Sunday, July 29, 2007

Why the recent stock market high wasn't that high to begin with

The pollyannas rejoiced recently when the Dow Jones Industrial Average at last broke 14000 on July 19th 2007. "See!" they thought to themselves, "The economy is doing great! Who are these fools who constantly warn about doom and gloom?". These are also the same permabulls who tend to believe every statistic the government publishes. Here I will show that this new "high" was never high to begin with, and any profits made by tracking the DJI are more akin to a statement issued by the Red Queen from Alice in Wonderland fame:

"Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"

Here I will compare the two previous peaks, the aforementioned from this month (14000), and the peak of the internet bubble: on Jan 14th 2000, the Dow Jones reached 11,723. The reasons why I compare peaks, and don't measure from trough to peak are because of hindsight bias and because I want to compare apples to apples (peak to peak, trough to trough).

I'm not going to use inflation to measure the change in the stock market in real terms, as it would involved a longer discussion about what the "true" inflation is. Instead I will compare the purchasing power of the dollar compared to other currencies. The currencies I have chosen roughly correspond to the G8. I chose gold and silver as traditional currencies and stores of value.

Data from 2000/1/14 2007/7/19 purchasing
power drop
British Pound 0.60750 0.48770 19.7%
Canadian Dollar 1.45080 1.04360 28.1%
Euro 0.97530 0.72470 25.7%
Gold 0.0035210 0.0014870 57.8%
Japanese Yen 106.150 121.9560 -14.9%
Russian Ruble 28.670 25.44230 11.3%
Silver 0.19610 0.075990 61.2%

The change in the purchasing power of the dollar compared to other currencies is absolutely astounding. The only currency that the dollar has actually increased its purchasing power against is the Yen, but this is mostly due to the fact that the Japanese have been pusruing a Zero Interest Rate Policy for many years now. For those not familiar with it, basically the Japanese have been "running the printing presses" like crazy to stop deflation, but it hasn't been working quite the way they expected (see Carry Trade).

Get ready for the big surprise: the peak-to-peak increase in the stock market was only 19.4%! As an intellectual exercise, if you had bought Euros or Pounds and put them in a regular savings account, and not invested in anything you would have made more money. If, like presidential candidate Ron Paul, you had put all your money into Gold and gold mining stocks, you would be making out like a bandit.

This is why I'm voting for Ron Paul for this presidential election. The Federal Reserve has been devaluing the currency so much, it's no wonder that the stock market seems to be shooting through the roof! Ron Paul will tame the federal reserve at the very least, and eliminate it entirely if he can.

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