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Why the Dow Broke 10,000, and Why You Should Still Watch Your Wallet
How did the Dow break 10,000 when the rest of the economy is in the toilet?
1. Corporate earnings are up -- mainly because companies have been cutting costs. Payrolls comprise 70 percent of most companies' costs, which means companies have been slashing jobs. In the end, this is a self-defeating strategy. If workers don't have jobs or are afraid of losing them, they won't buy, and company profits will disappear.
2. Federal borrowing has filled the gap that consumers and businesses created when the latter began to reduce their debt. Federal debt, in other words, has kept the economy from tanking. Can't keep up forever, though.
3. With such horrid employment numbers, Wall Street figures the Fed will keep interest rates low for some time, and continue to flood the economy with money. That's good news for the Street because it means money stays cheap -- and with cheap money the Street can make lots of bets on almost everything under the sun and moon. As a result, the Street's earnings are way up. But this, too, is temporary. At some point the Fed is going to worry about inflation and a falling dollar.
4. Investors of all stripes want to get in early and ride the wave. Pension funds, mutual funds, and other institutional investors figure the bull market has more oomph in it because, well, other investors will jump in. Think Ponzi scheme. Nice for now, but watch out if you're one of the last in.
In other words, this is all temporary fluff, folks. Anyone who hasn't learned by now that there's almost no relationship between the Dow and the real economy deserves to lose his or her shirt in the Wall Street casino.
1. Corporate earnings are up -- mainly because companies have been cutting costs. Payrolls comprise 70 percent of most companies' costs, which means companies have been slashing jobs. In the end, this is a self-defeating strategy. If workers don't have jobs or are afraid of losing them, they won't buy, and company profits will disappear.
2. Federal borrowing has filled the gap that consumers and businesses created when the latter began to reduce their debt. Federal debt, in other words, has kept the economy from tanking. Can't keep up forever, though.
3. With such horrid employment numbers, Wall Street figures the Fed will keep interest rates low for some time, and continue to flood the economy with money. That's good news for the Street because it means money stays cheap -- and with cheap money the Street can make lots of bets on almost everything under the sun and moon. As a result, the Street's earnings are way up. But this, too, is temporary. At some point the Fed is going to worry about inflation and a falling dollar.
4. Investors of all stripes want to get in early and ride the wave. Pension funds, mutual funds, and other institutional investors figure the bull market has more oomph in it because, well, other investors will jump in. Think Ponzi scheme. Nice for now, but watch out if you're one of the last in.
In other words, this is all temporary fluff, folks. Anyone who hasn't learned by now that there's almost no relationship between the Dow and the real economy deserves to lose his or her shirt in the Wall Street casino.
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since the dow was at 10,000 last time the US$ has lost 25% of its value. on the basis of the dollar loss the dow is now equivalent to about 7,500.
at the time that the dow was last at 10,000 it took 30 ounces of gold to buy the dow. now it takes about 10 ounces of gold.
October 14, 2009 10:28 PM | Reply | Permalink
What a load of nonsense. This isn't 1890. The price of gold has NOTHING to do with the value of the dollar. Relative to the Euro and most other currencies the dollar about where it was before the crash.
October 15, 2009 12:21 AM | Reply | Permalink
how can you say that the dollar has nothing to do with the price of gold. that is naive. as the dollar tanks, the price of gold goes up.
October 15, 2009 10:27 AM | Reply | Permalink
The price of oil is half of what it was in June 2008. Based on that, wouldn't you say the dollar is worth twice what it was then? Why is gold the benchmark? Why not oil? Or coffee? The value of a dollar is in its purchasing power and a lot more people buy gasoline and coffee than gold. There is no fixed standard to what a dollar (or Yen, or Euro) is worth, and there hasn't been since Nixon officially abandoned the gold standard in 1971.
October 15, 2009 11:36 AM | Reply | Permalink
The value of a dollar is in its purchasing power and a lot more people buy gasoline and coffee than gold
the point i was making above is that the purchasing value of the dollar has decreased by about 25%. it is taking more US$ to buy gas and coffee.
you can't compare oil and gold. oil is a consumable. we can make more of it but it might be very expensive. when we use it, it is gone. gold is the opposite. it is not renewable. we cannot make more of it and we cannot destroy it.
