Last week, Barron's Wall Street Week Column contained the chart I just posted as part of the basis for suggesting that the market was probably going to be relatively flat for the rest of the decade. The chart reminded me of a chart I had seen that showed how the purchasing power of the dollar had fallen over the years and the combination of the charts seemed to me to suggest that the claim that LONG TERM, the RETURN on INVESTEMENTS in the STOCK MARKET will provide substantial real returns is a myth.
Long Term Investment Myth
I sent the following comments to MICHAEL SANTOLI, Author of the column, along with the enclosed chart of the purchasing power of the dollar.
"Thank you for awakening me to real value of investing in the markets long term. The chart showing how the DOW moves in Starts and Fits reminded me of the attached chart of how the dollar has fallen in value over the past years. If you combine the information in the two charts you see that a dollar invested in 1905 would have returned only about a 10 percent increase in purchasing power by 2000 and would have essentially lost that in the 5 years since. It is also interesting that except for 1921 period to 1930, the purchasing power of a dollar invested would have dropped and only during those periods when you show a rise in the number does the purchasing power come close to holding steady. With our increasing debt today and the need to inflate our way out of the mess we have been creating since Volcker left the FED, it is clear that dollars invested in the markets today will have substantially less value when (and if) we start to experience real growth again. It is a sad commentary on the deficits don't count crowd."
Response from Santoli:
Thanks for your note and the chart, which I certainly had seen before. Iagree that this complicates any analysis of the returns on financialassets, to say the least. The economy has, without doubt, been arrangedfor the benefit of consumers over savers/investors. Living standards have, by most measures, increased in mirror image to that curve showing
the dollar's depreciation.
Please write any time.
I think the two charts speak strongly of a more important problem. He clearly spent very little time with my comments and didn't notice the error in my calculation. The actual increase in dollars according to his DOW chart is 10.7 but the purchasing power, according to the dollar chart, would have dropped by a factor of 12.3 (1/0.81) from 1905 to 2000. This means that a dollar invested in 1905 would have lost purchasing power. I guess I was so surprised by the impact of the debasement of our dollar that I screwed up my calculation of the value. In any event, the charts together speak loud and clear that there is more to investment than the return measured by the increase in the number of dollars. While, as indicated by the dollar chart, there were short period during which the purchasing power of the dollar increased, it has been down hill since the early 30s and it appears that its decline will accelerate over the next few years. The charts should also awaken us to the danger that our increasing debt and the need to inflate it away holds for Children's and Grandchildren's future. I have included a couple of charts of our increasing debt as a reminder of its magnitude.
I think the last sentence in Santoli's response points up another problem we all face - most of the economic analysis we see these days is trash. Santoli is obviously relative young and uses data without really understanding what it means. He is probably right that most measures of our standard of living show the improvement but, if so, I would suggest that the measures chosen have been selected, like most statistics from our Government these days to create the illusion of greater prosperity.