Yesterday we followed Monday’s short-term study with a longer view of the markets. In closing we offered a quarterly S&P 500 forty year chart for readers to consider. Today we’ll take a look at it in more detail, but first we want to attempt to get things into better context by looking at the first half of it more closely.

Part of the problem with long-term charts is that our perception of the ratios is easily skewed as the larger numbers show the movement more clearly. That’s why we provided this 20 year chart that magnifies the earlier movements for us. Note that on the forty year chart many of these highlighted movements look insignificant.

At the close of 1972 the S&P closed at 118.05, before peaking at 120.24 on January 11, 1973. By the end of February it was down to 111.68, close to where it held through the end of the quarter. This kicked off the largest two consecutive year percentage drop in S&P 500 history – 17.37% drop in 1973 and 29.72% drop in 1974. At the end of the third quarter of 1974, on October 30, the S&P 500 closed at 63.54, a full 54.51 points down (or 46%) from the 1972 close. This does not represent the peak nor the valley, but quarterly figures.

In our graph above this is represented by the first green band on the left. As you can see, it looks pretty sharp. But the realization of the numbers is much clearer here than in the chart below, where it barely looks like it moved.

The bounce from the lows of 1974 are misleading too, as is what appears to be a constant maintenance of 100 throughout the rest of the decade. However, if you had invested $1000 at the end of the first quarter of 1976, after the recovery, by the end of the first quarter of 1980 you would have lost 7.52%, or 268.68, in value due to inflation. This is the wealth-stripping inflation that QE∞ guarantees.

Hopefully we’ve brought a little perspective to our longer term chart. To finish our study today, let’s just look at the peaks and valleys. The overbought condition of the dot.com bust is obvious; and the results equally as obvious. Later we see the real estate bubble pop when the RSI reached 70, though it’s not as obvious.

There is a downtrend in these two triggers too, that may or may not manifest itself in the next drop. However, as can be noted, there still seems to be some time before we become severely overbought on this scale. Many analysts expect that time to come in mid-2013 to 2015, depending on how hard our leaders can kick the can.

So, the question we come back to is, “How will QE∞ change this?” In the long run, does it really make any difference for our economy? The answer is both yes and no. As far as what we’ve studied, no, it really makes no difference. But, for the stability of our economy, it’s disastrous.

QE∞ guarantees the continuing destruction of the middle-class. It guarantees the continued consolidation of wealth. It guarantees continued taxation through inflation. And, to some degree, it guarantees the eventual skyrocketing of precious metals’ priced in QE∞ inflated dollars.

Last week it appeared that QE∞ was a step toward saving the economy. Historians one day will recognize the Federal Reserve, the greenback and all QE as the Pandora’s box that led to the destruction of one of the greatest economic machines of all time. Only those who see the writing on the wall and prepare accordingly can overcome the train wreck that’s coming, whether it’s in our generation or our grandchildren’s.

For your prosperity,

J. Keith Johnson
The Gold Informant