Deadly Dow 36,000 & The Secret History Of A 70% Market Loss

Some investors fear that the Dow may go to 4,000 or 5,000. Surely that would be bad, but there is a worse possibility to consider, which is that the Dow could go to 36,000 instead. Now, Dow 36,000 may sound like a "problem" that most investors would love to have! So what's the danger?

To demonstrate why Dow 36,000 could be a nightmare scenario, we will begin with a review of how 70% of stock investor wealth was annihilated the last time the US endured the combination of sustained high unemployment and high rates of monetary inflation. Using a series of simple steps, we will pierce through the generally accepted but false narrative about that market, and show how even with an assumption of "perfect" market timing - that is, buying on the best single day over a near 12 period, and selling on the best single day over an almost 10 year period - that the historical end result was still crippling investor losses, caused by three distinct wealth-destroying forces.

We will then move to today's financial world, and show how the little understood interplay between these same three deadly wealth destroyers could create the glittering illusion of wealth that would be Dow 36,000 - even while wiping out 80% of real investment values.

How Inflation Hid A 70% Market Loss: 1968-1982

History has already shown us what can happen to long term investment returns when persistent high inflation collides with stubborn high unemployment, resulting in stagflation. Consider the graph below. As shown in yellow, the Dow Jones Industrial Average reached 919 in May of 1968, and by August of 1982, had fallen to a level of 777, for a loss of 15%.

Many investors recall a previous "Lost Decade" for the stock market when the market stayed flat to somewhat down, moving sideways but never persistently up, and what is seen in yellow is consistent with that market perception.

Except - a 15% loss in a long-term sideways market isn't what happened at all, not when we look at what a dollar would buy. That is, a US dollar in 1982 was only worth 35 cents compared to what it would have bought in 1968, because the dollar had lost 65% of its value to inflation. (more)