The REAL Dow

Few investors realize that stocks have been among the worst investments of the past decade. If they do, they probably do not realize quite how bad the decade was, because most people forget about the effects of inflation. This is especially likely as our Main Stream Media refuses to discuss the “I” word. To the media and their government handlers, inflation is a non topic. If mentioned at all, inflation is said to be minimal, a non factor or “under control”.

Despite the 2009 rebound, the Dow Jones Industrial Average today stands at just 10520.10, no higher than in 1999. And that is without counting consumer-price inflation. In 1999 dollars, the Dow is only at about 8200 and would have to rise another 28% or so to return to 1999 levels. Using today's dollars and starting at 10520.10, the Dow would have to surpass 13460 to get back to its 1999 level in real, inflation-adjusted terms.

Controlling for inflation takes extra work and makes stock gains look puny, so it is easy to see why stock analysts almost never do it. And as stated above the media almost never do it either. Remember that most of the “business news industry” is part and parcel an arm of the Wall Street equity touting machine.

But other things do get measured in real dollars. When economists report whether the economy is growing, they account for inflation. When analysts judge long-term gains in commodities such as gold or oil, they often adjust for inflation, noting that gold hit a record this month in nominal terms but remains far from its 1980 record in real terms. Because analysts almost never do the same with stocks, it leaves investors with an exaggerated view of their portfolios' performance over time.
Looking at returns on a nominal basis can be very misleading. One must check inflation-adjusted performance to monitor investments' real value.

A few analysts trying to get a better perspective on investments' performance have taken to measuring the Dow in a variety of unconventional ways. Gold bugs look at the Dow based on gold prices, which makes its performance look much worse over the past decade. Europeans and others with international investments sometimes measure the Dow's return in euros. That makes the Dow look worse since 2006, a time when the euro has been rising. The dollar's recent rebound has helped make the Dow look a little better against the euro and gold, however.

Mr. Bernstein says some investors saving for education expenses compare returns to tuition inflation. If the portfolio doesn't rise as fast as education expenses, these investors reason, they will need to boost contributions. The same is true for someone saving for retirement expenses or for future medical costs.
Garrett Thornburg, founder of Thornburg Investment Management in Santa Fe, N.M., calculates what he calls "real-real" returns, adjusting stock performance not only for inflation but also for real-world drags such as taxes and fees.

Example : Nominally, a dollar invested in the stocks of the Standard & Poor's 500-stock index at the end of 1978 had blossomed to $22.88 at the end of 2008, including dividends, a sweet gain even after the 2008 meltdown. But once estimates of inflation, taxes and costs are removed, he figures, the investment was worth only $3.76.

But don’t jump off the bridge yet. I am not trying to put you off stocks entirely, until you consider the long-term alternatives. Measured over the 1978-2008 period, rather than over just one decade, stock performance in real-real terms actually is better than that of just about any other major investment class, Mr. Thornburg found: 4.5% a year. Stocks' ability to keep up with inflation over the very long haul may be their best selling point.

In real-real terms, stocks did better over that period than municipal bonds (2.5% a year), long-term government bonds (2% a year) and corporate bonds (0.2% a year). Real-real home prices were unchanged over those 30 years. Both short-term government bonds and commodities suffered losses.

Figuring out how to adjust for inflation can mystify most investors, although the Internet now offers several Web sites that quickly adjust numbers for inflation and some mutual funds and independent mutual-fund analysis services calculate returns adjusted for fees and taxes.

Prof. William Hausman at the College of William & Mary long has urged the media to offer people inflation-adjusted stock charts. He says newspapers and analysts frequently point to the Dow's 2007 record of 14164.53 and talk about how far the Dow would need to climb to return to that level. In inflation-adjusted terms, however, the Dow in 2007 never quite surpassed its 2000 record, Prof. Hausman calculates. To return to an inflation-adjusted record now, he adds, the Dow would need to break 15000. "It really puts in perspective how stocks are doing," he says.

Stock analysts sometimes like to note that the Dow today is worth 27 times its value at its 1929 pre-crash peak, meaning that even if you bought at the worst moment, your stock still would be way up over time. In inflation-adjusted terms, however, the Dow today is only a little over twice its 1929 peak, according to Ned Davis Research.

Some analysts measure the Dow against the performance of gold, which further dents the record of the blue chips over the past decade. Peter Schiff of Euro-Pacific, has popularized interest in measuring the Dow in gold rather than dollars. Gold has rebounded since 1999, and the fascination with the yellow metal has made investors start thinking of it again as a currency.

