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Another Anecdote, Another [Far Different] Perspective



April 25, 2007 – Comments (6)

By now you might know how I like these silly little anecdotal contrary indicators.  I realize that sharp pens could shoot all kinds of holes in the typical lessons or conclusions I draw from these, so here, I'll also offer some much more in-depth data that the anecdote led me towards to see what was happening in the markets.  First the anecdote:

I live in a popular winegrowing region of the States that is getting ever-increasing tourist traffic from folks beyond our national shores.  More and more Europeans and a fast growing cohort of visitors from Asia.  I usually get my gasoline (currently over $3.50 per gallon and many of us know we'll be paying solidly over $4.00/gallon this Summer...yes, that's for the cheap stuff, 87 octane) at the Mobil station here in one of the small towns near me. You know those little trays we all see on the register counter esp. in gas stations full of pennies that say something like, 'leave a penny, take a penny'?  Well, more and more this past year or so, I've noticed the 'penny tray' at my Mobil station is often well-stocked with larger denomination coins:  Nickels, dimes and even quarters.  I've found this intriguing.  I've made sure over the months that I've asked each of the folks working the register why this is (at least 4 different employees, all older folks who I trust wouldn't just give me some flippant answer they haven't thought about).  Each of them has explained to me where the 'big money' change comes from:  "Europeans" they say everytime.  Some of the employees have even had conversations with the donors of the change trying to understand why this is common.  The common answer--as you can probably guess--is something along the lines of, 'it is not worth holding-onto the coins and trying to remember what they are and how to use them and besides, they aren't really worth much anyways'. 

This of course got me only thinking more about the value of our dollar vis-a-vis the Euro, the Pound and other stronger currencies. 

Then fellow CAPS player 'dwot' posted recently (on April 18th I think it was, titled 'Now that's inflation' or something to that effect) on a skyrocketing Zimbabwian stock market due to hyperinflation in that Country and how residents are ploughing their money (when they have any) into their domestic stock market as a relative safe-haven to the plummeting purchasing power of their currency.  Whether they know it or not, they are still losing purchasing power but nowhere near what they'd lose holding the cash or having it sit in the bank. 

Now, don't panic...I'm not going to try to make some outrageous comparison between hyperinflation in Zimbabwe and the very modest inflation we have here and the decline in our dollar.  But I do think the phenomenon--both of them above actually--is instructive to us as investors and, frankly, cititzens. 

Everyone is all "aflutter" today about the DJIA piercing the 13,000 level for the first time.  Nevermind that the S&P500 is still just a bit below it's all-time high of 1527 from seven years ago and that means an investor matching the market performance has made no money in the past seven years.  I know, I know, folks out there might say, 'but Gresh, that is before dividends'.  To which I would reply, 'yes, and it is also before deflating the value of the money by some accepted Price Inflation index (CPI, CPI-U, PCE, take your pick) and that we know the averaged published inflation data have been higher on average than the dividend yield for the S&P during this period.'  But I'd then offer to make this easy and we'll "call it a wash".  So we can return to just focusing upon the capital gains (or loses) of the S&P Index, right? 

So, the question becomes, how have the US Stock markets done in the eyes of a non US based investor?  I didn't work too hard to find the best USD Adjusted S&P data I could find online but I offer one decent write-up below.  The guys @ Zeal are usually good for stuff like this and the study below is actually about 2 months old but, I think still very 'fresh' data because, the S&P500 was about 1460 since the study was performed the week before the Feb. 27th mini-correction.  Today the S&P closed about 1495, the 1460 level used in this write-up is only about 2.3% below where we're at today.  Exchange rates don't move that swiftly so the data are still quite accurate I think.  The Dollar Index has pretty much only gone one direction since late Feb. so the relationship has definately not changed for the better these past two months.

Here's a couple highlighted excerpts but for those more interested, you should take the time to read the article and understand the various methodological assumptions used to derive some of the following conclusions:


"Even more depressing, the dollar-adjusted reality is far worse than the flat perception.  When the S&P 500 is adjusted by the US Dollar Index starting on the very day the S&P 500 topped in March 2000, it shows that the international purchasing power of the US stock markets was still down 28.4% as of this week!  Seven long hard years and US stock investors are actually 28% poorer in their international purchasing power than they were in 2000 when they started. Today the dollar-adjusted SPX is still under 1200."

"But believe it or not, this is certainly not the worst-case scenario.  The secular dollar bear started back after the dollar topped in July 2001.  The dollar then plunged sharply in 2002 and 2003 and has been gradually grinding lower in a long consolidation since.  How would the US stock markets look to investors unfortunate enough to have bought US stocks at the dollar’s secular top, back when the dollar’s prospects looked the brightest? The USDX-adjusted SPX from the dollar’s top is barely edging above 1000 today. This is horrifying, yet it is what US stocks are now worth in international-purchasing-power terms compared to the 1200ish levels the S&P 500 was at back when the dollar topped."


Admitedly, the prose is a tad hyperbolic.  But the data are impeccable.  

If Americans think this US stock market has yielded them any gains, even as we reach "record highs", they are not taking inflation or the erosion to their purchasing power  (that is expressed through international exchange rates) into account.  And they proceed at their own fiscal peril...

I have posted elsewhere and in replies to many a CAPS player's post and pitches that the "invisible" effects of an inflated currency are very difficult for most investors to isolate, understand and identify but folks, we're in the midst of it and these trends historically last longer than just 7 years.  When one considers all the the global economic imbalances and horrendous condition of the US fiscally, we've likely got a long way to go before this correction re-balances things.  

