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The Real Dow

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In March of 2002 the Dow Industrials were at the same approximate level, 10,500, as it is today. Much hubris has been made of this fact and it has certainly attracted new money into the market from the sidelines.

But the real Dow of today is much different from the real Dow of yesterday.
In March of 2002 the U.S. Dollar index was around 118; today it is around 86. In order for equity owners to have the same "wealth" or global purchasing power as they did in March of 2002, the Dow Industrials would have to be around 14,500 today.

By definition, whether you live in this country or not, if you own U.S. equities, you own dollars. A foreign holder could have hedged this dollar exposure, and while some did, most did not. But the important thing is that U.S. citizens definitely did not.

So there has been an enormous loss of wealth by equity holders and everyone else as well, although most just don't realize it yet. Certainly no one in Washington, except maybe the Democrats (but I doubt anyone will listen), or Wall Street is anxious to point this out. Sooner or later import prices will explode. Some, like oil prices and gold, are already sending warning signs. The problem is simple: there are massive structural imbalances that have been accumulated and must be corrected.

It's just that no one right now wants to face the problem. Sooner or later, we will have to.

No positions in stocks mentioned.

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