Monday, November 01, 2010

Follow up: After inflation, stocks have earned you nothing.

Today I ran across the wonderfully succinct explanation as to why the stock market is a scam and should be avoided. It appears in the comments section of today's post by Jim Kunstler, entitled "Now What?"

The person making the comment was responding to someone who was using hyperbole to ridicule economic analysts who have predicted the DOW will go down to about 4000. While I think that would be a bit of an over-correction (according to several charts I have posted here for you to peruse, the current value of the DOW should be somewhere between 8500 and 5500), the basic sentiment is that the "value" of the DOW is not reflecting what the companies are worth or what their earnings can support. A previous commenter joked that Kunstler had been predicting the DOW would hit 4000 "since 1812." (Neat trick, if true.)

All the DJIA average is reflecting, IMHO, is how quickly the US Dollar is losing value. (But I've only been writing about this issue since 2005.)

And when you adjust for inflation, the fact is that the stock market has not earned anyone anything in over a decade, as this comment points out.

Nyc Labrets replied to comment from Donny-Don | November 1, 2010 11:27 AM

10 years ago, today, the Dow Jones Industrial Average on the NYSE, was floating near the 10,000 point mark.

The DJIA today is barely above that point.

Factor in inflation, and the 40% loss in value that the US Dollar has seen in global currency markets since the year 2000, and it is clear that the Dow Jones is *already* at the 4,000 point mark.

And has been.

For years.

Which means that Kunstler's long standing prediction, (from the year 1812), was not so much a 'prediction' as it is an expression of current reality.

If you want to talk about the S&P 500, and its piddly 6.1% recent gain, since July 16th of this year, when it was all of a whopping 130 points higher than it is today...

Then fine, lets do that.

Today, as the US markets open, the S&P 500 is several *hundreds* of points *lower* than it was a decade ago.

Again, factor in a decade's worth of inflation, and the 40% loss in value that the US Dollar has seen since the year 2000, and it's clear that the S&P 500 is just as
---bleeped--- [insert expletive of your choice] as the DJIA is.

Now, from the day that President Clinton left office, had the DJIA lived up to its much touted 'Historically the Dow, like clockwork, sees an annual gain rate of 10%', (that every single Press Release that the NYSE has ever published says the DJIA has done since Day One), then today it'd be closing in at the 30,000 point mark.

Instead of it currently being @ ⅔rds of that mark, where it pathetically languishes today.

Happy All Saint's Day.

Inflation, what we call it when our money becomes worth less than what it used to be worth, has been endemic in the Dollar, particularly since WWII. Look at this chart:

If you went shopping in 1800 and bought a basket of goods, and went shopping in 1940 and bought the exact same basket of goods, you paid nearly the same price as you would have in 1800. But since the war, and especially since the Dollar went off the gold standard, the prices of everything has shot through the roof. If you bought that same basket of stuff today as you might have in 1800 or 1940, you would pay over 500% more - and "scarcity" is not the issue. There are so many widgets and what-nots available today that they practically give them all away in discount bins just to get rid of them. Is it the cost of oil? That can only account for the last few years - until then, the price of oil had been held low for decades.

After the embargo of the 70s was over, prices fell back down to near what they had been pre-WWII. It is only very recently that oil has been the cause of rising prices.

So the gains in the stock market are an illusion - people think they have made money when in fact they have LESS purchasing power than they did before they bought the stocks, especially if they have been held longer than 10 years - and that's if a 2000 basket of goods would cost the same as a 2010 basket, which of course it doesn't. The 2010 basket of goods costs more - you have to pay more Dollars because the Dollars themselves are worth less, not because the goods in the basket have inherently become more valuable, are better quality, or are more scarce.

People just don't seem to realize this - so they keep buying stocks even though in absolute terms of purchasing power the value of the stocks is less. They are poorer than they were 10 years ago, when that same amount of money would have bought far more stuff. Remember this chart?

Not much has changed since this was made. Think about it.

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