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Guest Post: The Most Important Chart In TheWorld
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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SP chart looks awfully familiar??
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.
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..
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,
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.
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.
www.youtube.com/watch?v=aDATXtewPrg trip on that thought..
www.youtube.com/watch?v=1CYbOeQ-WFM
"arabs created"
Oh yes, Aldous. Americans and the rest of the world are 'lagging behind' those clever Arabs in the desert...do you think the wealth in the Middle East has been created in a vacuum?
Well that would be fine. 24k fine.
DOW at 1:1 for gold would be catastrophic for TPTB.
They will fight that at all costs.
I was kind of hoping for Gold 1:1 with the CDS market, just saying. if you are going big, go BIG.
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.
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.
"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.
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.
USA VS RUSSIA
http://www.moneyandshit.com/wp-content/uploads/2011/05/usa_vs_russia.jpg
While we're at it why not put all the unfunded liabilities in there too?
Gold at $1,000,000/oz, shall we say?
"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.
Remember that in Weimar Germany, the exchange rate was 4.2 trillion marks / dollar. Not so farfetched.
There should be a +100 option for a sentiment such as that
Is this just before it gets confiscated by the USG (and other government/quasi-governments)?
Have been holding/stacking/trading for years watching this ratio fall. Not greedy and will settle up at 3:1.
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.
simple overshoot, industrial/electronic uses of silver and depletion of above-ground reserves? Meanwhile, gold just gets stacked up...
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.
TPTB make their plans, and God laughs.
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...
They'll be 1 to 1 when they both his 2000.....
Looks pretty bearish for gold.
I'll buy yours.
Buy at the exact bottom. Ambitious.
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.
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.
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.
with all the drink mixing I would venture your hard assets were going very liquid!
Smart Kid, you should be proud. Asteroid mining will make gold as common as iron in 70 years.
And I am just joking ;O)
Hard Assets related a story of his young son:
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.
DOW might hit 1:1 for silver with this coming currency debacle and full blown rush into PMs.
Dow:gold
If they all print: 40,000:40,000
If they don't: 4000:4000
A-men
Devil's advocate (easy fellows!)
Whats the chance of 1,000:1,000 ?
....a la severe deflation?
gotta rec that - it's the one i keep thinking is the least possible (severe deflation - not the ratio specifically).
not a chance. right?
No fiat currency has EVER gained value after the host country goes bankrupt.
From your fingers to God's ear.
Either way is OK by me.
Rich Cash @richcash8
Marc Faber: Global Recession 100% Odds; Germany Likely Heading Into Recession Soon...
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 !)
The DJIA itself is limited statistically. S&P 500 would be better for this metric.
One can hope...
http://www.silverdoctors.com/bill-murphy-jp-morgan-is-finished-jpm-silver-scandal-will-rival-libor/
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.
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.
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.
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.
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...
For the record..... If you hit the up or down arrow, you are allowed to change your mind and reverse the vote. Click on the other arrow, it's not rocket science, well not for most of us NASA geeks.
You're right. That works. I left it down just for fun...
Yes, I agree. But there is still the issue of wage inflation versus asset inflation and commodity inflation.
Energy and resources are the real underlying issue and power and control of them is what the Fed is trying to maintain.
When people post these Dow/Gold charts they really should post the log(Dow/Gold), otherwise the shape of the chart is kinda useless.
Oh, sorry, Mr. and Mrs. Downvoter. Keep your stupid non-linear chart.
Dow/Gold 0.1/1 ?
WHEN EVERYONE IS SAYING TO BUY AT DOW/GOLD RATIO OF 1:1, IN REALITY NOBODY IS THINKING.
How do you trade this information? Short everything? Ultra-short ETFs? It seems like John Paulson's Hedge Fund was pursuing this strategy, and misunderestimated the willingness of Teh Ben Bernank to just keep printing.
I think if you are still playing the paper markets at this point you have been missing the over all message of this site for the past three years.
."How do you trade this information?"
Let Graham Summers be your guide. It'll be the best money you never spent.
Somewhere (can't find it) I remember seeing a version of this chart which went almost 100 years farther back, extrapolating what the Dow would have been. The chart was surprisingly flat relative to what happened after we let the Fed come in with promises of "price stability".
the fed prices the dow in ipads
it will still go to 1:1 dow 3000/ipad $3000
great work Krieger
Let's start calling it "The Most Important Chart In The World" ... this week.
Wow. So, first there's gold, and then there's western society's increasingly enormous attempts to circumvent/replace/undermine/hypothecate its value with any kind of scrip. Which inevitably fails.
Dow/Gold ratio in 2017-or-so: 0.5.
I'll play the devils advocate even though I hope gold gets to at least $5K per oz. within a year!
What if a new currency was released to the world at a time of global panic and financial crisis that was purely digital which was not based upon any one country's money but based upon a basket of currencies much like the current specific drawing right unit (SDR) that the IMF uses?
What would gold be worth then...if let's say, the price of gold in US dollars was $5,000 per 1 oz....
But, it takes $500 to buy 1 unit of this international, digital currency which subsequently cannot be purchased with gold (the digital currency can only be purchased with another currency)?
And, to top it all off, lets say that this new global currency became the defacto unit for the purchase of oil?
?
