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Inflation Adjusted Stock Prices
Adjusted Stock Price
Financial advisors will often tell us of the steady increases available only through the stock market and present us with beautiful charts showing the relentless march of the the stockmarket ever higher and to the right. But what about inflation? How does the stock market perform when inflation is taken into consideration? After we take the loss of purchasing power into account have all the gains disappeared?
When adjusting stock prices for inflation we typically use the US Bureau of Labor Statistics Consumer Price Index CPI-U. Prices are then calculated in “real” dollars. That means that the price is adjusted so that we can see what it would have cost if prices were what they are today. Today’s chart is courtesy of our friends at “Chart of the Day” and shows the inflation adjusted stock price using the DOW as the reference. The DOW however has a built in upward bias because it is not made up of the same stocks as it was in 1925. As stocks fall out of favor they are replaced by better performing ones. A better indicator of the overall market is the entire NYSE. In our Inflation Adjusted New York Stock Exchange you can see the trend for the overall stock market. ~ Tim McMahon, editor
Inflation Adjusted DOW
For some long-term perspective, today’s chart illustrates the Dow adjusted for inflation since 1925. There are several points of interest. For one, when adjusted for inflation, the bear market that concluded in the early 1980s was almost as severe as the one that concluded in the early 1930s. Also, the inflation-adjusted Dow is up 159% since its 1929 peak and trades 84% above its 1966 peak — not that spectacular of a performance considering the time frames involved. It is also interesting to note that the Dow is up 98% from its March 9, 2009 low which is actually slightly more than what the inflation-adjusted Dow gained from its 1966 peak to today. Continue reading
The Doom of Wired Telecom
Advances in technology bring many changes to the business world, and certain industries that were once considered viable are now industries that should be avoided at all costs. One industry that is expected to shrink the most dramatically is the wired telecommunications carrier industry.
This industry has been rapidly shrinking in response to the increasing widespread use of cell phones and online forms of communication. The need for wired communications has become so low that 25 percent of all households do not even own a land line phone. Some even predict that by 2025, land line phones will completely disappear. Continue reading
How Inflation Affects Personal Debt Consolidation
What is the effect of inflation?
As a result of inflation, the value of tomorrow’s money decreases with regards to today’s money. In other words, you can purchase less with the same amount of money. This is commonly seen as prices having increased. This can make the situation appear more appealing for borrowers because they can buy today and pay back with less valuable dollars. But lenders and creditors don’t appreciate receiving less valuable dollars. So, in order to offset the declining value lenders and creditors increase the interest rates they charge. Thus inflation in general results in increased financial problems all around. It not only results in rising commodity prices but in increased interest rates as well. Inflation is mainly caused by governments. Because of high borrowing and deficit spending they find it necessary to increase the money supply which results in the value of each individual dollar in circulation being worth less. Continue reading
How Global Financial Developments are Affecting the Price of Gold
Let’s face it. With the US economy facing the bitter consequences of extravagance and unscrupulous spending, it has become quite difficult for the US to manage both its public and private debts now. In this phase of post recession hangover and economic meltdown, the U.S. federal government has bumped up against its permitted borrowing limit. According to Alison Fraser, director of the Roe Institute for Economic Policy Studies, America’s debt just crossed $15 trillion, which means presently, the amount owed by the United States government to the world, is equivalent to the amount produced by the American economy per year. All these factors lead to higher prices and intensifying inflation concerns in the U.S.
Along with the U.S., there is the raising euro zone crisis where a number of European countries like Greece, Ireland, Portugal, Spain, and most recently Italy failed to pay their sovereign debts and consequently are heading towards insolvency. In fact Europe’s weakening economic performance literally forced the European Central Bank to follow more accommodative monetary policies. In short, both US and European economies are going through several years of sub-par economic commotion, high unemployment, and rising inflation. However in the midst of economic turmoil, when unemployment is up and there are conflicting tax increases, the price of gold is soaring almost beyond belief. It seems the skyrocketing gold price has a strong impact on both the dollar value and the European debt crisis as well. Read ahead, to know the latest forecasts about the future of Gold price. Continue reading
Markets Fear Deflation
The best way to know the future is to survey millions of people and analyze their responses. That is exactly what the market does every day. And even better Mr. Market knows not only what people say they believe but where they are putting their money as well. In the following article Chris Ciovacco, the Chief Investment Officer for Ciovacco Capital Management shows us how the markets view the current possibility of deflation. Chris has an amazingly simple chart that shows us exactly what the market is thinking right now. That chart is the ratio of Treasuries to Treasury Inflation-Protected Securities (TIPS). Currently the ratio is indicating a deflationary bias in the market. When you think about it, if people fear inflation they will pay a premium for Inflation protection but as the fear of inflation decreases the premium decreases as well. Interestingly, deflation is bearish for the stock market. As Robert Prechter has been telling us for a while the only thing valuable in a true deflation is cash. Everything else decreases in value as we saw in 2008. ~Tim McMahon, editor
As we noted on November 1, a rally back toward 1,250 is well within bear market bounds. How we rally (volume, conviction, etc.) will tell us quite a bit about the odds of a more lasting upside move in stocks. We also outlined in a recent video reasons why the improvement in market breadth does not necessarily lean toward bullish outcomes. We are open to higher highs in stocks and the onset of a new bull market, we just do not have the evidence in hand to support those outcomes at this time.
We reviewed leading ETFs from several angles last night, including volume. The interest in Treasuries (TLT) and TIPS (TIP) was high in Tuesday’s session, with Treasuries getting a slight nod over TIPS. We will be watching the relative performance of TLT and TIP after today’s Fed announcement.
