2 market / economic pieces..

[LivinLOS]

These both come from the same guy.. I know this isnt of interest to the majority of the board but it may be to some.. I kinda like reading the electronic funny pages and these two in the last week or so rung very true to me.. I have said my bit before about debt loads and what I think of the credit based economies of the west..

As the Dow burst through the 13,000 milestone this week, few understood the hollowness of the achievement. Measured against the rising dollar-denominated prices of just about everything else on the planet, the Dow has actually lost value over the past seven years. Measured against the truest benchmark, the price of gold, the record high for the Dow was set back in January of 2000 when its price equaled approximately 43 ounces of gold. Today it is only worth about 19 ounces.

To better appreciate just how much of stock gains can be attributed to inflation, consider that the record high for the Dow in 1929 of approximately 380 also equated to 19 ounces of gold. So despite all of the hoopla and a thirty-fold increase in stock prices, the Dow has actually gained no real value during the past eighty years. The entire rise from 360 to 13,000 has been an illusion made possible by the magic of inflation. So much for the concept of stocks being a “can’t lose” long term investment -- unless you feel that eighty years is not quite a long enough time horizon!

Now that is not to imply that the Dow has not generated returns during those years: it has. However, those returns have been a function of dividends and not appreciation. But its not yields that Wall Street celebrates, its prices. By dazzling investors with higher prices, they distract their attention from the unpleasant reality that they are actually treading water. What difference does it make if you have more dollars if the dollars themselves have less purchasing power?

Despite its recent eclipse of 13,000 the Dow now buys 30% fewer euros than it did then back in 2000 when it was priced at approximately 11,500. It also buys 35% fewer gallons of milk, 40% fewer bushels of corn or wheat, 65% fewer ounces of silver, 70% fewer barrels of oil, 80% fewer pounds of copper, and 90% fewer pounds of uranium. Try figuring what the Dow will buy in terms of other necessities, such as housing, insurance, college tuition or hospitalization. Any way you measure it, the Dow is worth far less today then it was in January of 2000.

Back in 1980 one Zimbabwe dollar was worth more than one U.S. dollar. Therefore a billionaire in Zimbabwe was also a billionaire in America. Today, almost everyone in Zimbabwe is a billionaire yet few of them can afford a pack of chewing gum. Do you think that anyone invested in the Zimbabwean stock market these past 30 years cares how many record highs that market has made?

Many might feel that a comparison of the U.S. to Zimbabwe is ridiculous. However, fundamentally there is no real difference between a Zimbabwean dollar and an American dollar. They are both simply pieces of paper, the value of which depends on the resolve of politicians not to print too many of them. During the difficult economic times that lie ahead, the pressure on the Fed to run its printing presses full throttle will be immense.

Think back to the German experience with hyper-inflation during the Weimar Republic. At the time of its currency meltdown, Germany was a major economic power (even after the devastation of the First World War). Yet that status did not prevent its currency from becoming worthless. The impetus for Germany’s hyper-inflation was the fact that its industrial base had been badly damaged during the war, yet under the terms of Treaty of Versailles it was obligated to pay enormous reparations to the Allies. Lacking the ability to export enough goods to repay its debts, it resorted to a printing press instead. America is now in a similar predicament. Although our industry was not destroyed by bombs, it’s gone just the same. While we might not be bound by a treaty to pay reparations, the trillions of dollars of American IOU’s now owned by foreigners will be just as burdensome an obligation. It is hard to image we can “repay” these debts without civil unrest, massive inflation, or both.

The point to remember is that when it comes to records, it is real purchasing power, not nominal value, that counts. Measured by its purchasing power, the Dow has clearly lost value over the past seven years. Those who have remained invested in Dow stocks during that time period are clearly poorer as a result. Those who continue doing so will likely loss even more wealth in the years ahead, regardless of how many more nominal record highs the Dow sets.

It may come as a shock to many of you, but I too believe that we are experiencing a "Goldilocks" economy. However, unlike most on Wall Street I do not define this as economic growth that is neither too hot nor too cold. I believe the analogy is apt simply because U.S. economic growth is a fairy tale! When such gains are measured against the gains in the price of just about anything people buy, or in just about any foreign currency, it’s a whole different story. For example; measured in euros, U.S. GDP has declined from 11.5 trillion in January of 2000 to 10 trillion today. From a European perspective, the U.S. economy has been in a seven-year recession, with GDP declining by close to 2% per annum.

