Market Update For Late August

Then there are the bearish techniques that are available; shorting the market or buying put options. I’ve never had any luck with those. As I’m not an investment adviser by any legal definition, I’m not going to suggest these bear market strategies to my readers, though they might prove to be the correct thing to do here in the last week of August.  

What I do feel safe is recommending the reduction of one’s exposure to the stock market to the point my readers feel comfortable with, and begin placing their capital in precious metal assets. Way back in the 1970's and '80's an investment rule of thumb was an allocation of 5% to 10% of investment funds should be committed to gold and silver. That seems a prudent thing to do today, and I wouldn’t attempt to talk anyone out of committing an even larger allocation of capital to precious metals and their miners in our uncertain world.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 614\Chart #2   DJIA OHLC.gif

Like the Dow Jones, the other major market indexes I follow were doing fine, until Friday. And except for the Dow Jones Utilities (#1 below), the other indexes at the close of Friday also saw extreme moves from their Thursday’s close.

I have Dow Jones earnings data going back to April 1929, and it’s amazing how earnings for the Dow Jones and CinC have lined up for the past ninety years; with one dollar in Dow Jones earnings for about every one billion dollars of CinC. It’s not as if Dow Jones earnings and CinC are bolted together; they’re not. But when studying the two plots in the chart below, it’s hard not seeing an inflation component in the Dow Jones earnings.

Still, how monetary inflation (CinC / Red Plot) flowing from the Federal Reserve created earnings for the Dow Jones (Blue Plot) was different before 1979 than it was after 1979.  

  • From 1929 to 1979 (chart insert), rising CinC acted like rising water levels, lifting Dow Jones earnings up as CinC increased to ever higher levels. 

  • From 1979 to today, CinC functioned as a hard ceiling to Dow Jones earnings, as its earnings oscillated wildly.

One has to wonder why the change, and what made the Dow Jones’ post-1970's earnings different from previous decades? My opinion is when the US Treasury decoupled the dollar from the Bretton Woods $35 gold peg, many instabilities were introduced into the financial system, of which one can be seen in the Dow Jones earnings below.

What other instabilities also came with the dismantling of the Bretton Wood’s $35 gold peg? In August 1971 futures traded in the market were mostly, almost exclusively for agricultural products to basically hedge whether it rained or not in the Midwest.  

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