When the ratio of Treasuries to TIPS is rising it points to (a) little concern about inflation, and (b) increasing concerns about deflation. The chart below shows what the TLT:TIP ratio looks like during a bull market in deflation fears and a bear market in stocks.
In the following chart from November 21, 2008 we see an extreme example of rising deflationary expectations. When TLT:TIP is bullish, it tends to be bearish for stocks and inflation protection assets. The chart below shows what the ratio looked like during a bear market in stocks. The S&P 500 is shown under the bond ratio. Continue reading
Currency Strength Can Sap Returns
London is a money town. It has been the center of the whole Western world’s currency transactions for three centuries. Until 1945, the British pound sterling was the world’s primary reserve currency. The pound is less popular than the dollar or euro now. But whatever currency is king, London is likely to bank it, trade it and exchange it.
London bankers and brokers were old in the business when the New York Stock Exchange was born under a buttonwood tree on Wall Street. London bankers and fund managers were master investors when U.S. stock markets could barely support the capital needs for the greatest new technology boon known to man, that force of creative destruction that changed a continent… railroads.
When it comes to money, London knows the ins and outs.
That’s why I was so interested in a study from London Business School and ABN Amro Bank that I found recently about the effects of strong and weak currencies on the stock market. Continue reading
The Real Basket of Goods
Thanks, Ed. I agree, when I am deciding whether to purchase something, I like to think of it in terms of how many hours I have to work to buy it. (It helps keep it “real”). In addition economists often link how many hours the average person has to work to eat. A poor country might require eight hours of work a day just to eat. While a rich country might require only 1 hour a day. So you might like the following article by Lynn Carpenter as she tracks prices and earnings over the last 60 years. And tells how many hours you have to work to buy a “weekend of food”. ~Tim McMahon, Editor“When I try to educate people about the impact of inflation, I find putting it in terms of time worked for something is a good way of explaining inflation”.
No Wonder They Called It Happy Days
By Lynn Carpenter
The best thing about investing… Well the money can be pretty nice… but the part I like most is how following an investment idea takes you into so many different worlds.
For instance, lately I was wondering how bad inflation really is… in a real-world historical sense. Which led to food costs, which led to grains and biofuels, which finally led to the $9 million giveaway. Shall we proceed?
The shocker in all this is the starting point… food costs. Continue reading
Credential Inflation: Bachelor’s Degree Not Enough
In today’s tumultuous economic climate, when we hear the term “inflation” we think money and a failing economy our minds immediately turn to expenses, debt, and money woes. Rarely, however, do our minds turn to college degrees and job prospects. On July 22, 2011 Laura Pappano from The New York Times published an article titled The Master’s as the New Bachelor’s. Introducing into the public mindset the concept of “credential inflation” and “degree inflation”, this article has caused quite the hoopla in the academic world and many a panic attack among 20 somethings throughout the country.
Pappano suggests that there is a certain amount of credential inflation occurring throughout the job market today. College graduates are not finding the positions they would have in the past because those same jobs are now seeking candidates with more educational experience. So, 20 somethings entering the job market with their newly earned bachelor’s degrees and a pocket full of debt are told they have to double that debt in graduate school before they can hope to earn the money to start paying if off. Sounds like good reason for a panic attack. While this is obviously a problematic mindset for our young and qualified job-hopefuls to hold, is it actually based in truth?
The Housing Bubble Revisited
What really makes a bubble? Are bursting bubbles inflationary or deflationary? What lessons can we learn from history? In this article Justice Litle addresses these issues. ~editor
By Justice Litle, Editorial Director, Taipan Publishing Group
A burst housing bubble is a harbinger of deflation, not inflation, due to massive debts incurred and massive savings lost.
To really get your head around the inflation debate, it helps to understand the late great housing bubble. To that end, this description seems as informative as they come:
The smell of Boom was everywhere. It caught even those who were not particularly attracted by it. A former president of Freddie Mac, William Popejoy, arrived to head up a large savings and loan, American Savings. He had moved from the suburbs of Washington, D.C., “and we bought a four-bedroom house in Benedict Canyon for a hundred and sixty-five thousand dollars. We’d get over six hundred thousand for it now, in just five years.” If you could do that, without trying, what could you do if you were trying, if you were refinancing the first house and buying a second? “I own ten million dollars’ worth of houses,” said a thirty-year old actor… Money everywhere. The California dinner parties were all full of talk of overnight fortunes.
Yep. That captures the essence of the housing bubble all right. Home values zooming from $165K to $600K in “just five years”… goofball 30-year-olds buying millions of dollars’ worth of properties… dinner party talk of overnight wealth… Continue reading
Hyperinflation in Weimar Germany vs. The U.S. Now
Postcards From Weimar Germany
Monday, September 20, 2010
The Weimar Republic is perhaps the quintessential example of hyperinflation. But the buildup took longer than one might think.
Walter Levy is a German-born oil consultant. His father, a German lawyer, took out a life insurance policy in 1903.
Every month he had made the payments faithfully,” recounts Levy. “It was a twenty-year policy, and when it came due, he cashed it in and bought a single loaf of bread.
Such was life in the German Weimar Republic.
Things got so bad there for a while, dentists and doctors stopped asking for currency, seeking payment in butter or eggs instead. But the farmers weren’t keen on trading their produce for paper money either.
Prices rose not just by the day, but by the hour — or even the minute. If you had your morning coffee in a café, and you preferred drinking two cups rather than one, it was cheaper to order both cups at the same time.
Here is how a Weimar factory worker described payday (which was every day): Continue reading
