Bear Market Volatility, The 200 Count

Until the financial markets begin upchucking the “liquidity” being forced fed to them, we can anticipate the stock market will continue going up as the old monetary metals for the most part continue holding on to what they have.

Except for Thursday, the Dow Jones closed at new all-time highs every day this week. That should be big news, however in 2017 that seems to have become the rule rather than the exception.  Will the Dow Jones ever again find itself below its BEV -5% line in its BEV chart below?  Yes it will, and that will be big news!  As you can see in the corrections table in the chart, the Dow Jones today would have to shed 1,233 points to do it.

This market is so insanely overvalued the Dow Jones could go down 15% and still find itself above its 20,000 level.  Heck, before the November 2016 election the Dow was a then lofty 18,332.  To return to there would take a little bear market, a 26% decline in the Dow Jones.  But since then it’s seen 86 new all-time highs and 6,319 points with no indication of when the good times will end.

I like historical data; it places things as they are today into perspective. Here’s a chart showing how many dollars of Dow Jones valuation it takes to purchase $1 in Dow Jones dividend payment since 1925.

At the top of the Roaring 1920’s bull market, it took $35 of Dow Jones valuation to receive $1 in dividend payment, a 2.86% yield.  At the July 1932 bottom of the Great Depression crash, it took $10 of valuation for $1 in dividend payment, a 10% yield.  And so it went until August 1987, when Alan Greenspan became Chairman of the Federal Reserve.  

Before Greenspan, one could use Dow Jones dividends to see when the stock market was overvalued (bull market top) when it took more than $30 in valuation to purchase a $1 in dividend payouts. Safe reentry points back into the market were given when it took only $15 in Dow Jones valuation to receive $1 in dividend payout.

That sounds like the old rule of thumb of exiting the market when the Dow Jones is yielding 3% and returning when it’s yielding 6%.  Well it is.  This week I’m just displaying the data in a different format to keep things interesting.

We can see the problem the “policy makers” are currently having; after eighteen years of Greenspan inflating bubbles in the financial markets (1987-2006) the stock market remains wildly overvalued to this day.  At week’s close it took $47 of Dow Jones valuation to purchase $1 in dividend payout for the Dow, and to most people all seems well with the world.  

Remember the pain the sub-prime mortgage bear market inflicted on everyone? That’s when this ratio deflated to just above $20 of valuation for $1 in dividend payout.  Had this ratio declined down to where it would have before Greenspan, to $15, the Dow Jones would have seen a decline of 67% from its highs of October 2007, and who knows how much further the Dow Jones would have deflated from there?

Question: will this ratio once again operate within the historical parameters it had before Greenspan?  That it hasn’t since August 1987 when Greenspan became Fed Chairman is because the Federal Reserve and other central banks have set their meat-hooks deep into the market’s pricing mechanism.  

In December 2017, the least of these bankers’ fears is that the market is overvalued. Inflated market value is something they feel they can manage.  What they actually fear is that the market may one day return to a fair market value, set by the market’s pricing mechanism, not them.

For decades now, every time a market attempts to find fair value that the college professors managing “monetary policy” disagree with, they veto the misbehaving market by flooding it with monetary inflation. This only jacked up valuations of economic assets in an economy that on its own merits would not bear them. Other than encourage the public to engage in ruinous speculation, and enriching Wall Street, what other purpose was served?

But this system, devised by the best and brightest academia has to offer, is self-destructive.  So yes, I expect we’ll once again return to the sell at the $30 and buy at the $15 seen in this chart from 1925 to 1987.  But not until Mr. Bear is allowed to do what must be done – take out the trash Wall Street placed in everyone’s balance sheet.  I hope I’m wrong, but I expect that means another market crash on the scale of the 1929-32, 89% decline in the Dow Jones before we can return to normal.

But we’re not there just yet. The Dow Jones Total Market Group (DJTMG)’s top 20 made a new post March 2009 high this week. Fifty-three of the seventy-four groups in my sample closed this week within 20% of their last all-time high. What does that mean?  The “policy makers” are having great success in inflating the broad market to ever higher valuations. The question I have is how much longer will economic reality allow these central banks to continue this farce.