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Dow Theory Gives Warning; Can the Fed 'Print Over' It?


Dow Theory warns of a trend change; but is this warning still valid in a market back-stopped by QE-Infinity?

Dow Theory finds its roots in editorials written by Charles Dow, who founded the Wall Street Journal. He remains a household name with investors because he also co-founded Dow Jones and Company (presumably his co-founder had the last name of "Company.").

Mr. Dow passed in 1902 and therefore never had to contend with the Federal Reserve, since the Fed wasn't an entity until 1913. In Dow's day, the gold standard still existed, so money couldn't simply be "spoken into existence" by Mr. Bernanke and his printing press. Back then, money was viewed, first and foremost, as a way to exchange goods and/or services without the need for direct barter.

In other words, in 1902, wealth could only be created through the archaic concept of production.

Of course this is no longer the case, and we have since realized that the concept of "earning" money is just plain silly and old-fashioned. Once the government discovered they could create money out of thin air (via printing press) without having to actually do anything to earn it, the rules of the game changed completely.

The American dollar is really just a convenient and easily-exchangeable symbol of energy. You expend your personal energy, time, and resources in exchange for dollars -- which you can then trade to others as payment for their energy, time, and resources. So the dollar is, if you will, the symbol and storage-place of our collective national energy.

The problem introduced by the printing press, of course, is based on the fact that the dollar is merely a symbol -- if we remove our energy from the equation, then it has no intrinsic value of its own. Symbols are only as valuable as the concepts they represent.
No positions in stocks mentioned.
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