Monday, April 30, 2007

Are Global Stock Markets Really That Much Higher?

Amidst the hoopla about record highs in the Dow Jones Industrial Average and many other global markets such as Korea and China (Shanghai Composite), it's worth asking: how are they doing priced in a non-paper tangible good such as gold?

Why ask? As frequent contributor Harun I. notes below: "An Asset Is Only Worth What It Will Buy." In other words, if an asset (say a basket of stocks) rises in nominal terms, but it buys less tangible goods, then has it really risen, or was the rise illusory? Let's look at two charts Harun has provided:

In this "alternative view," the stock market's rise is revealed as being one of numbers rather than actual tangible value. Put another way: if your money buys 20% less than it once did, then a 10% raise isn't an increase at all except in nominal terms.

As the calendar turns and the old Wall Street adage to "sell in May and go away" kicks in, the illusion of "record highs" demonstrated above is worth pondering.

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