Also ignored in the rhapsodizing over U.S. GDP growth is the extent to which consumption has been paid for with borrowed money. Since these debts must be repaid with interest, GDP will likely decline even more significantly in the future. Had we borrowed primarily to finance capital investment this would not be the case, as the loans could have been repaid out of increased income. However, as the vast majority of borrowing is simply used to purchase consumer goods, the income needed to repay the debts will have to come at the expense of reduced future consumption.

This week we received new data that illustrates how big of a financial hole U.S. consumers are digging. Despite disappointing sales from major retailers such as Target and Circuit City, first-quarter profits at MasterCard surged 70% to a record $214.9 million following a 19% jump in transactions. I see two possible explanations for this apparent paradox. The first is that despite buying fewer items, consumers were forced to borrow to pay for things that until recently they could afford to pay for in cash. A second possibility is that due to disappearing home equity and tighter lending standards, fewer home owners were able to tap into home equity and were thus forced to use credit cards instead. Since credit card debt carries higher interest rates and is non-tax deductible, it is far more expensive to finance then mortgage debt. Under either possibility, future consumption will suffer as an even greater share of personal income is devoted to making interest and principal payments on items consumed in the past.

Compounding the problem is the fact that job growth is stalling. April’s 88,000 gain in non-farm payrolls is the most anemic in over two years. As falling real estate prices, rising mortgage payments, and tighter lending standards knock the legs out from under American consumers, look for even worse jobs reports in the months ahead. If Americans are struggling to make ends meet now, imagine how much harder it will be without paychecks!

While Americans continue to sacrifice their futures to indulge their present, the rest of the world sacrifices today to build a brighter tomorrow. As a result, the American economy will become increasingly less significant in global affairs. In January of 2000, the U.S. accounted for a staggering 31% of global GDP. While that percentage is still an impressive 28% today, it will likely fall to 20% over the next several years. This will certainly be true if Asian currencies, particularly the yuan, are allowed to rise to more realistic levels. Once the bottom really drops out of the dollar, I expect U.S. GDP to fall below 10% of global GDP. By then the world will surely have realized that the U.S. economy has not been the locomotive of global growth, but rather the caboose. If the actual productive economies decide to decouple the deadweight, the train would actually move much faster.

[marc26]

im interested in anything of this sort
feel you need to have a macro view

[LivinLOS]

Agree that money is made even when you know its a bad idea.. I have thought for months that China is in pure outrageous bubble mode.. But look at the return I have missed out from not playing that bubble with a sliding stop loss..

But when it hiccups (and it will) and everyones stops hit that day.. Its gonna be a wreck to see..

[MrDK]

Today it is only worth about 19 ounces.

... consider that the record high for the Dow in 1929 of approximately 380 also equated to 19 ounces of gold.

the Dow has actually gained no real value during the past eighty years.

This does not tell me whether the Dow gained value or not. It only states that for the 80 year investor gold and DOW would have been an equally good or bad investments. Gold in not the reference for inflation.

[LivinLOS]

It is of course one measure of inflation !!

Its the longest running monetary substance thats still used today !! You cam measure inflation from Roman times to today in how many grammes of gold for a bottle of wine.. Show me how to do that with any paper money.

I pay for good and services at the moment with egold.. I notice how products (fixed in USD prices) are getting cheaper all the time as inflation effects the US dollar.

You cant think in one comparison only. You cam measure inflation from any tradeable item to any tradeable item.. Thats the whole point of the first piece, that people looking at 'highs' in dollar terms are actually not highs at all.. If I had bought the DOW with EUR I would have lost money, its not a high in that two item comparison.

[Bushdoctor]

Was the person quoted Robert Reich by chance?

Just my observation, but this looks like more fuzzy math from the recessionistas. Firstly to compare to the height of the US stock market bubble in January 2000 does not give an accurate picture, perhaps just a convenient coincidence. Secondly gold, like corn and wheat which have inflated lately due to usage in bio fuel production, and Uranium due to building new nuclear power plants around the world, is a commodity with price fluctuations and not necessarily an accurate inflation gauge. As with any commodity, when demand goes up so do prices. In this current global economic boom gold is in high demand, especially in countries like China and India, where a few short years ago there wasn't even a big enough middle class to make a significant demand for gold. Maybe we should try pork bellies. Third, it's no surprise that the US GDP as a percentage of the world GDP should go down as the global economy improves, but the US GDP is still growing. In fact, if we are going to data mine and cherry pick statistics, gold is worth less now than it was 1 year ago, and stocks are much higher for the same time period. Also the 88,000 gain in jobs is still a gain. Unemployment is so low we are considered to be at full employment, and we've even had to import millions of foreign workers to fill the void. Everyone who really wants a job has one. Inflation is pretty tame now in the US, and the fed could afford a rate cut if they deem it necessary. Reality is, the rate of real inflation has been far less than the rate of increase of the Dow Jones or gold for the past seven years. That's if you held exact Dow Jones stocks. I know many people who have done much better, and the quote admits not even counting dividends into the equation. He really had to stretch to make his point.

