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Dow 20,000... Is This Peak Capitalism?

Written by Alex Koyfman
Posted December 15, 2016

Ever since Trump's electoral victory five weeks ago, I've been hearing one phrase more and more often: "Dow 20,000."

And it seems that any day now, that historic threshold just may be crossed.

Seems amazing that just under eight years ago, in February of 2009, that index was sitting at an abysmal 7,000.

Many people — most, even — seem to view this as a sign of prosperity... a sign that things are good and bound to get better.

But what does it mean, in reality, when the Dow 30 — the second-oldest and by far most-cited index on the U.S. market — hits these levels?


Bear in mind that the Dow 30 is nothing more than the scaled average sum of the values of its 30 component companies... famous brands including Nike (NYSE: NKE), Microsoft (NASDAQ: MSFT), Coca-Cola (NYSE: KO), IBM (NYSE: IBM), Goldman Sachs (NYSE: GS), Apple (NASDAQ: AAPL), and a handful of other major firms.

So the Dow being at all-time highs means that these companies — or most of them, anyway — are also at historic highs.

Common Wisdom: Buy High and Hope for the Best

It doesn't mean it will continue to climb; it doesn't mean our national debt load is decreasing; it doesn't mean your job, your retirement, or the value of your home is more secure; it doesn't mean the economy is on the right track.

The only thing it means, really, is that shareholders in these component companies are doing better than they were a month, a year, or five years ago.

Nothing more.

Which is why it baffles me when supporters of the current administration talk about the "Dow being high" as evidence that good things are happening.

If anything, these all-time highs should indicate, to even the most amateur economist, that potential upside has been exhausted; that future profitability — even for the wealthy who have benefited most from these bullish years — is at an all-time low.

Unfortunately, human behavior tends to work against this sort of reasoning.

Viewing the Glass As Half Full, Even When It's Mostly Empty

Thanks to something known as "optimism bias" — the tendency of individuals to underestimate the likelihood that they will experience unfortunate events (the it-will-never-happen-to-me fallacy) — long-term prosperity tends to create the presumption that more prosperity is in store.

It's why when people see a stock rallying, they immediately start itching to buy.

It's this very same psychological tick that led investors, even the giant, institutional variety, down the primrose path leading up to the subprime mortgage meltdown of 2008.

The general thought process is: Things are going so well that they can't possibly turn around on me, so I need to double down.

It's the root cause behind every bubble, going all the way back to the very first one, the Tulip Mania of 17th century Holland, where single tulip buds were being traded for the price of a home.

tulip mania

The sad truth is that things can and will turn around, and they tend to do so at the absolutely worst times.

The sane among us know all too well that long periods of uninterrupted prosperity only increase the chances of a collapse, and that the magnitude of the collapse is usually in line with the magnitude of the prosperity.

Viewed in that light, Dow 20,000 is only good news for those who consider themselves lucky to be perched atop a very tall, very rickety ladder.

Our Economy is a Body-Builder With a Heart Condition

So, we know that we're here... but what got us here?

Well, the post–financial crisis collapse was a very good start.

As is the case with any swinging pendulum, nothing will spur sudden, massive growth like a sudden, massive downturn.

The eight years of quantitative easing — the Fed's own money-production program — did most of the rest of the legwork in injecting cash into the stock market.

It helped to make investors rich, transferring more wealth into already deep pockets than any other event in the last hundreds years, but it did so at its own hefty price.

This radical money supply increase made the very dollar on which everything was founded catastrophically unstable, to the point where its very status as the go-to currency for international trade came under question.

All of these elements were and are quietly coming together slowly, brewing into a perfect storm for an economy that on the surface appeared to be recovering.

Ask the average person the street and, again, you'll probably hear about the Dow's highs and the recent lows in unemployment.

That's Not Rain Falling On Your Head

In reality, neither metric captures the essence of what's happening, either through general misconception (as is the case with the Dow) or complete and total fabrication (recent jobs figures).

When people ask me what they should be investing in, my go-to response lately has been "guns and ammunition" because, while not the best-returning assets in terms of dollars and cents, they just may be the most valuable ones on a practical level.

It's not the answer people want to hear, either, because they want to know how to make money, not protect themselves against threats that aren't yet apparent.

So as a fallback response, I tell them to start looking into early-stage companies that produce hedge commodities: precious metals like gold and silver.

Aside from guns and bullets, which will keep you safe if the very fabric of our society begins to break down, silver and gold will be, as they always have been, the go-to hedge investments for when more modern forms of currency deteriorate.

Of course, buying hunks of gold and silver isn't really practical for everyone, but for those looking to profit off their inevitable run-ups if and when instability sets in, owning shares of companies in the business of locating and producing these metals can be very effective.

The biggest profits, of course, come from companies that are in the earliest stages of developing precious metal–bearing properties.

Don't Reinvent the Wheel. Buy the Factory That Builds It

Just think of it as owning a startup company that's still in the product research and development phase — only in this case, there is virtually no chance at all that the product will not be in demand.

Risk, for this class of enterprise, comes entirely from the cost of production, and that varies from company to company based on the nature of the properties they own.

At times like this, however, the number of mining exploration companies in operation that have production costs exceeding market values for the underlying metals tends to decrease rapidly.

By the time the Dow bullishness turns into Dow meltdown, everyone and their grandmother will be on the search for gold and silver.

As shares of the tiny junior miners magnify the gains made by the underlying metals they produce, shareholders see their investments can grow several-fold in just days or weeks.

Finding the right junior miner, of course, isn't always as easy as it sounds. There are many, and because of the wildly differing nature of geology, a majority will never survive to produce a single ounce.

So being selective is crucial.

For those who understand the business and have an insider's view of the industry, it could be a near-perfect way to turn small investments into fortune during times of extreme uncertainty.

I've spent years building a reputation and gaining a foothold in this sector, and with the Dow hitting unsustainable records almost every day, the time has never been better.

Get the full story by watching this video. You'll never see mainstream financial opinions in the same light again.

Fortune favors the bold,

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Alex Koyfman

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Coming to us from an already impressive career as an independent trader and private investor, Alex's specialty is in the often misunderstood but highly profitable development-stage microcap sector. Focusing on young, aggressive, innovative biotech and technology firms from the U.S. and Canada, Alex has built a track record most Wall Street hedge funders would envy. Alex contributes his thoughts and insights regularly to Wealth Daily. To learn more about Alex, click here.


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