A month ago the Dow was at 9500. I asked a friend who is in the money business “How much lower can it go?” He said “7500. People who need cash, for whatever reason, have no way to get it except by selling public equities.”
Yesterday the Dow sank to 7500, so I called my friend asking for his next prediction.
“6000. Still a liquidity crisis.”
The aggregate market capitalization of the S&P 500 was about $10 trillion in years past. Presumably it is falling towards $5 trillion. We may be getting to the point that the people from whom we’ve bought stuff lately, e.g., the Chinese, the Japanese, the oil-exporting countries, may be able to come over here and buy a 100 percent interest in the 500 largest U.S. companies. Why would they want them if the U.S. economy continues to suck wind? (And it probably will if you believe that my economic recovery plan is necessary and compare it to what politicians are actually doing.) Most of those companies are multi-national and do a lot of business outside of the U.S.
Meantime, we can take heart that similar economic challenges were tackled back in 1945: important historical video.
Well, here’s an odd data point. At the current value the S&P500 has a dividend yield of a little over 4%, which means it is better than a long term treasury.
Peter Schiff makes an interesting observation in his book “Crash Proof” showing the Dow Jones Industrial Average having a value of essentially 1 once of Gold at the bottom of the 2 major bear markets of the 20th century: 1933 and 1982. Recalling from memory, I believe the values were around $35 and mid $700s respectively. If he’s correct – and just about every prediction made in the book has come to pass so far – then the 2 shall meet again before the current down cycle is over. This could mean a huge decline in the Dow or a huge run in the price of gold, but probably somewhere in between $2000 and $5000.