Congratulations, America! The Dow Jones Industrial Average has just rolled past 20,000 for the first time ever! Let the fireworks fly, because the ticker tape parade is about to begin!
The Trump administration, wasting no time in chalking this up to “the Trump effect,” celebrated.
Asian markets, which lifted as much as 1.8% on the news, celebrated.
European markets, which edged up across the board on the news, celebrated.
Global markets in general, which hit a 19-month high on the news, celebrated.
And why not? Such a momentous event must indicate that the global economic recovery is right on track, right? Surely we can now rest easy in the knowledge that the coming years will bring prosperity and security for all, right?
If the crossing of a nice big round number on the DJIA doesn’t fill your heart with joy or make your pocketbook feel any heavier, then good for you. You’re right to be wary.
It’s not just that we live in a different world now, one where stock markets have become completely meaningless to the majority of Americans who now own precisely $0 worth of stocks. The problem is even more fundamental than that.
Remember Dow 10,000 back in 1999?
Of course you do. It was right before the bottom fell out of the dot-com bubble, and Greenspan inflated the housing bubble, which popped in 2007 and led to this current asset bubble, which led to Dow 20,000.
In short: Don’t be fooled. This is just another bubble.
But don’t take my word for it. Take Donald Trump’s. No, not President Trump’s word. Not President-elect Trump’s word. Candidate Trump’s word: “Believe me, we are in a bubble right now, and the only thing that looks good is the stock market, but if you raise interest rates even a little bit, that’s going to come crashing down,” he said during the first presidential debate (right before the Fed raised interest rates). “We are in a big, fat, ugly bubble.”
To get a sense of how meaningless Dow 20,000 is in the face of a general asset bubble, look at this comparison of prices, compiled by The Motley Fool, showing the difference between Dow 10,000 in 1999 and Dow 20,000 in 2017:
- Price for a gallon of gas: $1.12 (1999) vs. $2.44 (2017)
- Price for a barrel of oil: $14.36 (March 1999) vs. $53.18 (2017)
- Price per MMBtu of natural gas: $1.85 (1999) vs. $3.34 (2017)
- Average U.S. home price: $119,600 (1999) vs. approx. $204,500 (end of 2016)
- Gold price per ounce: $280.10 (1999) vs. $1,200.50 (2017)
- Silver price per ounce: $5.10 (1999) vs. $16.97 (2017)
- Movie ticket price (adjusted for inflation): $5.08 (1999) vs. $8.65 (2016)
Even if you were heavily invested in the DJIA over this unprecedented eight-year-long QE heroin bull run, you would still be worse off when you tried to buy anything with your returns.
Indeed, as Tim Price of SovereignMan.com explains in his own piece on this Dow Jones “milestone:”
“The price of a stock alone doesn’t tell you much. It’s important to look at the price of the stock relative to other important metrics, like cash flow, book value, sales, earnings, etc.”
So what do these metrics say?
They tell us that the Dow is currently at its highest price-to-sales ratio since the 1999 bubble.
They tell us that the Dow is reaching all-time highs even as the companies that make up the Dow are reporting their worst revenues this decade.
They tell us that consumer confidence is radically diverging from the DJIA index.
They tell us that the cyclically adjusted price-to-earnings ratio is at levels not seen since the dot-com bust.
Too much financial gobbledygook? Then let me put this as simply as I can: The central banks have spent most of the last decade “saving the world” from the subprime meltdown they helped to create by blowing yet another bubble. Or, in the memorable words of the Bank of England’s “director of financial stability:”
“Let’s be clear. We’ve intentionally blown the biggest government bond bubble in history. We need to be vigilant to the consequences of that bubble deflating more quickly than [we] might otherwise have wanted.”
So President Trump might want to be very careful before attempting to own Dow 20,000. Because if he wants to claim credit for the last expansion of the bubble then he will undoubtedly be forced to own its inevitable pop.
But don’t worry, everyone, the wizards of Wall Street are currently positioning themselves for one last melt-up before the whole thing goes down, so there may yet be time to squeeze another few meaningless points out of this stock market rally…assuming you can get out just in time.
So the question, as always, is: Are you feeling lucky, punk?