Inflation is afoot, scorching everything it touches, from financial assets to house prices to bananas, coffee and cotton. And if the Fed gets its way, even more money will be released into the global wild. But where will it go?
US blue chip stocks are one obvious recipient. But the Dow could go to 20,000 and not produce one single dollar more in real wealth for American or international investors. The Dow—like gold and oil—is rising because the Fed is trying to reflate the bubble. But the chart below from my friend Ron Griess at TheChartStore.com shows the Dow/Gold ratio is currently near 20:
What does it mean?
It takes about 20 ounces of gold at the current spot price (US$734) to buy one “share” of the Dow (13,912). If the ratio stays around 20 and the Dow goes to 20,000 (let’s say Bernanke keeps cutting rates)—then the gold price would have to be US$1,000. Dow 20,000, gold US$1,000, Gold/Dow ratio 20:1.
The chart, however, shows that the Gold/Dow ratio is in decline. If the trend keeps declining, it should take fewer ounces of gold to buy a share of the Dow. That means if the Dow is going up—which the Fed and the American political establishment clearly want to happen—gold will go up faster.
In other words, what we’re saying is that the nominal rise in financial assets is a big shiny, shallow sham. Trash US dollars may be floating US stock prices. But global capital flows are migrating toward tangible assets. That’s the trend to keep your eye on. That trend is your real friend.
“Japan is preparing to launch the biggest change in the country’s financial regulations in 20 years, a move designed to encourage the nation’s thrifty savers to put more of their US$13 trillion in personal assets into stocks and bonds,” writes Yuka Hayashi in today’s Wall Street Journal. She reminds us that once a generation reins in its animal spirits—as the Japanese did after the bursting of their own bubble in 1989—those spirits take another generation to revive.
“Getting individuals to buy more stocks could have a profound effect on Japan’s market, which still trades at less than half the peak it reached in 1989. The percentage of the market held by individuals dipped to 18% at the end of last year from 21% at the 1989 peak, according to the Tokyo Stock Exchange,” Hayashi adds.
Oil’s up. Gold is up. The ASX is up. The Dow is up. So far so good on the reflation plan. Except that the dollar is down and there are five million unsold new homes in the US. Did we mention house prices can fall too?
Median house prices fell by 8.3%. When you trade houses like stocks—buying them with credit and hoping to sell them to a greater fool—you’d better have really good timing.
Markets and Money