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“Nowadays, people know the price of everything and the value of nothing.” – Oscar Wilde
“Price is what you pay. Value is what you get.” – Warren Buffet
This is a follow-up to my article of Nov. 12, 2024: “DJIA Grossly Overpriced Vs. DDV”
DJIA Way Ahead of DDV – Sell and Take No Prisoners
On January 8, 2025, the price of the DJIA closed at 42,635. The Dividend Discount Value (DDV) of the DJIA fell to 33,065 as the yield of the 30-year T-bond rose to 4.93%.
The premium of the DJIA’s price over its DDV in absolute terms is at a record of 9,570. While this was only 28.9% below the DJIA price it is still a huge concern as even this is the highest level in over two decades.
The DJIA has fallen 5.3% from its record of 45,012 on December 4, 2024. This was achieved a month after the election in a buying euphoria resulting from a misguided belief in a mythical repeat of Trump’s first crack at being President.While the DJIA is back to its pre-election level, its premium to its DVD has, in percentage terms, remained in the mid-to-high 20s, compared to 10% to 12% prior.
One might ask, how so?
Simple. The DDV has fallen more, down 7.6%, than the DJIA, down 5.3%.
1987
Despite the extremely high long-term correlation coefficient of 0.97 between the DJIA and its DVD, there have been short-term periods where the price and the DVD have been out of line.The best example was during the spring and summer of 1987 when the 30-year T bond backed up 38% from 7.44% on March 4 to 10.25% on October 19, 1987, following its 6-year drop from 15.2% on September 29, 1981. The price of the DJIA had risen steadily over those six years and, as man has an amazing propensity to project the most recent trend ad infinitum, stock market participants have played their part.
Concentrating on price regardless of the value is folly as demonstrated so vividly on October 19, 1987.
Which brings us to what is happening.The DDV is almost at the level of October 2023 suggesting that DJIA could soon follow and if T. Rowe Price is correct in expecting a10-year T note yield of 6% in the first half of 2025 the 30-yea T bond could rise to 6.2% driving the DVD down to 25,500. The DJIA should then be not far behind.
Points to Ponder
Wage demands are rising to catch up with past inflation, new price inflation is on the horizon from proposed tariffs and the threatened deportation of up to 20 million workers (at an estimated $1.76 trillion or $88,000 each) from the labour force. Furthermore, Trump seems determined to extend his 2017 tax cuts and to increase them. Is it any wonder that he wants to eliminate the Debt Ceiling? Higher 30-year T-bond rates seem certain and with them a further decline in the DDV of the DJIA and a 97% probability of a significant drop in its price.
In 2016 the DDV was at a large discount to price. Today it is at a premium.
On election day November 2016, the DJIA price was at a 25% discount to its DDV. It moved towards equilibrium following the Trump tax cuts but fell back to a 45% discount as COVID-19 shattered world markets, in March 2020. Today Trump is starting his second term with the price of the DJIA at a 28.9% premium to its DDV, the largest percentage differential since 2002.
The National debt stood at $21 trillion when Trump was first elected, today it is $36.3 trillion. Annual interest was running at $259 billion, today it is over $1 trillion. Since November 2023, Janet Yellen has refinanced in the short end of the Treasury market. There appears now to be no other choice but to revert to the long end which has pushed the 30-year T bond rate above the minimum 4.5%, which along with the rebalancing of the constituents of the DJIA is forcing the DDV down.
Bitcoin – Perfect Example of an Entity with a Price but no Value
I commented previously that Bitcoin has a price but could not determine its value. My quandary is unchanged. Turning to history for guidance Bitcoin reminds me of the madness of crowds seen in the South Sea Bubble, and the Dutch Tulip Mania as well as more recent scams such as Carlos Ponzi’s scheme, the Panama Oil scam of the 1920s, any number of gold mining promotions and Bernie Madoff’s revived Ponzi scheme etc.This week Kyle Torpey of Investopedia pointed out that Bitcoin on Monday evening traded at $103,000 by today it is down to $93,000. Without enunciating the full significance of what he wrote, Kyle explained that “risk assets, such as Bitcoin and other crypto assets, tend to fall in conditions that are less conducive to lower interest rates as it means there will be less money to throw around at such assets, and yields on bonds will be more appealing.” i.e. Bitcoin is gambling, Not exactly investing!Bitcoin has no discernable value so why does it have a price? More By This Author:DJIA Grossly Overpriced Vs. DDV
DDV Heading Down As 30-Year T Bond Yield Hits 4.58%.
DJIA On Cusp Of Correction As 30-Year T Bond Yield Hits 4.52%
