I rather like this chart from the New York Times showing the value of the S&P 500 Index in the dollar, three foreign currencies, gold, houses, oil and corn. While the index shows appreciation in currency values, it has been meandering sideways or even lagging when measured in terms of the physical assets. Two important points that these graphs make very nicely is that what matters is relative prices, not nominal prices, and that relative prices change all the time.
Oil, corn, and houses are a reasonably good proxy for the things that people need to buy in order to keep their life going – food, energy, and housing. If the price of your assets is increasing more slowly than the price of goods that you buy, then you are losing purchasing power over time.
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Corn is a very poor proxy for food, due to its recent use in making ethanol for fuel. The price of corn, in all currencies, has gone way up in the last year.
Rescale the graph to last 5 years and a very different picture emerges. Let me let you in on a secret: 2000-2003 wasn’t a very good time for stocks.
If we can dump the clown college that passes for our current administration, we can probably get back to something that looks more like the Clinton era: Reduced budget deficits running all the way to a surplus and the longest sustained expansion in US history.
LoL
don’t like the graph? torture it until it shows you what you want to see.
classic
In Gold We Trust.
Yes, yes great article indeed, it’s a point I make, alongside of keeping track of the real rate of inflation in the U.S., see http://www.shadowstats.com/cgi-bin/sgs? . With a perspective from someone in the United States, I would have to add gasoline. See http://www.gasbuddy.com , where I track US gasoline prices at the pump.
Oil is still a good overall measurement in a macroeconomic sense, no denying that. Adding gasoline prices adds a very critical capital good to determining stock prices over time, espically when refining capacity is not increasing. The S&P sure dont look much better, compaired to the price I gotta pay to get to the job so I can make the investment in the first place!
Why are you using the S&P to measure the stock market. Few people discuss that index…it’s all about the Dow Jones Industrial, you know the one that is hitting record highs daily. I’d like to see graphs comparing those currencies and commodities to the Dow.
The Dow Jones Index is the worst index of stock prices used anywhere is the world.
Without the constant ‘re-gigging’ of the ‘Dow’ the ‘real’ index would still be 20% lower than the 2000 high. The composition of the index changes often but the media reports the number just the same.
Using the S&P 500 or the NYSE Composite offers a more complete picture by using a larger sample size.
An easy way to convert historic prices into modern prices use a constant asset such as ounces of silver, bushels of wheat or wood board foot.
Silver is good as British Pounds were literally one troy pound (12 troy ounces) of silver (349 grams). At today’s NY closing price of US$13.37 per ounce that is $160.44 per Pound.
Here’s another chart showing two time series (2000 – today) of the S&P 500: the first is in dollars and the second in gold.
The Dow is a narrow index (30), while the S&P is much broader. Also the Dow is price-weighted, which is a bit weird, while the S&P is cap-weighted.
That the U.S. had “the longest sustained expansion in US history†had, naturally, nothing to do with the Clinton administration but rather with the inflationist policies of the Federal Reserve. The Federal Reserve embarked upon expanding the money supply further and faster in July 1990 to combat the beginning of a recession (a recession which the Federal Reserve had caused) and the recession ended in March of 1991. Long before Clinton was elected (in the end of 1992). Growth began to slow at the end of 2000 and a recession started in March of 2001.
In other words an ordinary business cycle composed by the Federal Reserve.
http://www.econedlink.org/lessons/index.cfm?page=teacher&lesson=EM220
Björn Lundahl
Bjorn: “That the U.S. had “the longest sustained expansion in US history†had, naturally, nothing to do with the Clinton administration but rather with the inflationist policies of the Federal Reserve.”
Exactly! Greenspan could get away with his massively inflationary policy because of high productivity growth rates during the 1990′s. Without high rates of productivity growth, the 2001 recession would have happened much earlier. It’s sad that few people consider the fact that without the Fed, and without fractional reserve bankin, the US might have enjoyed an entire century of uninterupted growth. And the think the Greenspan was once a colleague of Ayn Rand.
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