Where's the bottom?

[william the wie]

Fairly simple question for some things but not for others

DJIA=1 oz of gold means that the stock market has reached bottom. The market can bottom at higher levels but has not bottomed at significantly lower levels since the DJIA was created in the late 1800s. The linkage to the explicit or implicit storage costs of gold vs. the net dividend yield of the DJIA is what causes this relationship but examining the nuts and bolts of why gets complicated. If you have a simple and easy to understand way of explaining this please post it.

Real estate, when rents are at or above 125% mortgage payments for comparable properties then the bottom is reached because it is then cheaper to put 20% down and buy rather than rent.

When AAA bonds pay 250% of the dividend yield of the DJIA then bonds are paying the same expected returns as stocks but with greater safety.

That is the simple stuff but what is complicated is figuring out the bottom for unemployment, debt loads and the other things that have people scared. So what I am asking is put up your rules of thumb and see what the response is.

 

[Mad Scientist]

What does "DJIA= 1oz of Gold" mean? That the price of gold equals what the Dow Jones is? Are you saying Gold could go to $10,700?

As long as the Privately owned, Non Government run, Federal Reserve keeps printing money and calling it "monetizing the debt" then Gold has no max price I would think.

But when everyone starts buying gold that's when the real gold bubble starts and when you should probably get out of the gold market.

But I admit I'm a bit confused by the "gold bubble" theories. We've seen the "dot com" and "housing" bubbles but how could there really be a "gold bubble"? Gold would have actual value in a barter economy as opposed to housing and dot com stocks.

I realize this post is all over the place, I'm just thinking out loud. Sorry!

 

[loosecannon]

What does "DJIA= 1oz of Gold" mean? That the price of gold equals what the Dow Jones is? Are you saying Gold could go to $10,700?

As long as the Privately owned, Non Government run, Federal Reserve keeps printing money and calling it "monetizing the debt" then Gold has no max price I would think.

But when everyone starts buying gold that's when the real gold bubble starts and when you should probably get out of the gold market.

But I admit I'm a bit confused by the "gold bubble" theories. We've seen the "dot com" and "housing" bubbles but how could there really be a "gold bubble"? Gold would have actual value in a barter economy as opposed to housing and dot com stocks.

I realize this post is all over the place, I'm just thinking out loud. Sorry!

good post.

Willie, I for one place no stock in simple equations to measure bottoms. Doesn't their use rely on rational market theory?

 

[william the wie]

What does "DJIA= 1oz of Gold" mean? That the price of gold equals what the Dow Jones is? Are you saying Gold could go to $10,700?

Gold could go up, shares could go down or they could meet in the middle but at the 1oz. point the DJIA will do at least well as gold.

As long as the Privately owned, Non Government run, Federal Reserve keeps printing money and calling it "monetizing the debt" then Gold has no max price I would think.

But when everyone starts buying gold that's when the real gold bubble starts and when you should probably get out of the gold market.

But I admit I'm a bit confused by the "gold bubble" theories. We've seen the "dot com" and "housing" bubbles but how could there really be a "gold bubble"? Gold would have actual value in a barter economy as opposed to housing and dot com stocks.

Fiat currencies are too prone to collapse. Gresham's law is the real danger, people save their good money and spend the bad. Such good money savings is not available for investment and the economy slows down. Worse yet what little bad money savings there is gets diverted from investment into reducing the supply chain and labor inputs to limit the amount of bad money that is held in stock. We're at the tail end of the greenback's collapse.

I realize this post is all over the place, I'm just thinking out loud. Sorry!

No problem.

 

[uscitizen]

We are supposed to be afraid ot terrorists, not the economy.

 

[william the wie]

What does "DJIA= 1oz of Gold" mean? That the price of gold equals what the Dow Jones is? Are you saying Gold could go to $10,700?

As long as the Privately owned, Non Government run, Federal Reserve keeps printing money and calling it "monetizing the debt" then Gold has no max price I would think.

But when everyone starts buying gold that's when the real gold bubble starts and when you should probably get out of the gold market.

But I admit I'm a bit confused by the "gold bubble" theories. We've seen the "dot com" and "housing" bubbles but how could there really be a "gold bubble"? Gold would have actual value in a barter economy as opposed to housing and dot com stocks.

I realize this post is all over the place, I'm just thinking out loud. Sorry!

good post.

Willie, I for one place no stock in simple equations to measure bottoms. Doesn't their use rely on rational market theory?

Actually arbitrage theory. That's why Toro and many others place the bottom at DJIA= 3 oz. which is about tangible book value whereas 1oz. is generally the net cash in the till. At those kinds of prices you can generally turn a profit by liquidating the companies. I am unaware of any case where anyone has lost money buying a company for net working capital (Roughly DJIA=1 oz.)

 

[Pepe]

As one of the non- economists hereabouts, I would ask the bottom of what?

Or perhaps where will UE top out, etc.

UE is already at >22%. Where does it go from here?

Housing has at minimum another 5% to 50% to fall depending on market.

I understand that QE2 will arrive on November 3rd with the FR purchasing another 2 trillion in Bonds and Securities. Just how much lower can interest rates go?

Foreclosures will continue.

Personal Bankruptcies will hit another record.

Just like the UK is learning (the hard way), the more unfriendly you are to business, the more these folks move out of your Country/State.

Unions now want Congress to Nullify the "Right to Work" laws in 25 States.

The Welfare State and the Military Industrial Complex still want to slop at the Gubermit trough.

Ad nauseum

 

[Toro]

I do not know where the bottom will be, whether it's 1x, 2x, 3x, 5x etc. But it is not unreasonable to look at prior bottoms and use that as a guide. And I use that as a guide, not a hard target, because there is nothing saying that gold cannot bottom at 4x.

I also like to look at behavior when looking at tops and bottoms. But even then you have to be flexible. When oil topped at $147, it didn't look like a typical top.

 

[loosecannon]

a lot of the inertia for the commodities bubble of 08 was the weak dollar. But I am sure you know that. The top and the bottom were as much a function of political forces as anything else. Abstract equations played essentially no role in that event.

 

[uscitizen]

We are likely to be as well off now as we will get for the next 5-10 years.

 

[Big Black Dog]

The bottom, for those of you that don't know, is slightly below the waist and a bit higher above the knees. If you are looking forward, it is directly behind you but lower.

 

[william the wie]

Well I think an SGS UE number close to 40% will be the bottom. OTOH I will not be surprised if the BLS manages to keep the official number below 10%.

 

[loosecannon]

I think we may have already passed the EU bottom tho that may retrograde slightly.

The US is gonna maintain significant employment if for no other reason than because we must, and we need. As the baby boom passes out of the work force things will only improve on the economic front.

We have a labor glut, much to the chagrin of those who think we need an expanding workforce.

 

[jeffrockit]

What does "DJIA= 1oz of Gold" mean? That the price of gold equals what the Dow Jones is? Are you saying Gold could go to $10,700?

As long as the Privately owned, Non Government run, Federal Reserve keeps printing money and calling it "monetizing the debt" then Gold has no max price I would think.

But when everyone starts buying gold that's when the real gold bubble starts and when you should probably get out of the gold market.

But I admit I'm a bit confused by the "gold bubble" theories. We've seen the "dot com" and "housing" bubbles but how could there really be a "gold bubble"? Gold would have actual value in a barter economy as opposed to housing and dot com stocks.

I realize this post is all over the place, I'm just thinking out loud. Sorry!

The Fed may not be govt run but just as Fannie and Freddie, govt has a big voice in matters of the Fed.