Thursday, October 22, 2009

Stocks, Inflation, Speculation, Desperation

The nominal rise in the stock market masks a brutal depreciation of purchasing power.

Frequent contributor Harun I. submitted a chart of the Dow Jones Industrial Average from 1897 to the present. This is of course priced in nominal (not adjusted for inflation) dollars. Curious about what the chart would look like adjusted for inflation, I asked Harun if he could conjure up such a chart, and he kindly produced an inflation-adjusted Dow.

Now before we look at the charts, we should note the many ways both the Dow and the rate of inflation have been massaged (or manipulated); weak stocks are pulled from the Dow 30 and replaced with stronger companies, and inflation has generally been under-reported by tricks such as overweighting "owner's equivalent rent" (some 40% of of the CPI calculation) and other suspect methods of calculation.

Be that as it may, the charts paint an unambiguous picture of a tremendous loss of purchasing power in the stock market as reflected by the Dow 30. We start with the nominal Dow, with a 200-month simple moving average line.

Click on chart for a larger version in a new browser window.

Next up, the Dow adjusted for inflation.

Click on chart for a larger version in a new browser window.

Notice how the inflation-adjusted price actually touched the 1966 high.

Even though stocks traded sideways during the 1967-1982 Bear market, adjusted for inflation the Dow lost a tremendous amount of purchasing power.

The recent nominal high in 2007 is revealed as no more than a double top when adjusted for inflation.

Next, the Dow -gold ratio (the Dow priced in gold).

Click on chart for a larger version in a new browser window.

Priced in gold, the Dow returned to 1987 levels of valuation.

These charts make me wonder if the rampant speculation we see in every layer of the economy isn't just a reflection of (normal) human greed but a reflection of a desperation to catch up/not fall behind. In other words, investing "for the long run" hasn't increased purchasing power as much as nominal prices suggest. Perhaps people sense they're falling behind in actual purchasing value of their money and assets, and as wages have actually dropped for most workers since 1973, then the loss of purchasing power is in effect doubled.

Sensing that they are falling behind, perhaps people are stepping up to the roulette wheel in a desperate bid to catch up and restore the purchasing power of their money and assets.

There is no gambler more desperate than the one who has lost a number of bets. It is not greed driving his betting so much as a desperation to recover what has been lost. Perhaps that is the underlying zeitgeist of the U.S. real estate and financial markets alike.

Permanent link: Stocks, Inflation, Speculation, Desperation

Check out my article in American Conservative Magazine No Easy Money: The case for raising interest rates.

You can also find my work on AOL's Daily Finance and Seeking Alpha.

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

"Your book is truly a revolutionary act." Kenneth R.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Daniel R. ($20), for your much-appreciated generous donation to this site. I am greatly honored by your support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.

Our Privacy Policy:
Correspondents' email is strictly confidential. The third-party advertising placed by Adsense, Investing Channel and/or other ad networks may collect information for ad targeting. Links for commercial sites are paid advertisements. Blog links on the site are posted at my discretion.

Our Commission Policy:
Though I earn a small commission on books and gift certificates purchased via links on my site, I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by 2008

Back to TOP