October 15, 2009 11:49 AM | Reply | Permalink
The purchasing power of the dollar has NOT decreased by 25% over the last year. Prices of virtually everything people buy are more or less unchanged. The price of normal commodities like gasoline and coffee are what determine the purchasing power of the dollar. The price of gold is irrelevant.
October 15, 2009 1:18 PM | Reply | Permalink
We can "make more gold" in exactly the same sense as we can "make more oil" -- by extracting more of it from the earth. And they are both limited in exactly the same way.
October 16, 2009 1:23 AM | Reply | Permalink
We can "make more gold" in exactly the same sense as we can "make more oil" -- by extracting more of it from the earth. And they are both limited in exactly the same way.
October 16, 2009 1:26 AM | Reply | Permalink
That's irrelevant, unless you're positing that gold is the *only* commodity in existence. Gold's worth whatever I can sell it to you for, and its price always increases in times of economic uncertainty. Besides, as has been observed, since Bretton Woods went bye-bye, there's no explicit peg between gold and the dollar. You can't draw meaningful inferences about the health and value of one simply based on the health and value of the other.
Gold's a great hedge against unexpected inflation, but I'd say that, given the considerable deficit spending this year, inflation's not only expected, but it has a place setting waiting for it at the table.
October 16, 2009 6:51 PM | Reply | Permalink
If I had a magic wand and overnight I could double the number of dollars, and also double the number of Euros and Yen and Yuan and double the amount of every fiat currency on the planet, what would happen?
What would happen to the value of the dollar compared to the Euro? It would stay the same.
What would happen to the price of gold? (Or oil, or peanut butter, or Levi's, or...)? The price of everything would double.
As Blue Pearl pointed out, the reason people reference the price of gold is that its supply is relatively stable. Therefore its price is better correlated to the supply of money (than, say, oil, whose price is affected by many other factors).
My point is that the fact that the dollar keeps pace with other major currencies does not mean anything if all governments are simultaneously devaluing their currencies.
Your argument amounts to saying, "But everybody's doing it." (Yes, and if everybody jumped off a bridge, would you jump, too?)
-- ARG
October 15, 2009 12:51 PM | Reply | Permalink
It's not temporary fluff, it's asset inflation due to the concentration of wealth into the hands a few. The market will not go down because all the money that could be taken is almost gone. In other words, there is little left for "Wall Street" banksters to steal. The upper class has won the "battle of the bulge" They are just trying to lull us to sleep now, so they can keep all their ill gotten gains. Our throats are slit now they just have to wait for us to bleed out. You know it's true....
October 15, 2009 2:16 AM | Reply | Permalink
Speculators continue to take value out of the economy without putting anything in. The corporations that bought, paid for and now run the government are not about to have their own lobbyist write bills that would change the short term bottom line goals that brought us to where we are. All the people that were responsible for the meltdown are still there to do it again. As long as these people and corporations (and the corporatist politicians of both parties that compete to kiss their behinds) are still running the show we are just passengers (or more correctly, their serfs and slaves) 'cause it's gonna happen again until those corporations that are running the government to write their own rules are taken down.
October 15, 2009 6:03 AM | Reply | Permalink
The present Administration and congress's insistence on continuing to practise 'Trickle Down' economic policies (bailing out the corporations that are their big donors while the people founder) only delaying the inevitable collapse with extended unemployment means the people need to fasten their seat belts while the elites party on.
October 15, 2009 6:38 AM | Reply | Permalink
Over the last week the dollar has really taken a beating compared to the Mexican peso, from 13.4 to 12.9. That isn't a particularly good sign given the fact that the backing of the peso, the Mexican economy, isn't the strongest in the world. I suspect what it means is that it would be a good time to heed the advice of investor analysts to diversify into overseas holdings.
It is kind of amusing to watch the balancing act of trying to maintain a strong dollar to keep up foreign investment buying the debt while at the same time have a weak dollar to improve exports. You really can't win that one.
October 15, 2009 8:06 PM | Reply | Permalink
I've agree with you. I think the DOW rise has just been what Peter Grandich calls a "Melt up". It's all a bit bogus at this point. There's too much hot air money.
October 16, 2009 10:47 AM | Reply | Permalink