Saturday, December 10, 2016

30 years later the Dow is at the same ratio to debt as it was in late 1987

Following the 1987 stock market crash, the Federal Reserve began a new course of monetary policy in which they would use a combination of debt and manipulated interest rates... not to protect the bond markets or inflation, but to boost up the stock markets.  And in the just over 29 years since this policy started under Alan Greenspan, an interesting parallel has occurred.


The ratio of the national debt is virtually the same as the increase in the Dow Jones average.

National Debt

Dow

In 1987 the United States ended the year with a national debt of $2.35 trillion, and the Dow ended the year at 1927.31.  However, before the Oct. 19 crash it was at 2246.73, or a ratio of 1:.956 Debt to Dow.  This ratio of nearly 1:1 is significant because it is the starting point for a trend where the Dow would begin to rise either in tandem, or in the same multiples as the debt.

When Bill Clinton took office in January of 1993, the debt was at $4.064 trillion and the Dow was at 3301.  And the increase of debt from 1987 to 1993 was virtually the exact same increase the Dow experienced (42% vs. 41.6%) during the same period.

Most mainstream pundits and economic analysts love to tout how Bill Clinton 'balanced the budget' and added few deficits that led to increases in the national debt.  But what they willingly or unwillingly fail to mention is how the Clinton administration raided the Social Security Trust of over $3 trillion and replaced the cash with Treasuries (debt).  And instead of borrowing the money from the Federal Reserve, which would have officially been added to the National debt number, he instead robbed Peter to pay Paul, and his total increase to the debt was over $4.6 trillion to finish out his term with the real debt between $8.6 and $9 trillion.

But there was a caveat that needs to be added to this era as it was also a time when Alan Greenspan lowered interest rates from 7.25% in late 1987 to a low of 3.25% when Clinton took office in 1993.  And because of this near doubling of overall debt coupled with the halving of interest rates, the Dow subsequently more than tripled during this era known as the Dot Com Boom.

Real debt increase from Jan. 1992 to Dec. 31 1999: 120%.  Dow increase from Jan. 1992 to Dec. 31 1999: 348%.  Interest rates halved from 7.25 to 3.25%.

Over the course of the fiscally irresponsible years from 2000 to 2016, where the national debt doubled first under George W. Bush to $9.5 trillion and again under Barack Obama to its current level of $19.8 trillion, the stock markets climbed nearly in tandem to the rise in debt outside the stock market crash and declines of 2008-2009.  And most astonishing is that as of Dec. 9, 2016, the ratio of Debt to the Dow is back where it began nearly 30 years ago at a virtual 1:1 equivalent.

Dec. 9:  Dow close:


Dec. 9: National Debt


$19.87 trillion to 19,756     Ratio 1:.994

Coincidence?  Now imagine what the stock markets would look like if the government had not borrowed so much money... or if they decide to finally shut off the spigot... or the spigot is shut off for them.

Are you willing to put your retirement trust in the hands of entities that will not grow or survive without more and more borrowed debt?

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