Between the beginning of year 1900 through August of 1929, the Dow Jones Industrial Average increased by an inflation-adjusted 162.63% vs. average weekly earnings of U.S. production and nonsupervisory employees increasing by an inflation-adjusted 49.11%. This large divergence with the Dow gaining 3.31X more than U.S. wages was unsustainable. The stock market had become a major bubble and it collapsed afterwards by 85.7% – causing the Great Depression. Between 1931 and 1995, cumulative gains since 1900 of U.S. wages remained above cumulative gains of the Dow Jones.
Since 1995, the Dow has increased 15X more than U.S. wages and we once again have a situation that appears very similar to 1929 – with cumulative gains of the Dow Jones since 1900 currently 3.13X greater than U.S. wages.
If the Dow was a stock priced in dollars, it would currently take the average U.S. worker a record high 27.51 weeks of earnings to afford a single share. This is a stunning three standard deviations above the 1900-2017 average of 9.41 weeks! The 1929 high just prior to the Great Depression was 19.72 weeks and afterwards it crashed down to only 3.34 weeks!
The Dow Jones hasn’t traded at its long-term mean of 9.41X average weekly earnings of U.S. production and nonsupervisory employees since 1995, but it has returned to within one standard deviation of the mean in 2002 and 2009. Since 1900, the Dow Jones has spent 68% of the time within one standard deviation of the mean (between 3.76X and 15.05X average weekly earnings).
With the average weekly earnings of U.S. production and nonsupervisory employees currently $730.46, the Dow Jones must decline by 45.3% to a level of 10,993 for it to return to within one standard deviation of the mean. To return to the mean, the Dow Jones must decline by 65.8% to a level of 6,874.
Wage inflation is about to rise dramatically – so it is unlikely that the Dow will decline by 65.8% in terms of dollars. Undoubtedly, the Dow will lose more than half of its real value priced in gold. We will have a major gold update this evening!