Simply put, a rising stock market isn't always good news.  Sure, it is better than not rising or falling but unless you are outperforming on an inflation-adjusted basis over a long period, you are losing ground.  We're losing ground ya'll. 

And Europeans treating our coins as nothing more than a nuisance now makes even more sense to me.



6 Comments – Post Your Own

#1) On April 25, 2007 at 6:13 PM, ElViking (96.74) wrote:

I agree that our currency is cheap relative to the Euro.
However, to provide one little poke in your anecdote, remember that in a lot of European countries, it's the norm to have taxes figured into the sticker price of things, which are often rounded to nice even numbers (much less of the $1.99 sort of thing we're used to)
That and international travelers do tend to be well-to-do, and probably in "vacation mentality", that lovely state where you're spending so much money that an extra bit of change here and there is pretty meaningless.
Inflation adjusted, we're no where near a new high in the stock market, but that's arguably a good thing, as the last true high we had was part of a massive bubble.

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#2) On April 25, 2007 at 7:07 PM, Greshm (85.90) wrote:

Point taken, thanks. 

Oh yeah, but we're still in a bubble.  Now a massive credit bubble with artificially low costs of capital so companies can even finance huge stock buy-back programs not to mention private equity launching record-setting LBO's every week now. 

The ample cheap credit helps put a floor under the stock prices and without this latest bubble (the credit that is), on an inflation-adjusted basis, the US stock market would be even more of a black-hole for investor's purchasing power...

Thanks for the reply.

Oh, I almost forgot:  Another anecdote about our coinage that I've blathered on about elsewhere that seems--to me at least--to demonstrate its eroding value is the loss of seignorage for both the cent and the nickel (in the US).  Both coins now contain more value in their component metals (Zinc, Copper, Nickel) than their face values.  And that is before manufacturing and distribution costs.  So our Government loses marginal money on every one of the billions of those two coins they mint every year...

But consumers only recognize the face value of the coin and essentially can't convert them for their intrinsic (metals) value so they are regarded--even by Americans at home--as a nuisance as well. 

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#3) On April 25, 2007 at 10:21 PM, CycleFreak7 (< 20) wrote:

So, it seems that since I was a procrastinating moron when it came to saving & investing for my future, I inadvertenly did the right thing.

My 401(k) as it currently sits is about 90% comprised of money I put in after  2001 began.  True, the market trended downward until the beginning of 2003, but not at the rapid rate seen in 2000-2001.

Lucky me.

Really.  I also bought my first house in Jul/Aug 2004.  Since then, interest rates have only gone up.  My mortgage interest rate is lower than the fed's prime rate. I love to open those unsolicited offers to refinance my mortgage because "Rates have never been lower!" whenever I need a good laugh.

I should put stuff off more often. :)


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#4) On April 26, 2007 at 12:29 AM, Greshm (85.90) wrote:

Well, I agree to a certain extent.  But I think, if you read the details of all the data provided (i.e., the rather long report @ Zeal), you'll still likely find that if your 401(k) has essentially been matching the performance of the S&P, you have still lost ground when it comes to the purchasing power of the USD.  In the context of the USDX exchange rates.   But not anywhere to the extent of American buy-'n-holders...

My Sister and Brother-in-law locked-in a 30 year fixed to build their new house a bit earlier in 2004 than you.  I don't remember the exact rate, it is below 5% and I think it might even have been down close to/around 4.5%  I told her, 'that's the mortgage of at least a generation!' 

Holding a nice fixed low-rate mortgage like that in the coming inflationary years could be one of the best performing things around.  IF, that is, the value of the underlying asset--your house--maintains its value.  That probably depends upon a whole bunch of locational and other factors only you would know. 

Yep, people would be well-served right now to be conserving cash and procrastinating about 'bottom-fishing' in a lot of things.  But, they also need to determine how to hedge relative to inflation to maintain purchasing parity.

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#5) On April 26, 2007 at 3:24 PM, CycleFreak7 (< 20) wrote:

I disagree.  Maybe true looking only at the dollars put in.

Two important factors make it a very worthwhile investment:

1. My company matches 100% up to 6% of my salary.

2. Gains are tax-free.

My gains last year inside the 401(k) were about 16%.  Doing slightly better than the market.  However, when you consider that the first 6% gets a 100% return the day it goes in and all the gains are free of tax, I am more than beating the S&P.

In my early years, I only put in 6%.  Then, I upped it to 10%.  I am now putting in the max allowed by the IRS (roughly 20% of my salary).  It reduces my tax rate and I save more for retirement.

All around win for me.

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#6) On April 30, 2007 at 1:45 PM, Greshm (85.90) wrote:

Well, sure, now that you've thrown-in the Company Match data that wasn't in this equation before...of course, that makes a difference.  A large one. 

However, one last point-of-clarification:  gains are not "tax-free".  They are Tax Deferred.  Big Difference.  I know, I know, the assumption is that you'll pay lower taxes on those funds as you theoretically wait to begin taking distributions in your lower-income retirement years.  But you remember what they say about the word "assume", right?  It only makes an "ass-of-u-'n-me".  Be circumspect about what future tax-brackets will look-like.  

But of course, yes, the company match is a great thing.  One last old investing adage though:  During Bear Markets one should concentrate on return OF capital, not just return ON capital.

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