Another fiat that you can't even touch? Not only would physical gold explode, but so would physical paper currency as well as any coinage (and I would lose a bet to a 68 year old man who has physical pallets of $100 bills).
pure digital will never work. requires global electrical/telecomunication infrastructure.
Pure digital currency already exists. It's called Bitcoin. Of course, TPTB will fight this too (in vain) because they can't control it. As long as you protect your wallet file, your Bitcoins cannot be stolen, taxed, frozen, devalued, or linked to your real name. Bitcoin cuts off both legs of the modern welfare state: income tax and fiat money creation.
Of course, the State can still tax your house, your car, and your swimming pool. Sales and excise taxes could pay for police and national defense, but they cannot support any sort of welfare state because they hurt workers more than the rich. E.g. the Luxury Yacht Tax of 1990 left rich people without new yachts and yacht-builders without jobs.
I kinda sorta get it but I can't exactly put my finger on it. But thanks, I get the concept. Maybe there will be a black market.
camels have two humps, not three. This chart is a fake!
Or a premoniton of morphed camel humping.
Fukushima effect on camels!
Next we know WE won't have a pair, but triplets!
Agree, the chart is useless.
"The real inflation will come once the money is handed out at the street level"
No shit DickHead: If the money was given out "at the street level",most of the BullShit we been experiencing since 2008 would have been avoided.
But instead,all the FUCKING MONEY was given to insolvent Banksters and their Cohorts.
The money IS given out at the street level!!!!! already!!!!!!
No one, I mean no one, actually works anymore.....
There's social security, and then there is unemployment insurance, and then there is disability and food stamps.
The people who have "jobs" drive in to work every day and they sit at their desks and play computer games
or look at pornography (or read Zero Hedge!) all day.
No one actually works. No one.
That's because some one else did it.
But that would have been bad, as we'd have all the money, and the banks would be BANKrupt.
put the chart in LOG scale... it looks better.. especially the downside potential
The chart is meaningless before American's were allowed to own gold. Before then the price was established by government decree.
DOW up, gold up at a faster rate. Then whats next? DOW down , gold goes to zero, the chart gets in synch. The third peak in the chart above is inverted.
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.
You mean like giving everyone an EBT card, 99 weeks of unemployment or putting them on disability? Pretty soon this may cover everyone making less than the magical $250K. Of course, when minimum wage is $250K, who will care.
Allright, I've been trying to avoid this moment and figure it out for myself, but I gotta ask the dumbass question.
What program/site are these charts being constructed on.
I like the pretty colors.
I like this chart. It tells you get rid of your gold.
The gold bubble is close to the end.
Golden BTFD Cup of Fornication in the hand of the Whore of Babylon riding the Market Beast, imagine that! http://bible.cc/revelation/17-4.htm
Blaaa haa haa haa. What's next, physicists will start painting pictures of Genesis? http://www.smh.com.au/technology/sci-tech/melbourne-researchers-rewrite-big-bang-theory-20120821-24j5z.html
http://bible.cc/genesis/1-2.htm
http://www.youtube.com/watch?v=sCNPXpehoCM&feature=related
Story after sotry like this... just more fuel for formerly-unthinkable events such as the coming MASS ARRESTS, the death of the Federal Reserve Note, and the restoration of the Constitution... http://tinyurl.com/cd5cyjo/
Hate to sound stupid. But how is this calculated?
dow/gold. At some point it's got to be arbitary. The Dow is a collection of stocks that changes. What unit is gold in oz? grams?
When he says reaches the ratio of 1 to 1. 1 what to 1 what? One ounce of dow to 1 shares of gold?
How many oz of gold it takes to buy 1 share of all the dow industrials?
"How many oz of gold it takes to buy 1 share of all the dow industrials?" ..Yes, that is it.
"How many oz of gold it takes to buy 1 share of all the dow industrials?" ..Yes, that is it.
Sorry for my double-speak. Just comes naturally.
My biggest investing mistakes were things i did not do, like sell all my paper assets in 2008 to invest in either gold or silver and reverse the trade today. My portfolio has got back to near even after three tears of trading stocks but that just means i lost three years of my life getting nowhere.
That's it? Only your last three years. Crap, the last 10 years have been flat. Your up 7 on the rest of us.
SPX / DOW / NASDAQ / DAX / FTSE choppy daily charts are still breaking down.
http://www.zerohedge.com/news/2012-12-24/market-analysis
Krieger's analysis matches my own. The Dow:Gold is one of the pole stars I use to sail my own little ship; and has been since spring of '06.
It has been discouraging to watch the Dow:Gold go from under 6 roughly this time last year back to 8.2 about two weeks ago. 8.2 hadn't been seen for nearly two years. This was probably the last time to ditch stocks for gold. Either that, or gold investors were about to get killed.
The former situation is very most likely the reality. With energy prices plus too much un-payable, global debt placing a hard cap on growth, hard assets and especially hard money are still set in an uptrend.
I'm not a trader. I'm a "buy and holder". For this strategy to work identifying long term trends early enough, and then to ride them, is crucial.
Thought you folks might appreciate seeing this chart in an interactive format and using a log scale - gives a much better context than the charts in the article: http://www.macrotrends.org/1378/dow-to-gold-ratio-since-1915