U.S. Stock Market Index Values vs. Collapsing Dollar
September 13th, 2007IMPORTANT NOTE: If you think, “I’ll just buy Canadian dollars then,” you’re totally missing the point of this. The point is not to suggest one gamble over another, but to let you know the reality behind the high index numbers.
Via: University of Michigan:
Lupia, who also is a research professor at the Institute for Social Research, says the value of a Dow Jones point has declined significantly in recent years, thus news reports of “record highs do not mean what they used to.” As a result, some people might be surprised to learn how little their IRAs and 401(k)s are worth when they retire.
The researchers tested their theories in an experiment that allowed a person to purchase stock or to convert the money into Canadian currency then place it under his or her bed for a year.
In one demonstration that included dividends and other benefits of holding stocks, Lupia and colleagues showed that an investor who bought all of the stocks included in the Dow Jones on Jan. 2, 2001, and sold them on the record-high closing date of 2006 (Dec. 27), gained $3,377.34 — or $2,870.74 after taxes.
If, however, the same investor simply converted the money to Canadian dollars on Jan. 2, 2001, and changed them back for U.S. dollars on Dec. 27, 2006, his or her post-tax gain would have been substantially greater ($3,074.64) than it would have been from participating in a “record-breaking” stock market.
When the researchers repeated this comparison for nearly 800,000 combinations of “cash in” and “cash out” dates between 2001-06, they found that after accounting for taxes, investors would have been better off exchanging their money for Canadian dollars than buying the components of the Dow Jones 97 percent of the time.
The reason for this surprising result is that the value of a point on the Dow Jones Industrial Index is tied to the value of a U.S. dollar, Lupia says. In recent years, due to a series of economic factors and political decisions, the value of the U.S. dollar has fallen substantially against other benchmarks, such as an ounce of gold, a barrel of oil, the Euro, and the Canadian dollar. The meaning of a Dow Jones point increase and record highs in the stock market are severely diluted, he says.
If I’m reading the chart right:
http://www.kitco.com/charts/popup/ag3650nyb_.html
silver was at about $4.50 on Jan. 2, 2001. Today it is $12.68. Even better than Canadian Dollars. And I’ll bet you a Morgan it will do better in the next six years.
“Friedman: The key to future value is at what rate you will be able to convert an item into other things in the future. In 1980, I was able to pay for my house, the house I still live in for 2500 ounces of silver I sold then. If I held until $50, it would have taken only 2000 ounces. Today, it would take almost 70,000 ounces of silver to buy my house. My house is nice, but it is not worth 70,000 ounces of silver in my opinion. Not because my house is too expensive, but because silver is too cheap. Based upon my own experience with my own house, silver too cheap by a factor of 30. I wouldn’t dream of converting silver into anything today. Not for real estate, stocks or any other commodity, including gold. Today is the time to convert everything into silver. Then, years into the future, you will be able to make the same switch that I made in 1980. Only at the top of the next long cycle you won’t have to spend the 2500 ounces I spent to buy a good house, you will only need 250 ounces.”
http://www.goldismoney.info/forums/showthread.php?t=176674