Interestingly the US has had roughly the same rate of inflation as the UK for the past 7 years. Measuring Worth - Inflation Rates in the US and United Kingdom

[LivinLOS]

In fact, if we are going to data mine and cherry pick statistics, gold is worth less now than it was 1 year ago

Says who ?? Gold is up (slightly) on a 1 year chart in USD terms.. You mean in non USD terms ??

[Bushdoctor]

I was going by this chart but didn't really look into it. It shows gold at over $700 one year ago. Historic gold price charts -- gold prices in dollars and euros

[LivinLOS]

Gold is up 12 month but only by <2% or so.. This time last year is when the spike happened so thats kind of normal..

Also I tend to dissagree that inflation is benign.. The stats used by government are so hopelessly adjusted and manipulated they are not close to real world cost of living.

[Bushdoctor]

True, it's hard to know what inflation rates really are.

[LivinLOS]

Ohh, and while he didnt include dividends, he also didnt include trade fees, capital gains tax, income tax, and all the other ways that holding stocks get sliced down..

The main point is that many people have a 'buy and hold and it will always come good in the end' mentality.. just goes to show that buying and holding for 80 years didnt actually create any real wealth, all if did was stay the same over that time..

The current massive asset appreciations are more to do with increases in money supply that feed back into investments.. Creating bubbles in real estate and stocks.. that masive global liquidity is very dangerous and leveraged by hedges in ways never before seen..

[LivinLOS]

Originally Posted by Bushdoctor

True, it's hard to know what inflation rates really are.

Shadow Government Statistics.

This guy pulls all of the hedonic adjustments out (someetimes fixing back in other eras standards (like a Reagan ere fixed measure or a Clinton era fixed measure brought forward)..

You wont like his view but his numbers are hard data..

[Bushdoctor]

Originally Posted by LivinLOS

Ohh, and while he didnt include dividends, he also didnt include trade fees, capital gains tax, income tax, and all the other ways that holding stocks get sliced down..

The main point is that many people have a 'buy and hold and it will always come good in the end' mentality.. just goes to show that buying and holding for 80 years didnt actually create any real wealth, all if did was stay the same over that time..

The current massive asset appreciations are more to do with increases in money supply that feed back into investments.. Creating bubbles in real estate and stocks.. that masive global liquidity is very dangerous and leveraged by hedges in ways never before seen..

Don't those same fees also apply to gold?

[LivinLOS]

Depends on who and how you get it.. But to simply own the dow you have to keep trading stocks brought in and out.. Theres a continaul trade cost.. Bullion may have a purchase and sale spread.. Once !!

Taxes ??

Every year your portfolio goes up you pay loads of tax.. Take a DOW buy then, and annually declare its gains, deduct that taxation, keep the system rolling..

Then what are you left with after 80 years..

[Bushdoctor]

Buying an ETF might be simpler. If all I was doing was trying to duplicate dow returns by buying each dow stock, I could think of a few poor performers that I would leave out and hopefully come out much better.

[LivinLOS]

But you do still have to sell right ?? So what are capital gains on that amount ?? you lose 20% of that ??

Now very OT from the main premise.. But the main thing is, all these assets that people think have made them richer, have only preserved wealth (before tax)..

It was said a suit would cost an ounce of gold in 33.. Still does.. How many dollars back then and now ?? its not I am only pushing gold, more making a point that fiat currency is being debased at rapidly rising levels (real M3 may be hitting 10% per annum !!!) holding paper money, or valuing items in terms of paper money fails to see the rapid rise in inflation and fiat currency.

Dont forget this experiment with fiat currency dollars only started in 73 with Nixon.. We have been playing with this system for only 35 years.. Every other time in history its been tried it ended in a worthless paper currency.. This was why the founding fathers said money could only gold and silver (why is it that can be ignored while guns cant ??) to prevent government doing exactly what is being done now.