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New Quarter, Same Trend; Secular Bear is Settling In
EWI analysts report the nominal Dow has a long way to go before it catches the ‘real’ Dow.
Yes, the secular bear market is here. In fact, it’s been here for a while – and it’s going to stay for a while.
So, the time has come to ignore the talking heads who keep calling a "bottom" that could be years away. U.S. stock investors are nowhere near the "point of recognition," or the mid-point of the dominant trend when participants see that trend for what it is.
The July 2008 Elliott Wave Financial Forecast (learn more) says it best:
“Watching financial TV, where the stock market recovery begins every hour on the hour, it is not hard to find economists, analysts and fund managers who are eagerly snatching up perceived bargains.”
You’re Just a Few Clicks Away from EWI's Latest Stocks Analysis
The July 2008 issue of The Elliott Wave Financial Forecast is online now. In it, you will discover what's changed in the past 6 months, what to expect in the next 6, why DE-flation not IN-flation is the word of the day and how Elliott-minded investors have kept their money safe. DETAILS>>
On Wednesday, July 2, 2008, the bear market became “official” by the mainstream definition. But let's step out of the mainstream for a moment to consider another possibility: If you’ve been with us for a while, you might recall Robert Prechter dubbing this phenomenon the “Silent Crash.”
When it comes to stock shares – whether in the Dow, Nasdaq or S&P 500 – their real values (measured in ounces of gold) have been declining since July 1999. Prechter calls it “silent” because, even as Wall Street celebrated all-time highs, the "real" value of dollar-denominated shares was actually crashing.
You see, when you measure your stocks’ value in dollar terms – namely, the way the Federal Reserve wants you to measure it – you are literally short changing yourself. The simple fact is, dollar-denominated – or “nominal” – stock values have been pumped up (sic: propped up) since 2002 by enormous credit and U.S. dollar inflation. The Fed is partly to blame for credit inflation, but in truth so are the millions of consumers who snapped up easy credit at every opportunity. What’s worse, that credit (sic: funny money) usually goes to discretionary spending rather than debt reduction – and on the cycle goes.
If you own stocks and want to know their true worth, you must apply a measure of real value. But after one look at the following charts, you'll understand that stocks have been the last place to acquire "real value." Here's what they show:
Figure 1: The Dow Industrials priced in both U.S. dollars and ounces of gold.
Figure 2: The Dow Industrials priced in ounces of gold only.
Figure 3: The Dow Industrials priced in the CRB index only, or how many commodities your shares can buy.
For those of you who are seeing these charts for the first time, I’ll provide you a moment to pick your jaw up off the floor.
OK, let’s continue.
As EWI subscribers already know, a true bull market will see nominal and real values increase together, which they did from January 1980 to July 2000. That was a bull market.
By the time the nominal and real Dow diverged in 2002 (see Fig. 1), the real bear market had already begun.
You’re Just a Few Clicks Away from EWI's Latest Stocks Analysis
The July 2008 issue of The Elliott Wave Financial Forecast is online now. In it, you will discover what's changed in the past 6 months, what to expect in the next 6, why DE-flation not IN-flation is the word of the day and how Elliott-minded investors have kept their money safe. DETAILS>>
Of course, most folks on Wall and Main Streets talk about the nominal Dow, because that's what they hear on the evening news and read about in the newspapers. But if the dollar was still tied to gold – as it was for most of U.S. history – the chart above is the one everyone would instead be talking about.
You may be thinking, "We buy stuff with dollars, the stock indexes are measured in dollars, and dollars are the country’s only accepted form of currency -- so why is it important to track the 'real' Dow?"
Bob Prechter provides an answer. Referencing the chart above (Fig. 1, updated for this publication), he points out how from 1973 to 1974 the nominal Dow played catch-up to the real Dow by way of a 47% nominal price decline. This is important, he says, because it provides a historical precedent for what he believes is happening right now.
“I think the ultimate resolution of this dichotomy is going to be the same [as 1973-1974], except for one thing: it’s bigger! Ultimately, real prices are leading the dollar prices, and we’re going to see a tremendous drop in the dollar prices [of stocks] as well.” (Quoted from Dec. ’06 Silent Crash video)
In fact, the July 2008 Elliott Wave Financial Forecast (learn more) updates Prechter’s outlook:
“As of today (June 27, 2008), the nominal Dow, denominated in U.S. dollars, is below its high of 8 years ago in January 2000 while the nominal S&P 500 and NASDAQ are down 17.5% and 53%, respectively, from their 2000 peaks, and the ‘real’ Dow, as measured in terms of its gold value, is off by over 70%. In a bear market, some will slowly catch on to how much safer (and much more fun) it is to just stand on the sidelines and watch the knife catching than it is to take part. The sooner that they recognize the advantages of this approach, the more capital they will conserve and the smarter they will look at the bottom when the genius of getting out and staying out is finally recognized.”
Take one more look at the featured chart above (Fig. 1). See how the dollar-denominated value (shown at the far right on the black line) has already begun to curl down toward the real value of the Dow. Now ask yourself this critical question: "Is my portfolio prepared for the nominal value of stocks to be equal to the real value?" Elliott-minded investors are armed with the knowledge to say, “Yes!”
You’re Just a Few Clicks Away from EWI's Latest Stocks Analysis
The July 2008 issue of The Elliott Wave Financial Forecast is online now. In it, you will discover what's changed in the past 6 months, what to expect in the next 6, why DE-flation not IN-flation is the word of the day and how Elliott-minded investors have kept their money safe. DETAILS>>