True or False: The “Real” Dow Jones Industrial Average has rallied more than 30% from its March 2009 low, standing near its highest level in nearly six months.
That depends on who you ask. According to the mainstream experts, the answer is clearly YES. For many in this camp, the Dow’s upsurge is the “slow and steady” start of a new, “healthier” bull market.
There’s just one major problem with this assumption, namely: Wall Street gauges the value of the Dow in terms of the U.S. dollar. This is a “nominal” figure based on intangible ebbs and flows of liquidity.
In truth, there is only one genuine measure of the Dow’s actual purchasing power: Gold. And that picture isn’t so pretty: Right now, the “Real” Dow/gold is circling the drain of the 170-level, half of its Depression-era peak.
Now, you might ask yourself: Who gives a hoot about the DJIA in terms of gold? Wall Street doesn’t pay it any mind. And gold itself hasn’t been the standard since FDR gave nightly “fireside” chats and the average cost of gasoline was 10 cents/gallon. (Circa 1933.) So, what does it matter where the Dow is denominated on this outdated scale?
Here’s why it matters: In the last three decades, an authentic bull market has occurred ONLY when the “Real” Dow is rising alongside the Nominal Dow.
On this groundbreaking discovery, the January 2008 Elliott Wave Financial Forecast presented this powerful, three-paneled chart of the Dow Jones Industrial Average from 1980 to 2007.
The first tier shows the Nominal Dow, as measured in U.S. dollars; the second shows the Real Dow, as measured in ounces of Gold; and the third depicts the Dow versus the S&P Goldman Sachs Spot Index of Commodities Ratio.
As you can see, the genuine bull market era of 1980 to 1999-2000 witnessed a synchronized rally leg in all three indexes. From there, the trio of Dow valuations reversed course in a coordinated decline.
In October 2002, however, a major divergence took place when the Nominal Dow broke away from the crowd and started to rally as the Real Dow and Dow/Commodities continued to collapse.
The five-year advance in the nominal index since 2003 was not the product of currency inflation, but rather CREDIT inflation. Stocks flew too high on the "borrowed" wings of every debt-related vehicle under the acronym-esque sun: ARM, ARS, SIV, CDO, etc... And, once confidence in that elaborate system of leverage evaporated in 2007, the entire system collapsed alongside. (The Nominal Dow plunged 60%-plus to a 12-year low, falling in step with the 80% drop in its "real" counterpart)
In the end, one thing remains certain: No bull market can begin until the Real Dow says so. The July 2009
Financial Forecast Service publications present multiple pictures of the DJIA/gold that reveal whether go-ahead has been given.