A few weeks ago in Stocks Next Leg Down I called for the bear market in stocks that began in February to resume. As I noted in a followup to that post (I frequently follow up posts in the Comments section), that was clearly early and, as also noted, potentially outright wrong if the selloff didn’t resume promptly. It did, so let’s just say that call was a narrow escape.
That followup had a higher confidence level because it did an end run around a confounding variable – the dollar. In general, stocks do not “go up”. Rather, the dollars in which we price them go down. During inflationary periods, stock prices may rise more than enough to compensate for the depreciation of the currency unit, because they embed a short position in currency. In other words, most corporations are leveraged by virtue of being partially capitalized by debt, not just equity. But as we discussed in another recent post, The Key To Endless Prosperity Revealed, that’s not a genuine source of returns … despite central banker fantasies to the contrary, we cannot all prosper by shorting a declining currency. The principle source of real stock returns is in their yield. Dividends represent the sustainable excess of stock returns over gold.
My followup analysis took advantage of the fact that the distortion due to changes in the value of the dollar can be algebraically eliminated by changing the pricing unit to gold. Some might call this a “stock:gold” ratio, but that misses the point a bit … in fact all prices are ratios. The popular stock indexes, for instance the S&P 500, are not “absolute” stock values either, merely the ratio of the values of stocks to that of the US dollar.
So what next? This particular short term trend is moving fast and could be halfway done by the time you finish lunch. But it’s likely part of a larger or higher degree downturn that has much longer to play out. Look for further follow up as developments warrant.