In a recent video blog Peter Schiff said recent stock market rises were not actual rises because the value of the currency and what it can purchase has fallen. Apologies if this is not quite correct or exactly what he said as I am a layman, but hope you get the gist of what I am trying to understand.
What I am also getting confused about is, that if I had savings in a normal bank account with a meager 3% yearly return, it would be far lower than if I had invested the same savings in the stock market which could now be up 40% in the same period. Surely, what Peter is saying only has weight if inflation is higher than the gains made by cashing in, and I cannot see at present that it is. Or that purchasing power as of yet has been destroyed to that extent by the increase in the money supply?
The point is that the low interest rates are causing the nominal gains in the stock market. A reduction in the rate of interest means an increase in the money supply (inflation). The newly created dollars are flowing into the securities and commodities markets, causing big spikes; but the spikes are not caused by any real underlying factors (increased revenues, innovation, or whatever). The fact that gold is moving faster than the market tells us that the stock market gains are entirely illusory. If adjusted for real inflation, the SNP and DOW would be much lower; if I had to guess, they would probably be around 700 and 8100 respectively (but that’s just a guess). It’s quite simple, equities are denominated in dollars, and if the purchasing power of the dollar falls, the equities will rise. (1/1=1, 1/.25=4).
Perhaps a good analogy is to think of the various economies/stock markets/currency areas of the world as runners in a gym. Each runner has his own treadmill(currency).
Now the runners are all running at different speeds(the nominal gains or losses on the stock markets), but the treadmills are also running at various RPM’s…
So if you look at the US market in isolation, it appears to be working it’s ass off, running faster than the others(nominal gains) but once you factor in that the treadmill it is on(the dollar) is running faster than the others(inflation/dollar drop) the runners position RELATIVE to the other runners means that he is losing ground even though everyone else is running slower than he is.
Inflation is higher than the gains made by the US stock market. The consumer prices may not be rising as fast as the stock market, but the consumer prices are not inflation. Inflation is the new money created out of nothing. The rise in prices are only a delayed effect of new money.
With foreigners continuing to buy more US bonds and therefore the artificial, state created demand for more new money remaining high, the effects of inflation on prices are stil being contained. But do not be fooled, the quarantine glass is cracking.
The money creation and its inevitable consequences can not be kept apart for ever. Banking on the US is banking on the foreigners, sucking out the poisonus ill effects out of the US and into themselves, to ruin themselves before they let the Dollar go to ruin. Nobody likes the Green that much.
If you are eager to invest in stock, there are better stock markets to invest in. Whatever the seeming gains the US stock market makes, the foreign stock markets double.
PS, With fed secrecy the best measure of real inflation is the portion of government spending not financed by taxes. And that has never been higher.
And if you had purchased stock in the DOW when it was at 14,000, what would your return be now that it is at 10,000 as opposed to have had your money in a CD earning 3%? In the stock market you would have lost 30%. In the CD, you would be up 6%. So that is a 36% difference.
You cannot look at it in terms of periods. Peter is just saying that the stock market is up nominally, but realistically, it has not moved. But yes, you would not have lost as much by having your money in the stock market as opposed to having it in a CD, if you purchased at the low of 6700. But on the other hand, if you would have purchased at the high, you would be down if instead you would have purchased a CD.