Friday, February 16, 2007

It's a Toppy Market

16 February 2007

Today I want to comment briefly on a widespread but dangerous popular misconception about the US stock market. The stock market bulls are beginning to ridicule the bears. This was recently done by a smart and quirky, and usually contrarian thinker, whom I will reference here – Cliff Droke. In his February 15 article,
The Cult of the Bear, Mr. Droke states:

“A gradual procession of super bears has been quietly admitting they've been wrong in their bearish assessment of the stock market. As the major stock market indices continue to push to higher highs and as market internals continue to reflect a stellar market condition, even the most stubborn of bearish traders and market commentators have been forced to reconsider their positions. Slowly, and with little fanfare, they've been covering short positions.

“Yet these same died-in-the-wool bears refuse to turn bullish and are now standing idly on the sidelines watching stock prices move ever higher. If they can admit they were wrong to sell short, why can't they bring themselves to become buyers in what is obviously a strong bull market?”

OK, you may be thinking, that was a moderate enough opening gambit. But now consider how Mr. Droke closes his article, with a newly penned piece of verse:

The Bears' Lament

"The sky is falling" or so we're told,
but these pronouncements are growing old.
"Sell stocks and bonds and bar the door!"
Haven't we all heard this before?

"The crash will come," the bears intone.
Too bad for them their shorts are blown.
Perhaps they should give the charts a look,
and see the market they all forsook.

Instead of taking their bad advice,
The investor should ask, "At what price?"
For they've missed more than one bullish run:
no sense in missing another one.

Having read Mr. Droke's work for years, I can attest that he knows better than to spout such ideas so uncritically. He is a very intelligent man, if also perhaps a renegade thinker. But obviously his success in reading the technical indicators behind the current broad market rise has given tailwind to his hubris.

What then could be at fault in Mr. Droke's logic?

My reply would be: its fundamental premise – that stocks are in fact increasing in value.

Let us take the Dow Jones Industrial Average as our landmark evidentiary exhibit. As I have earlier demonstrated on this same site, the Dow Jones Industrial Average has continued to collapse in terms of the world’s primary inflation-proof currency – physical gold, and this all-too-obvious collapse will enter its 9th year later this summer.

Let’s update that chart here.

As you can see, the Dow Jones Industrial Average has been cascading steadily downwards since mid-1999 – when priced in a currency that is not subject to inflation. And this collapse is in fact occurring as the nominal value of the Dow has reached a new record level.

What then is the critical flaw in Mr. Droke's argument?

When the trend of the Dow turns negative in nominal terms – and that day is at some point inevitable, for reasons already well-described on this site – the gentle cascade downwards will morph into a furious and collapsing torrent – as the signature index of the market value of America's pre-eminent corporations yields to the adverse impact of past decades of brazen monetary manipulation.

What has blinded Mr. Droke?

He has forgotten that the US dollar is an arbitrary indicator of value, that it is falling drastically against most other global currencies, and that it is collapsing even more dramatically against the value of gold (and let us not even discuss silver, where the pattern of the dollar’s demise is more dramatic still).

Mr. Droke’s mountain of dollars is diminishing from within even as it expands, bubble-like, to superficial and external view.

(Let me close with a note of respect to Mr. Droke, as I know him to be a sage interpreter of the precious metals markets who has taught me much. May he only be wise enough to convert his dollar holdings to gold at an opportune moment so as to preserve their ever-diminishing value against a currency that he knows full well to be considerably more reliable.)


  1. Good analysis, but you should post the links to your previous posts if you reference them. I would like to read the previous but don't know where to look.

  2. Alas, that is sometimes more effort than I feel like taking. I shall redouble my efforts in future.