Below are two self-explanatory charts which shed light on the current rallies in the stock market and oil.
The first is a long-term snapshot of the Dow Jones Industrial Average, showing its 11-fold increase from the start of the Great Bull Market in 1982 to the present "nascent recovery." Credit default swaps have risen 10-fold since the dot-com bubble burst; CDS can be viewed as a rough measure of leverage and risk-gaming.
One dollar in 2000 is $1.26 in 2010 dollars, hence Dow 11,000 in 2000 is equal to Dow 13,860. Thus even as the Dow has returned to 11,000 nominally, the value of those shares has declined 26% in the past decade.
The chart illustrates purchasing power with this Dow/Oil ratio chart. In essence, even as the Dow has risen some 70% from 6,550 to 11,200 (a 4,650 point rise), the amount of oil a share of the DJIA can buy has remained more or less the same as when the Dow was still 8,000 in 2009.
These charts remind us that nominal prices are not the final arbiter of value or purchasing power.
Charles Hugh Smith has been an independent journalist for 22 years. His weblog, www.oftwominds.com, draws two million visits a year with unique analyses of global finance, stocks and political economy. He has written six novels and Weblogs & New Media: Marketing in Crisis and just released Survival+: Structuring Prosperity for Yourself and the Nation.
