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Stocks are not going up

Stocks keep making all-time highs. Since the 2008 Great Recession, when stocks fell off a cliff, the S&P 500 index has climbed remarkably. An investor who invested in January of 2009 and held through this spring would have earned a 15.30% annualized return, including the reinvestment of dividends. Even an investor who bought before the crash, in January of 2007, near the pre-Great Recession highs would have earned an annualized return of 7.33%, including the reinvestment of dividends. So, what’s with the title, you might ask? Clearly stocks have soared.

I posit that the surging valuations of stocks during this period, along with those of other financial and real assets such as real estate, all bonds, leveraged loans, etc., have very little to do with the resurgence of the economy and say very little positive about circumstances. Instead, the significantly increased valuations have much more, if not entirely to do with the fact that we are measuring these things in dollars.  But for many, following the narrative of the mainstream economists, who feed their pabulum through to us via the media and politicians, this makes no sense? Hasn’t the dollar been on a tear during this time too? Isn’t it very highly valued today? Well, as measured by its value relative to other, even weaker fiat currencies like the Euro, the Yen, the Yuan, and the Sterling, it is. But, who among you Americans is busy exchanging your dollars for those other pieces of paper? Practically none, if you reside in the U.S. and do your spending in dollars. The only exchange rates you ought to be focused upon is the exchange rate between dollars and the things you consume, and between dollars and other stores of wealth. When measured that way, the dollar isn’t doing as well*.

For example, rather than say the S&P 500 is up by 176% since January 2009, one might more correctly say that my 2009 dollar can only buy me 36% the same amount of stock that it used to back in 2009. The dollar that you may have saved in the bank when you were hunkering down in 2009 with justifiable fear that the world may end as you know it and you couldn’t be sure where the next dollar might come from, has now been devalued against stocks by 64%. Your relative wealth, if you were a saver of dollars, which surely seemed like the safe thing to be in 2009, has been decimated.

Where will we go from here? Will this valuation peak end in ruins as is predicted almost daily by the many pundits and economists who have their heads buried in regression analyses and are unable or unwilling to consider that today’s bubble is a bit different from past ones? It is entirely possible, of course, that there may be a correction. So much about markets is driven by emotion and herd mentality, so to discount that high valuations themselves create selling, which magnifies naturally as prices correct, would be silly. Also, it  is reasonable to assume that the academicians who run our economy from D.C., and who have scant real world or market experience, will react incorrectly to market downturns and could easily take initial actions that might exacerbate things. However, the long-term trend will continue to point UPWARD for financial asset values and, concurrently, DOWNWARD for fiat currencies. With debt levels where they are, and even greater unfunded pension liabilities, this is a certainty.

Two presidents, first Obama and now Trump continue to point to the surging valuations of stocks to underscore how strong the U.S. economy is, and what a wonderful job they’re doing, and each of their throngs of supporters were all very quick to fall in line and support this claim. What a joke!

* This argument doesn’t apply to all things that dollars buy, which also are influenced by other variables such as supply/demand and increased efficiency in the cost of production – including gasoline, automobiles, cell phones, and low-end food products.

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