Deadly Danger Of Dow 50,000 (1 Minute Article)

By Daniel R. Amerman, CFA

Some investors are afraid the Dow may go to 5,000. That would be bad but what really scares me is the Dow going to 50,000. Let me explain.

The United States is roughly $100 trillion short of being able to pay for Social Security, Medicare and pension promises. When we divide by the roughly 80 million households above the poverty line and below retirement age over the coming decades, that works out to $1.25 million dollars per household. 

Now, you’re good for your share, right? No way that works! Unless inflation knocks the value of each dollar down to a nickel and then it works.

If a dollar’s worth a nickel and the Dow is 50,000, then the purchasing power of the Dow is 2,500 in inflation adjusted terms.

 

Call it too many boomers selling their investments side by side even as the real economic power has moved to Asia, and even as US government spending consumes an ever greater share of what economy remains.

So your stock investments will buy 25% of what they do today. Until you pay the taxes on the profits in going from Dow 10,000 to Dow 50,000. Because the government’s broke, the tax rates have gone up to 50% on long-term capital gains. The government takes half of the 40,000 point rise and you're left with Dow 30,000. 

Which is worth Dow 1,500 in today’s dollars, and you’ve lost 85% of your net worth.

What I’ve just described is an example of monetary inflation, with simultaneous asset deflation in purchasing power terms, and inflation taxes, and I believe that preparing to survive these three cornerstone dangers should be the very heart of retirement planning.