Dear Friends,

Did you hear the sound of joy and the exuberant cries of rejoicing among the talking heads in the financial media and the hacks of Wall Street as the Dow peeked back above the magical 10,000 level in today’s trade? Happy days are indeed here again as we all know that the average man on the street will soon be rolling in new found wealth, more than happy to plunge back into the depths of debt and bondage if only to fuel the mighty consumer spending machine. I can already see the new home construction business sharply rebounding…

For all the near hysteria about the climb back above 10,000, a look at a ratio chart of the Dow Jones compared to an ounce of that “barbaric relic” and nemesis of Central Bankers, reveals a picture that if rightly understood by those leading the cheering and popping the corks, would turn them into weeping and wailing.

What we are witnessing is not a rising Dow but a collapsing Dollar fueling a wave of paper inflation in equities as the effects of quantitative easing take hold and shove prices higher in a remake of the 70’s horror film called “Stagflation”.

Please examine the following charts. The first is the Dow Jones Industrial Average running back into the 1980’s. Note on that chart the first ellipse between 1993 – 1995. It is 1994 that I want to draw your attention to. The Dow ranged between 3,500 and 4,000 for that entire year. Now look at the area denoted by the second ellipse to the right near the 10,000 level which is where it closed this year, 2009. That is a period of 15 years.

In nominal terms, over that period, the DOW ran up and went down and is now at 10,000 for a gain of 6,000 points for those 15 years. Not bad, I suppose (keep in mind that this does not account for companies that have been dropped out of the index due to failures).

Now take a look at the second chart – the Dow Jones – Gold ratio. Look first at the right side of the chart where you will see the ratio closed today – a bit above 9.4. Follow the line all the way back to the left where it intersects with the plotted value all the way back in 1994. What does this mean?

Quite simply – The Dow has in effect gone NO WHERE in REAL TERMS for FIFTEEN YEARS! Let this sink into your mind – FIFTEEN YEARS have come and gone and all the gyrations in the Dow and all the ups and downs have accomplished not a single bit of real gains when compared to an ounce of gold.

The debauchery of the Dollar has made a mockery out of wealth preservation for those who held nothing but paper equities.

The stock market is a leading indicator and what it is indicating is that the horrific consequences of conjuring paper money out of thin air are coming home with a relentless fury. The Fed has unleashed a tidal wave of inflationary forces upon the land and with the help of the gang of power-drunk, irresponsible, reckless and treacherous politicians, has set in motion a process which is going to bring grief and misery to millions.

Click charts to enlarge in PDF format with commentary from Trader Dan Norcini