Ned Davis, the founder of Ned Davis Research, referred to gold as "real money" in a recent report and published charts of bonds, home prices and stocks measured in gold rather than dollars. Even with gold's swoon in recent days, the Dow looks a lot weaker over the past decade measured in gold than in dollars.

Of course, it is possible to find a hot investment that dwarfs the Dow's gains over any period, which makes many analysts question the value of adjusting the Dow for gold's gains. Such skepticism doesn't stop gold's supporters from pointing out how much weaker the Dow looks when measured in "hard" money.

In 1997, the Dow looked strong at 40 times the dollar value of an ounce of gold. With gold's rebound since 1999, the Dow now is worth about nine times an ounce of gold, meaning simply that gold has performed a lot better than the Dow.

For those who like bandwagons, that suggests that it is time to buy gold. For those who like to buy things when they are cheap, it suggests that gold was cheap in 1997, and stocks have gotten cheaper since, at least when they are measured against gold.

Remember that there are always exceptions in the equity markets. Stocks, that due to either a technology, a high demand service or commodity that they represent, can and will soar far and away above the Dow, and its 30 stock index. That after all is the lure to equities.

Omar P Bounds III
AARE., GPPA, CES
The Bounds Auction Company

Chinese to limit Treasury purchases in 2010

Supporting the Beach Ball!

The Blogger & Peter Schiff

This could easily be the most important story in the end of year run up of political & economic Bombshells - and it is likely to be completely over looked। With all smoke being blown up everyone's butts by the shenanigans surrounding the Senate health care debacle and the Copenhagen farce, this little story copied below got buried।

As Dollar Busters go - this very well could stand as the " other shoe" that many Dollar watchers have been predicting.

In The Fall of 2009, I attended a talk by given by Euro Pacific's President and erstwhile US Senate Candidate for Conn., Peter Schiff , where he predicted exactly this scenario. Schiff, a long time dollar critic and gold tout asks the question that no one in the US Government wants to hear:

When will "they" ( foreign sovereignty funds & the Chinese in particular ) stop buying our debt?

"The situation is not unlike a beach ball being supported by the hand of an outstretched arm " Schiff remarked. "Our currency & economy are that beach ball and the Chinese purchases of our Treasury notes are the outstretched arm. What happens to the beach ball when that arm is withdrawn? "

As this dollar watcher see it, there are two scenarios for the beach ball in the near term, neither of which is appealing.

#1। The "arm" is suddenly withdrawn and the market for US debt goes into collapse।The "Ball" gets dropped!

Whether it bounces or hits like a ripe melon is academic?

#2 The "arm" still supports the ball, but as the US's "beach ball" get heavier, becoming more like a 16 lbs shot put, the effort, as in the cost required to support it will go up.

The cost of the US debt goes up substantially.

What is the interest only payment on 14 Trillion?

Currently, the greatest influence on the "arm" is that most of the other "balls" in the game are getting heavier as well।

Omar P। Bounds III

The Bounds Auction Company

Published on ShanghaiDaily.com (http://www.shanghaidaily.com/)

http://www.shanghaidaily.com/sp/article/2009/200912/20091218/article_423054.htm

Harder to buy US Treasuries

Created: 2009-12-18 0:13:35

Author:Zhou Xin and Jason Subler

IT is getting harder for governments to buy United States Treasuries because the US's shrinking current-account gap is reducing supply of dollars overseas, a Chinese central bank official said yesterday.

The comments by Zhu Min, deputy governor of the People's Bank of China, referred to the overall situation globally, not specifically to China, the biggest foreign holder of US government bonds.

Chinese officials generally are very careful about commenting on the dollar and Treasuries, given that so much of its US$2.3 trillion reserves are tied to their value, and markets always watch any such comments closely for signs of any shift in how it manages its assets.

China's State Administration of Foreign Exchange reaffirmed this month that the dollar stands secure as the anchor of the currency reserves it manages, even as the country seeks to diversify its investments.

In a discussion on the global role of the dollar, Zhu told an academic audience that it was inevitable that the dollar would continue to fall in value because Washington continued to issue more Treasuries to finance its deficit spending.

He then addressed where demand for that debt would come from.

"The United States cannot force foreign governments to increase their holdings of Treasuries," Zhu said, according to an audio recording of his remarks. "Double the holdings? It is definitely impossible."

"The US current account deficit is falling as residents' savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world," he added. "The world does not have so much money to buy more US Treasuries."

China continues to see its foreign exchange reserves grow, albeit at a slower pace than in past years, due to a large trade surplus and inflows of foreign investment. They stood at US$2.3 trillion at the end of September.