The Dow/Gold Ratio, Presidents, and Elections

“History repeats itself, first as tragedy, second as farce” – Karl Marx

I’m going to make a prediction about the 2012 presidential election. OK, not really. I’m actually going to make some tenuous connections of historical presidential types and claim that Obama might just be the new Jimmy Carter – which bodes ill for his re-election chances.

First, consider the following plot of the “Dow/Gold Ratio” borrowed from “sharelynx“. The “Dow/Gold Ratio” is, of course, simply the Dow Jones Industrial Average (stock prices) divided by the price of an ounce of Gold. It is, therefore, simply the stock price measured in ounces of gold.

Various places will offer commentary on what is meant by the “Dow/Gold Ratio” – the best that I’ve heard is that it is a relative comparison of trust in “the system”. That is, when stocks are high and gold is low (Dow/Gold high), people are displaying a general belief that the fiscal and economic system in which we live is fundamentally sound and there is no need to worry. However, when stocks are low and gold is high (Dow/Gold low) it  means that people don’t trust the system and are fleeing to gold (a shinny metal of limited quantity). As the chart notes, there is a clear difference in the “trust in the system” behaviors before and after the creation of the Federal Reserve – which is interesting but not the topic of this post.

In the next plot we focus on the time period from the 40s through today and overlay the presidents with commentary about system confidence along the way. The trend goes something like this:

  • Hope in a dreamy new reality
  • Acceptance that perhaps the dreams were a little overblown and some adult (conservative) leadership is needed
  • Disillusionment with a “conservative” who didn’t live up to his supposed ideals followed by an “unlosable” election …
  • Total destruction of system confidence by a wide-eyed liberal who hasn’t a clue
  • The entrance of a new, adult leader who restores confidence
  • Wash, rinse, repeat

First it was Kennedy with Camelot, followed by Johnson and the Great Society. There was this dreamy feel that we really were on to something new here. This was a peak in confidence in the system; we’d finally arrived at the new (and better) reality. When it didn’t really hold together we turned to an adult conservative in Nixon – who turned out to be not so trustworthy and brought confidence in the system low. Tricky Dick was impeached, which led to an unlosable election in which Democrats chose to run a pedantic child of an “outsider” who they hoped would finally break free from the laws of physics and human nature and usher in true liberalism. Carter won by virtue of not being a Republican, and proceeded to destroy any belief that the system could work at all – the Jimmy Carter “malaise” if you will. This led to Reagan, and the long drive toward restoration of confidence in the system.

Will history repeat itself? Let’s see. We had the dreamy hope of the Clinton years – the 2nd Camelot and the dot-com boom. This time it was different. We had again reached peak confidence in the system (high Dow/Gold ratio). But, as before, we needed an adult in the White House – someone who wouldn’t “not have sexual relations” with interns. The supposed “conservative” turns out to not quite live up to conservative ideals and oversees a massive Fed-induced housing bubble followed by collapse. While not as bad as Watergate, the collapse of the housing bubble led to an unlosable election. Instead of nominating the pragmatic choice (Hillary Clinton), the Democrats picked a pedantic child with dreams of hope and change … this time it will be different – “yes we can” break the laws of physics and human nature and finally make socialism work.

Will Obama and the not-yet-solved banking crisis usher in another down-leg in confidence in the system, leading to a Romney presidency? I don’t know. But I think the cycle is interesting, and I suspect the Obama administration is pushing hard to have Bernanke, Geithner, Merkel, and any other leader who will listen to stave off the Euro crisis just a little more. Only 144 days to the election … will it hold up?

(Yes, I’m aware that the correlation of presidential types and system-trust gives a Romney=Reagan implication. I don’t buy that at all, but their names do both start with R and have six letters.)


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2 Responses to The Dow/Gold Ratio, Presidents, and Elections

  1. I would really like to get my hands on the actual data represented in the given plot (i.e., in “analyzable” format); any idea where they can be found? Because I can’t say that I buy the “clear difference in trust of the system” business at all. Let’s be scientific, and consider the following exercise: start with a plot that shows nothing but the actual Dow/gold ratio (i.e., nothing but the black curve, without the red line, or blue “confidence band,” etc.). Now hand that plot to someone, and see if they can draw a vertical line that separates what they interpret as two regions of clearly different behavior. How well would someone perform on such a test?

    In fact, I wonder just how indistinguishable is this time series from a simple random walk? That is, using common statistical tests of randomness, it would be interesting– and frankly, amusing– if the data *passed*.

    (Just to appease the conservatives in the room, this same sort of analysis can be helpful in refuting faulty arguments for global climate change. “This is the warmest year in recorded history!” Well, so what? Even with completely random, say normally distributed, annual average temperatures, we should *expect* to see about ln(n) “warmest years ever” in a lifetime of n years.)

    • nomasir says:

      Nice use of ln(n). I too would have liked the data in raw form – but that would have taken like 10 minutes instead of the 3 I had.

      Agree on the notion of getting the data outside of the “chartsman” lines that were already added. Folks can draw lines any way they want to. As per the “confidence in the system” argument, it tends to lie outside the data. That is, folks don’t look at that chart and say “see, it demonstrates when people were losing confidence in the system due to policies of this or that party.” Rather, the theory goes that gold relative to any asset class represents a “confidence in the system” conjecture. That is, when people don’t think the financial system will hold they prefer a shiny metal of limited quantity that has no other intrinsic value … other than its limited quantity.

      Will see if I can find the raw data. (Because it would be quite funny if it passed some statistical tests for randomness.)

      My main point was that if we accept the “confidence in the system” argument we can make tenuous yet plausibly humorous arguments about repetition of presidential types. Eisenhower=Reagan=Conservative who believes in freedom and actually returns some small measure of it to the people. Kennedy=Clinton=Moderate who gives the left some modicum of hope that we can have “reasonable liberalism”. Nixon=Bush=Faux conservative who ends up trashing the system with some absurd “realpolitik” stay-in-power approach to governance. Carter=Obama=incompetent leader who hopes and dreams that their moral superiority alone can lead to a rise in successful liberalism. Ford=Bush(41)=historical footnote.

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