Dow 50,000

 Dow 50,000

 

 

Forty years of Dow Jones Industrial Average performance begs the question "When?" not "If?" the DJIA will reach the 50,000 milestone.

 

As often discussed on this blog, the greatest dangers to the financial farmer are taxation and inflation. In regards to the DJIA, we can clearly see the effects of inflation; the average has a relatively stable linear trajectory from 1984 to 2024. Albeit, there are some SERIOUS instances of volatility cause tremendous slides and spikes. 

With that said, we are about 32% away from Dow 50,000 or just about a third. Over the past forty years the Dow has risen some 37,000 points or 3200%. Is America 32X BETTER than it was in 1984? Doubtful.

As best I can tell, the major "advances" over the past 40 years have largely been in the PRICES. Real wages have fallen after having peaked sometime in the early 1970s. What has increased? The price of nearly everything save perhaps for COMPUTING power. And that is what I argue has been the REAL growth over the past 40 years, indeed perhaps even dating back to the invention of the microprocessor itself.

Nearly every component of the Dow, the the members have changed significantly over the past 40 years, have by definition been industrial companies. Over time though those components have weighted more and more towards technology. The same can be said of the broader S&P 500 Index, whose 505 members are a cross section of the largest companies in the United States.

Today fewer companies make more of the profits, and naturally those companies have higher market capitalizations. It has gotten so extreme that less than a dozen technology companies account for the majority of the capitalization. 

There have been several seminal events over the past 40 years of Dow performance which has driven the market significantly higher. In the early 1980s the taxation structure was significantly changed in the United States under President Reagan. This led to an unprecedented boom.

After the crash in 1987 and recession in the early 1990s I argue the next seminal event was in December 1994 when the Netscape Navigator browser was released. That opened the world to the internet. And even during multiple upheavals during the next 30 years the internet gradually came to dominate global commerce.

I believe we are at a similar inflection point to December 16th, 1994 the day after Netscape Navigator was released with AI today. Via ChatGPT and distribution via the largest company in the world, Microsoft, I believe the world again is going to pivot higher in terms of real growth.

What does this mean for the Dow Jones Industrial Average? Assuming more of its components harness AI, or are even replaced in the Index BY AI-dominate companies, the Dow itself should see meaningful increases in the year(s) ahead and not just due to inflation, but rather TRUE growth in terms of productivity. If the Netscape theory holds, then we should see Dow 50,000 sooner rather than later.

Inflation Nation

 Inflation Nation

Nothing makes America poorer faster than inflation. Last Friday's annualized Consumer Price Index (CPI) number came it at a sizzling annualized 6.8%, the highest since Reagan had to go to work defeating the last remnants of the Carter's administration's handiwork. Reagan broke the back of inflation by jacking up interest rates to the point where inflation was tamed. The greatest Bull Market the world has ever witnessed soon followed. We might not have that luxury of both a prudent leader and the liquidity to tame inflation this time around.

Simply put, inflation is the by-product of a fiat fiscal and monetary policy run amok, too much paper money (fiat money) is created rather than actual value. Gold has well stood the test of time for literally thousands of years because it cannot be created by man. It must be acquired by toil. Not the case with Benjamins. The Treasury Department can keep on a-printing those bad boys all day long. In fact, with the modern marvels of blockchain and digitization 1s and 0s can now account for the actual "money." No need to even print it...just add a couple comas to the supply and viola, you have more money!

The Biden Administration is in a serious bind. There is tremendous demand for a limited set of real products; read housing, energy, food, education, healthcare, and hard goods. Consumers are not stupid. They are moving their digital paper money as quickly as possible into goods and services, hence simply via a classic supply & demand scenario prices go up with increased demand and diminishing supply.

Although the headline number of 6.8% annualized is bad, the reality is far, far worse dear farmers. The fact is the majority of Americans do NOT live in Megacities. As evidenced by the population density map of the USA below, the country is pretty well distributed with the East (loosely East of the Mississippi River) being at least 2X more dense than the West (up until you get to coastal California of course.) Why does this matter?

This matters financial farmers because both the CPI data set is a fallacy. The majority of Americans are seeing double digit inflation in everything that matters, and most importantly they're actually paying for it out of pocket. Let me explain. A significant portion of the residents of Megacities are subsidized in terms of housing, food, and healthcare. Meaning the government is picking up the tab. Whereas outside these areas, the median (not average) citizen is paying through the nose for higher gas prices, housing, food, healthcare, education, etc., etc.

The end result is a total theft of wealth from the very people who the Government SHOULD be focused on improving their opportunity in life with lower taxation, less regulation, and more opportunity for goods and services sold in the USA. The opposite is happening. The government is subsidizing cheap labor and goods overseas which then compete at a significant advantage against home-grown goods and services. The net result is the loss of market share, employment participation, and meaningful opportunity for the very citizens the government was elected to serve.

What is a hard-working financial farmer and patriot to do? First, keep calm and carry on. Second, look to circle the wagon(s) around physical goods and vital services. There is nothing "transitory" about the hordes of people competing for the same goods and services...lock up your share of real estate, blue chips (larger-cap monopolies paying a dividend, see "Rapko's Rules"), gold, education, and healthcare. Oddly enough having some cash might not be a bad idea, because even though its buying power decreases by the day (hour?) there is something to be said of "buying the dip" in terms of assets.

When will the ship turn around? It might not turn around. We have a timid Fed unwilling to buck the interests of the Biden Administration. An impartial Fed does not exist, if it ever did. So what this means is interest rate hikes will be milquetoast at best, especially if the "BBB Plan" is enacted by some unfortunate miracle. Part of the BBB Plan relies heavily on low rates, forever. As an investor this means 2022 doesn't look particularly bright in terms of upside as investors will be fighting for survival against the Fed.

2022 is all about finding assets which offer REAL growth in terms of capturing market share, increasing dividends, and raising their prices for goods and services. A great question to ask is "can this business pass along costs?" For companies without positive cash flow and living on the largess of zero interest rates it becomes a eloquent kabuki dance of finding investors willing to stomach volatility spikes. Only those that create and sell real value will survive.