Priced in real value, the Dow has collapsed 84% since 1999
Stock market investors who glance at their screens see the dollar value of the Dow Industrials.
Another way -- the way Elliott Wave International (EWI) prefers -- is real value, in terms of the things you can actually buy with your Dow shares, such as real money (gold) or a basket of commodities.
Clearly, one could ask: "Why is the Dow priced in real value important? I buy things with dollars."
Let's look briefly at the nominal (dollar valued) Dow vs. the real Dow. Then we can address why the Dow measured in real value matters.
On July 16, the nominal Dow reached an all-time closing high of 17,138.20.
The value of the real Dow is not even close. Indeed, you may be in for a shock.
The Dow priced in real money-gold-topped in 1999 and has collapsed 84% since then ... . Had the U.S. maintained honest money, the Dow would be priced at 266 today ....
The Elliott Wave Theorist, June 2014
Robert Prechter, founder and president of EWI, calls the collapse in the real value the "Silent Crash."
The December 2006 Elliott Wave Theorist explains why the value of the real Dow matters. Take a look at this chart [updated in July 2008] and read the commentary:
What happens when a market declines in real terms but not in dollar terms? We have one really good example of when it happened in the past, and [above] is a picture of what was going on back in the early '70s. If you recall, from the 1970 low to the peak in January of 1973, the Dow made a new all-time high. It went above the old high of 996 and got to 1051 on a closing basis. ... There was a lot of optimism, just as there is today.
But if you look at this blue line, you will see that the real value of stocks was falling during the end of that rally, and falling from a higher point way back in 1966-68. So you had declining values in real terms ... with rising values in nominal terms.
How did it resolve? It resolved with a collapse from January 1973 to December 1974, a 47 percent decline in the Dow, 49 percent on the S&P. In other words, the nominal prices played catch-up with the plunging prices in real terms.
The Elliott Wave Theorist, December 2006
The set-up today is much bigger.
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