happen?"

He said, "This 'baby boomer' thingy?"

I said, " Well Chris, we had WWII from '39 until '45. Every soldier, man or near man was shooting bullets at enemies. Every woman was at home making bullets in a factory or working their asses off doing a 'man's job' at home. Horny women at home, horny men shooting villians and then it suddenly fucking ends. "

I paused, then carried on, "Then what you have is every horny man re-uniting with every horny woman on the entire planet and everyone shagged their asses off for a few years !"

He said, "No kidding !"

I mixed another drink.

falak pema's picture

with all the drink mixing I would venture your hard assets were going very liquid! 

smiler03's picture

Smart Kid, you should be proud. Asteroid mining will make gold as common as iron in 70 years.


And I am just joking ;O)

TheFourthStooge-ing's picture

Hard Assets related a story of his young son:

He said, "So what, big deal ! I will put my money into the stock market and over the LONG haul I will be better ahead than your commodity inflation baloney."

He must be around 18. When you're 18, you know everything.

The smart ones, by around age 25, start to realize how little they actually know. The dim bulbs rarely progress to that stage.

TheSilverJournal's picture

DOW might hit 1:1 for silver with this coming currency debacle and full blown rush into PMs.

apberusdisvet's picture



If they all print:   40,000:40,000


If they don't:    4000:4000

Hard Assets's picture

Devil's advocate (easy fellows!)

Whats the chance of 1,000:1,000 ?

....a la severe deflation?

ayanni's picture

gotta rec that - it's the one i keep thinking is the least possible (severe deflation - not the ratio specifically). 

not a chance.  right?


TheSilverJournal's picture

No fiat currency has EVER gained value after the host country goes bankrupt.

Roandavid's picture

From your fingers to God's ear.

Either way is OK by me.

ATG's picture

Marc Faber: Global Recession 100% Odds; Germany Likely Heading Into Recession Soon...

Monedas's picture

Carta Blanca .... Latin for a new roll of TP !         Monedas     1929        Soul is the brevity of wit !   (No, I'm not slamming Niggers .... I'm slamming touchy feely Liberals who like to rescue dogs !)

InconvenientCounterParty's picture

The DJIA itself is limited statistically. S&P 500 would be better for this metric.

q99x2's picture

75%. Hell I'm saving mine to bribe my way out of the country during the time the DHS start firing their 1.4 billion rounds at us.

Can't bribe a drone but you can pay for a safe place to hide.

I'm not FEMA camp material.

LawsofPhysics's picture

Just a point of analysis.  I see at least one glaring contradiction.  The authors says the following "My view, and one that was borne out in the last big inflationary period in the 1970s, is that high inflation is not good for stocks.  Not even in nominal terms.  PE ratios shrink as there is little real investment, confidence is shattered and the outlook becomes cloudy"

Then the author points out that stocks have gone nowhere during the last ten years, a period during which we have had low inflation.

I think the author misses the point that we had an oil issue and wage inflation in the 70's (the latter is not necessarily bad)  however, we had hig interest rate and real inflation during the 80's, when the stock market took off.

Seems like the author desparately wants to be correct either way - FAIL.

Beam Me Up Scotty's picture

Low inflation due to MOPE.  They don't compute it the way the did in the early 80's.  Today they pencil whip the shit out of it.  While inflation today may not be quit as high as it was back then, it certainly is higher than the 2% or so that they are telling us it is.

akak's picture

I concur.

With the US dollar having lost approximately 40% of its value just since 2000, I would hardly call that "low inflation".  And if anyone here wants to trot out those laughably low CPI bullshit figures from the BLS to make that claim, expect to have your lying head handed to you on a plate.

donsluck's picture

I trashed you accidently, sorry. Anyways, at 3.5% inflation, the dollar loses 40% of it's value in 12 years. Still not "high" inflation per the Fed, but to you and me...