17 September 2010

The US Economy and the Long Term Structure of the Dow Jones

As I said in an earlier post I do not believe that is a head and shoulders pattern being traced on the Dow, since 2000, as some believe. For starters, one needs to look at the long term view of the Dow in perspective and look at a log scale.

On that is it just a basing pattern along a huge technical level, such as happened at 1000. As I said though I believe that basing pattern should be shorter. Why - because the (corrected) trend lines have sped up the long term momentum of the Dow itself.

This is possibly a reflection of the way it grows, a greater precision in its overall functionality, growing companies and itself. But of course as this blog has been pointing out the Dow is about more than company growth, it is about money flow as well.

It does seem to be the case that the way money flow has been used to refloat asset values in the aftermath of the crash, is a more explicit use of this than has previously happened. Then it was part of the usual functionality of the Dow, with a certain ramping up from the early 1980s.

The problem is that those asset values, with some exceptions, are probably correct. That means the correct functionality of the Dow is being altered for the purposes of reflating correctly valued assets.

Those spikes down on the long term Dow since 2000 are probably a consequence of the huge asset inflation from the housing bubble and tech, plus vast financing money flows consequent on the US deficit.Think of it like an attempt to reach true valuations as the Dow has always done, reflated up.

Basically interest rates have been used as a tool to restart the Dow in the early 1980s. This was perhaps even correct (hey, it worked), but a dependance on this tool reached its nadir in the run up to the crisis. A new way of managing interest rates may need to be found.

So what does this means for the Dow, it means it is necessary as this blog has been suggesting for the computational health of the Dow (for the future health of the US economy) to raise interest rates and remove this inherent inflation from cheap dollars. The Dow does not need this kind of exercise. The health of the US economy is even stronger than it ever was (its creative companies, the source of that long term momentum), as this blog has elaborated.

The promise of the tech bubble is being fulfilled, but what promise exactly was there in the housing bubble ? Well the promise of a democratization of credit. But to afford this, the economy has to grow with its companies, which needs a working Dow. Basically not raising interest rates may prolong the interregnum before the basing pattern becomes another trend. All the US economy really needs is for that to happen, nothing else.

The failure of interest rates to lift the US economy up into a new uptrend (as it lifted it out of a basing pattern in the early 1980s), and in fact to cause spikes down which look like a head and shoulders pattern on a linear scale (like the misleading clarity in forex patterns, from a market made more like it from interest rate derived conduit driven money flows), suggest the usefulness of this tool may have ended.

Real company growth in an investing economy is a great replacement. A lot of factors make the time for this, now, but this is what President Obama seems to want, assuming he is allowed make it happen.

© 2010 Guy Barry - All Rights Reserved.