Today the Dow Jones Industrial Average marked a new historical record. Wall Street is happy, the crisis is behind us, at last we surpassed the pre-crisis level, and the asset value loss is erased. I think before we go to the profit ecstasy, we must first take in mind that when Wall Street is going excellent while the real economy is going tragically, this must make us expect some rebalancing :)
Let us look at the real world. The previous historical record of Dow was in October 2007. At the same time the balance sheet of FED was about 3 times lower than now. This means that 5 years and some months ago the market reached its record level while fueled with 3 times less money. The monetary base of FED is the foundation of all financial markets.
Compared with the level of existing dollars todays record must be considered as 3 times lower. I.e. it must be accepted as not 14000, but as around 5000. For instance in July 2008, Dow was at 11000 with the same monetary base as in 2007. I.e. this means about 20-30% decline. But this 11000 must be considered higher than current 14000, because today the quantity of dollars is much higher.
Theoretically with this tripled monetary base, Dow can reach about 42000 if economy really returns to growth and the speed of capital moving reaches the pre-crisis level. Yes, it is not a joke. With $2,5 trillion FED balance sheet, a super bubble bomb it ticking on all markets and it can really explode. Even at the most optimistic Greenspan times, there were no so much dollars on market. And we all remember all the bubbles inspired by Greenspan. So now Bernanke has pumped so much money that it is absolutely expected new bubbles to appear. 14000 today is probably a bubble, especially when considering the funny situation of the real economy. You cant have a weak real economy and an extremely prosperous Wall Street.
The hypothetic 42000 level of Dow Jones must be accepted as a warning of the inflationary potential, created by continuing constantly even now money print. In the same way The Dow is rising also the consumer prices are rising. So with increased monetary base the real inflation can reach the same fantastic levels like the leading financial indexes.
March 5th 2013