Dow Theory

 

When the Dow Jones Industrial Average of 30 large cap stocks and/or the tech heavy Naz goes up or down, most journalists also report Standard & Poor's 500, a broader index of medium size companies. Since the 2009 financial bail-out, upward momentum in all three indices reflects secular inflation and financial repression (0.25% cost of cash). There is a far more accurate barometer of economic health known as Dow Theory that focuses exclusively on transportation companies.

 

Historically, the transports were mostly railroads and a few steamship lines. Today the index includes trucking, air cargo, and passenger airlines. Most of them are in serious trouble, struggling to keep their noses above water. Railroads burn diesel and their intermodals are being looted in rail yards, notably in Los Angeles. Truckers are quitting, freight rates are going up on higher fuel cost, truck tires are hard to find, and trailers are in short supply. Used tractors and new big rigs are scarce, with over 300,000 costly high tech diesel tractors backordered. Airlines are limping along underwater financially, dependent on bail-outs and cheap funding. The entire category of transportation is sinking fast. It cannot be cured by consolidation, or nationalization like loss-making Amtrak and Conrail, the zombie remains of two historic transport giants — Pennsylvania RR and New York Central, bludgeoned to death by Nixon and Ford.

 

Dow Theory matters. If transport companies stumble and fail, it's an economic cancer that spreads to manufacturers, retailers, and money burning losers like Uber and Netflix. Watch 10-year Treasurys and the Fed balance sheet. They display a rear view trailing indicator of transports 18 months ago. What's happening in transportation now, today, will force tighter Fed policy and price controls next year.

 

Labor shortages. Fewer trucks on the road. Empty shelves in grocery stores. Shortage of eggs in New York, limited milk selection, no 2% or 1% skim, no lettuce. Consumer prices are rising steadily higher. Soon there will be "informal" black markets and an uptick in highway robbery, truck drivers assaulted in rest areas and fuel station parking lots.

 

There was one brief period in modern history when it was an excellent time to invest, in 1933-34, after the market crashed and assets became cheap, an era of gangsters and bread lines. Twelve years of Fed stimulus puffed up $9 trillion of overvalued paper assets that will burn in another truly historic crash.