It took almost six years, but the Dow Jones Industrial Average, a price-weighted average of thirty very large, US-headquartered companies (but more post-industrial than industrial), has finally breached the closing high last set in October of 2007. 

It took almost six years, but if your portfolio had included a Dow (or for that matter, S & P) index fund in the fall of 2007, and you’d held onto it through the route and subsequent rise, you would finally now have broken even, at least in nominal terms.  It’ll take a bit longer before you make any money in real terms. 

So what does it all mean?  Essentially nothing, except that the old adage that you should never fight the Fed eventually proves true.  After all, the Fed has the unlimited capacity to create dollars, and dollars are the metric through which US stocks are priced, and the Fed has literally flooded the world with dollars since the financial crisis broke, tripling the size of its balance sheet since 2008.  What part of not fighting the Fed is there left to understand?  The Fed can, given enough time, engineer prices to whatever level it pleases. 

Except.  There has to be an upper limit where Fed-engineered prices become utterly meaningless.  Maybe the Dow reaches new records from here on in, traveling along an infinitely upward trajectory.  If so, the only possible reason would be currency traveling on a similarly infinitely sustained trajectory downward, making the whole thing a farce, followed by a tragedy.

My guess is that the Dow will push a bit higher, maybe another ten percent, which is roughly what it did before beginning its last slide after breaching its top, and then it will start falling, gathering velocity on the way down, until it roughly halves.  And this would also be attributable to the Fed’s monetary mischiefs, to borrow a phrase from Milton Friedman, because the illusion of high and stable prices is just that.  High prices due to depleted currency values aren’t stable.  Some “Great Moderation” these last few decades have been.

Besides, a top, and then a crash, must not be far off.  James K Glassman, a co-author with Kevin Hassett of the Dow 36,000 book and prediction published just before the dotcom bubble burst, all but predicted as much today (March 7, 2013), by explaining in a Bloomberg article why he wasn’t wrong after all–that Dow 36,000 is just around the corner.  He predicted in 1999 that the Dow would hit 36,000 in three to four years.   He practically defined chutzpah in the early 2000’s with the defense of his 36,000 prediction  He’s offering to redux the definition today.  Some people will do anything to get attention, no matter how stupid.

Allow me a prediction:  The Dow will never hit 36,000.  Ever.  Financial Armageddon will have destroyed the US economic system before Dow 36,000 becomes even a nominal reality. 

I predicted a couple of years ago that the financial crisis would revisit the world economic system soon, probably around the end of 2012.  My timing was wrong.  Timing is almost impossible to get right.  But I stand by my prediction that the financial/economic crisis is far from over, because the ultimate driving cause is a demographic implosion in the developed world, and the implosion has only gathered steam since the initial crisis.  With stagnant and aging, or outright declining, populations, there is no way Europe or the US or Japan can grow their way out of their massive debt/entitlement overhangs.  Demographics finally caught up to debt and deficit and entitlement spending to cause the initiation of the crisis in 2008.  Nothing has changed demographically, except people are older and having even fewer babies, and more debt, deficit and entitlement spending have been added, but this time to the public side of the obligation leger.  Without growing populations, from where do these governments think the growing revenues needed to service their continually growing obligations might arise?  

All the economists bemoaning austerity programs (e.g., Paul Krugman, who has a face made for radio, who bemoans austerity, even what he sees of it in the US, nearly everyday, and the too-cute Megan Greene, today on Bloomberg, regarding Portugal) will ultimately get their wish.  Austerity, meaning attempting to stay solvent by reducing expenditures to a level reasonably consonant with revenues, will soon enough face wholesale abandonment.  Pretty much all of the developed world is on course to default on its government and quasi-government obligations in some way or another (devaluation of the currency, outright refusal to pay, etc.).  And this time around, the sovereigns won’t be able to rescue their insolvent banks because they will be insolvent themselves.