November 2009

Market, up 20% & Dollar, down 20% = Nothing

It was good talking with you recently and we trust that you had a very pleasant Thanksgiving holiday. We take this opportunity to wish you all the best during the upcoming holidays and a very Happy New Year.

A poignant remark was recently made by a financial guest on CNBC “Most market professionals are in the market today not to invest (read, long-term) but to trade (read, short-term).”

Below is a chart of the S&P 500 stock Index from 1950 to date. As one can see, the market as a whole has done little during the most recent decade even though volume (the exchange of shares) increased dramatically. Artificially low interest rates helped spur the extreme stock rallies during the past decade and perpetuated not only the “internet bubble” but also the “housing bubble”. The recent market bounce from the March 2009 lows (extreme right on chart) is significant for the “trade” but not so significant for the longer-term “investment”. In a most simplistic way, one could say that during the past decade or so the accompanying chart illustrates the greatest participation in the market with little to show for it.

Keep in mind, if the market increases by 20% and the dollar declines by 20%, what has one gained? The above chart is illustrated in nominal dollars and not adjusted for the loss in purchasing power over this period. Another way of looking at the market is illustrated by the following chart. The chart below represents the ratio of a unit of the S&P 500 stock Index to an ounce of gold. Re-pricing to reality is now underway.

Let’s take a step back and take a renewed look at the broader perspective of the U.S. in relation to the rest of the world.

As the winds of change muster, what might be the perception of the U.S. from distant shores? Perhaps, a mighty power perched in arrogance on the shores of economic pre-eminence. Whether we want to adjust our sails or not, the rising powers from the East may not lean so heavily on the West in coming years for their survival. The development of the middle-class in the Far East is all but impossible to restrain. If consumption is an undercurrent of economic success, as it is in the United States, representing roughly 70% of GDP, we have many worthy competitors abroad. History may one day demonstrate, as it has for all ages, that our economic fortune was created with the same means that will represent its undoing – the decree that is fiat currency. Incurable politicians with unquenchable thirst for spending have resulted in the unceasing debasement of the U.S. dollar, and because of this the dollar may be dethroned of its world reserve currency status in the years ahead. In the rising wake of the current globalized financial crisis, the U.S. is now confronted with the difficult task of convincing our “foreign bankers” that we are worthy to borrow even more so that we may continue to watch from our privileged perch those hard at work on distant shores.