Today the DJIA index (DIA) touched 13,000 for the first time since May 2008. Mainstream media has printed articles suggesting we will again witness a flood of retail investors throwing money at the markets now that we've broken a psychological barrier.
At the same time, we have analysts arguing that Dow 13,000 is a meaningless number. I tend to agree.
Quite simply, some of the biggest stock market booms in history were coupled with the some of the biggest currency devaluations in history. The Weimar Republic and Zimbabwe are two examples that come to mind.
I'm not saying that the US is anywhere close to the Weimar Republic or other hyperinflationary environments (at least, not yet), but the same principles apply. With trillions of dollars injected by central banks into the global financial markets over the past few years, I can't help but think these stock market gains are somewhat diluted. Housing deflation aside, is $1 today what it was at the bottom of the market in March 2009?
With that said, measuring the true value of $1 is quite difficult. After all, CPI is manipulated and various other measures are highly personalized.
One of my preferred proxies for monetary expansion is gold (GLD). When measured in terms of gold, the DJIA has actually fallen by almost 11% since the March 2009 bottom. Compare this to the DJIA in nominal terms, which has risen over 70% during the same time period.
In my opinion, we should be concerned about this massive discrepancy, and celebrating Dow 13,000 may be premature.
Disclaimer: Data Sources: Plan B Economics, Yahoo, World Gold Council. This is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk, and you could lose all your money. Consult a professional advisor before making any investing decisions.