Saturday, November 06, 2010

Stocks Have Collapsed in 2010--When Priced in Wheat

To gain a more realistic perspective on the stock market's supposedly heady run, imagine you were paid in a currency backed by commodities such as wheat, corn, cotton and sugar.


The Federal Reserve's great accomplishment of 2010 has been to devastate the U.S. dollar, which has plummeted almost 15% since June. Wow, who knew it was this easy to spark a rally in risk-assets such as stocks?


By pushing the dollar down 15%, the Fed managed to goose the S&P 500 by 19% since June 1. Stated that way, the leap in stocks can be seen as mostly the result of the Fed's eradication of the dollar's purchasing power.


Priced in wheat, which has soared 71% since June, then the U.S. stock market has woefully underperformed.


If you were paid in maize (corn), which has risen 35% since June, then selling your corn and buying the SPX in June resulted in a serious loss of purchasing power.


Imagine you were paid in a currency backed by grain, cotton, sugar and other agricultural commodities. Let's call it the quatloo, shall we? Your quatloos have gained tremendously in purchasing power since June when priced in U.S. dollars--or the S&P 500.


How many quatloos did it take in June to buy a share of the S&P 500? How many does it take now? As a rough approximation of the quatloo, we can imagine getting paid in silver, which has rocketed up about 40% since June.


If you'd foolishly traded your silver or quatloos for shares in the U.S. stock market in June, then you'd be facing a massive loss of purchasing power; the stock market's apparently mighty advance of 19% since early June is less than half the gains (when priced in U.S. dollars) you would have made just holding your silver coins and ag commodity-backed quatloos.


Glance at these charts to see what the Fed accomplished by destroying the nation's currency in its misguided attempt to unleash a "wealth effect" among the top 10% of the households who gain most of the "increase" in stock market "wealth."


I have italicized "increase" and "wealth" because when priced in silver or agricultural commodities, stocks have declined about 20% since June.



Priced in silver or agricultural commodities, U.S. stocks have collapsed in value, not risen. The Fed has ruthlessly pursued a policy designed to extract wealth from all households (via destroying the purchasing power of the dollar) and funnel it into the Financial Elites and "too big to fail" banking sector.


The con is masked by the apparent rise of the U.S. stock market: the nominal gain is the purest propaganda available, and Mr. Bernanke has recently made it clear that creating a nominal gain (not a real gain in purchasing power, mind you) is his entire game plan to "renew growth" in the non-financial Elite economy, i.e. the real economy.


The Fed and Bernanke have failed in their duty utterly and completely. But thanks to their brilliant propaganda campaign, only those paid in silver and quatloos (wheat, corn, sugar, cotton, etc.) can see this clearly.


The rest of the populace has been fooled--for awhile.


I'm going to make a bold prediction here: I predict the Fed's policy, and indeed the Fed itself as an independent policy-setting agency, will be discredited by late 2011. The total failure of the Fed's policies will be clear to all by then, and there will be no QE3 or QE10. The political chickens will finally come home to roost for the Fed.


The propaganda stock market will collapse even in nominal terms for reasons I will explain Monday, and with that collapse then the last simulacrum (A key concept in the Survival+critique) of Fed competence and effectiveness will be lost.


I predict Ben Bernanke will either:

1. resign "to pursue other opportunities"

2. be forced out by political pressure caused by the rising anger of the public as the higher prices triggered by the Fed's destruction of the dollar start flowing through to consumers

3. be rendered ineffectual by political limits imposed by Congress. If he clings to his office, the glory days when his words had impact will be over. He and the Fed will be widely despised as tools of Wall Street and the "too big to fail" banks.


The entire Fed scheme of sparking organic growth in consumer demand by smashing the purchasing power of the dollar--the actual measure of the cost of goods in the U.S. economy--in order to generate an entirely bogus "wealth effect" in the top tranch of households who might gain (on paper) from nominal gains in the stock market (about 10% of households)--will be discredited as a catastrophic policy failure without precedent.


Lagniappe thought: If a non-governmental organization established the quatloo as a real currency based on commodities, I would certainly prefer to hold quatloos than dollars. Even as an imaginary currency, the quatloo would serve a valuable role in revealing the truth about purchasing power.



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