Dow Euphoria

Following President Trump’s speech the Dow Jones Industrial Average (Dow) easily broke 21,000, and closed at another all-time high – 21,115.

The Dow closed up for the 12th consecutive day on Monday February 27, another three decade record.

Excel calculated the Dow’s daily Relative Strength Index (RSI – 14 period), a technical timing oscillator. It reached 97.75 (maximum = 100.00) on March 1, an exceptionally “over-bought” reading that has occurred nine times since 1950.

The weekly RSI also reached a very high “over-bought” reading as of March 3, the end of last week.

Margin debt recently registered an all-time high on the NY exchange. Price to earnings ratios have risen into “nosebleed” territory, and the last 1% correction in the S&P was in November – a long time ago. Many other market extremes and highs in confidence indexes are evident.

YES, THE EUPHORIA IS PALPABLE!

The Dow reached new highs the normal way – levitated through the creation of massive unpayable debt and the expectation of huge profits (for traders). Daily sentiment has reached a peak and indicates we are at or near a top.

Official national debt is nearly $20 trillion. Regardless, President Trump promised something for everyone:

• More military spending, which will create larger deficits and more debt;
• Middle-class tax relief; (Larger deficits and more debt…)
• $1 trillion infrastructure spending; (More debt…)
• Education bill for more school choice etc.; (More debt…)
• The Wall; (More debt…)
• And more promises that require massively more debt.

The Dow likes more debt, until reality strikes.

Previous Peaks in the Dow: (National debt in $ billions.)

Date                      Dow          Official National Debt          Ratio Dow to Debt

Jan. 1973              1,067                   450                                      2.37

Aug. 1987             2,746                 2,330                                     1.18

Jan. 2000            11,750                 5,776                                     2.03

Oct. 2007            14,198                 9,055                                     1.57

Mar. 2017            21,115               19,960                                     1.06

To keep the Dow rising, create debt and don’t worry, be happy…

But it takes more debt to buy each Dow point than it did several decades ago. How much debt will be needed to levitate the Dow to 30,000? Will it require $40 trillion in debt? And what are the consequences of massively more debt? Stagflation is on the horizon.

Consequences of the spending problem according to Ron Paul:

“That leaves only one solution: printing money out of thin air.” [But] “printing money out of thin air destroys the currency, hastening a US economic collapse and placing a very cruel tax on the working and middle classes as well.”

His solution for US government policy:

“… end the US military empire overseas, cut taxes and regulations at home, end the welfare magnet for illegal immigration, and end the drug war. And then get out of the way.”

These ideas will encounter fierce resistance, so much that his plan is clearly “dead on arrival.”

CREATE MORE DEBT! 

More debt is guaranteed by a century of fiat currency devaluations, a borrow-and-spend congress, the executive branch, central banks that love debt, and an economy that runs on debt and credit. Expect continued dollar devaluation and more Dow highs after a nasty correction/crash.

While the Dow corrects and the U. S. economy struggles in a fiat currency induced coma, gold and silver prices will rise.

CONCLUSIONS

• The Dow has reached another all-time high powered by borrow and spend euphoria. A bubble in search of a pin… Read Speculative Blow-offs.
• By many measures including daily sentiment, P/E ratios, technical indicators, and consecutive daily highs, the Dow is peaking and due to correct. Perhaps the correction/crash will occur soon, or near the next Fed meeting, or after the March 15 budget ceiling deadline, or whenever the HFT machines decide to crash the market.
• Expect massively more “money printing” and debt creation.
• Ever-increasing spending and more debt and currency in circulation will push the price of gold to new highs. Fear and panic will eventually force withdrawal of “funny money” from the stock markets and bond markets. Some of that fearful money will purchase gold and silver for safety, preservation of capital, and protection against further devaluation of fiat currencies.
• The stock and bond markets will correct but the debts will remain.
• Gold and silver will surge higher, probably through the balance of this decade.

Gary Christenson

The Deviant Investor