A Market Rally in Monopoly Money

When priced in US dollars, the US stock market appears to have rallied significantly since the beginning of the year - it's now up 18.31% since January 1st. However, since the dollar has fallen 5.82% since the beginning of the year, if we subtract the dollar decline during this same time period, the 18.31% gain drops to a 12.49% gain. This is a more honest means of interpreting this rise, for as we all know, a gain in real wealth is not determined by solely having a greater amount of a certain currency but also by adjusting for the increase or decrease of that currency’s purchasing power.

Looking at the below graph, since gold has been considered a currency for thousands of years, if we price the behavior of the S&P 500 in terms of gold, the gain in the S&P 500 since the beginning of the year shrivels to a 3.92% rise.

Silver, too is deemed a currency by many countries - many countries also mint silver coins. When we price the behavior of the S&P 500 in terms of silver, as we can see above, the gain in the S&P 500 evaporates and becomes a 21.36% loss.

So depending on what currency you would like to hold in the future, your perspective of the current rally in US markets will change dramatically based upon the currency lens through which this rally is viewed (even if you don’t believe the compelling evidence that the US Federal Reserve and government have been tampering excessively in US stock markets this past summer to artificially manufacture this current rally. Personally, for the past several years, I’ve preferred to hold currencies with zero counterparty risk).

Finally, I’ve produced one chart above where I’ve superimposed the the US dollar (daily) over the chart of the S&P 500 (daily) since the beginning of the year. I haven’t taken the time to adjust the scales of both graphs to accurately represent percent moves for comparative purposes because I only wish point out that the chart patterns of the S&P 500 and the US dollar have been near perfect inverse images of each other for this entire year.

As I’ve stated before, as long as Wall Street computers keep using low summer-like trading volumes to manipulate this market higher, the market can continue to melt up on the back of a devaluing dollar before it will eventually melt down. And as long as the US Federal Reserve continues to try to appease public anger by giving the public greater amounts of a worthless currency in a monetary game the public, by and large, fails to understand, I will continue to hold my currencies in forms that have zero counterparty risk. This, despite the fact that we are due for some strong short-term volatility in gold and silver for which we will take appropriate hedges.

Comments

[Michael Clark:]

Another good article, J.S. So the Fed is giving with one hand (stock appreciation) and taking away with the other (dollar depreciation). So this stock rally is designed to make us feel good, good enough to throw our savings back into risky assets like housing or stocks.

Wait until the negative interest rates come: to penalize American citizens for saving. This will be the final act of cowardice -- and should be considered a second 'shot heard 'round the world': the declaration of a governmental tyranny that must be resisted with force.

Sep 21 06:13 AM

[Moon Kil Woong:]

Thanks for the chart. I've been saying for quite a long time this year's rally is being fueled by dollar devaluation and expectations of the seconf half of a bloated spending/stimulus bill.

Of course, a meltdown in long term treasuries and the money cycling into equities and commodities also help prop up the rally, but the effects overlap with flat out dollar depreciation since the cause is the same. That being, too much silly dollar printing and a burgeoning federal deficit on falling tax revenues.

Sep 21 06:40 AM

[Leftfield:]

John Lounsbury has an article, "The Hidden Depression of the 2000's" which shows a 10-year chart of Dow/gold. That shows the Dow at less than 25% of it's peak less than 10 years ago, which adds to your point.

Sep 21 07:13 AM

[coldcall:]

Michael,

Interesting point you mention about the threat of negative interest rates in order to get everyone spending and borrowing like druken sailors again.

In fact here in the Uk the government has already started lecturing us ordinary folk that we are now saving too much and not borrowing enough. In other words, its all our fault that the economy isnt picking up as expected :-)

Check this out in today's Telegraph: (BOE warns against thrift!)

www.telegraph.co.uk/fi...









On Sep 21 06:13 AM Michael Clark wrote:

> Another good article, J.S. So the Fed is giving with one hand (stock
> appreciation) and taking away with the other (dollar depreciation).
> So this stock rally is designed to make us feel good, good enough
> to throw our savings back into risky assets like housing or stocks.
>
>
> Wait until the negative interest rates come: to penalize American
> citizens for saving. This will be the final act of cowardice -- and
> should be considered a second 'shot heard 'round the world': the
> declaration of a governmental tyranny that must be resisted with
> force.

Sep 21 07:33 AM

[H. T. Love:]

For the last several months, I pull up the DXY first thing in the morning and follow throughout the day to see what the market is likely to do. It's had a degree of correlation.

HardToLove

Sep 21 08:25 AM

[doubleguns:]

This is an example of why I follow you. You are spot on again. Keep up the great articles, and as always the reception is awesome, a very clear picture.

Sep 21 10:49 AM

[Mark Bern:]

Mr. Kim,

A very interesting analysis and assessment of what is driving the market. It certainly hasn't been fundamentals, as we all know. I have suspected that the dollar devaluation was a contributor for some time. That, combined with the low volume, has given rise to manipulation, IMHO.

Keep posting your insights.

Sep 21 11:39 AM

[Davinci:]

If the government told you that a small amount of arsenic was nutritional and you where forced to eat it and everyone else was eating it, that would not make arsenic nutritional.

Reality is a an absolute.

Small amount of arsenic will not kill you right away but it will kill you eventually.
Paper money will not rob you of everything right away but it will rob you of everything you worked for eventually.

Both statements are absolutes of reality.

Put another way if you lived in a condo and loved your build and an architect showed you the math behind why your build will collapse but could not tell you when because of random load distributions, and it collapses in 10 years not right away. Was the architect wrong? No, you could have moved let others stay and felt jealous that they enjoyed the build for 10 years. But the end result was an absolute the people left in the build when it did collapse, died.

I am not saying that paper money will collapse in 10 years, what I am saying is I do not know when it will collapse, and you could try and time it but does it makes sense to put your self at risk?

No

Thus gold and silver may go down priced in paper money but it will NEVER go to Zero.

Sep 21 12:05 PM

[Bill S. Friend:]

The US economy needs inflation to relieve this huge debt burden. I believe the devaluation of the USD is actually undershot at this point and will pick up steam, gaining momentum until it overshoots to the high side. When and how far are the tough questions. The dollar will, in the distant future, decline to a point where our goods will become attractive around the world again. Perhaps equities with international exposure will perform well over that period.

Sep 21 12:05 PM

[fireball:]

mr. kim
another thank you.
haven't had much time for posting lately. been examining govt. largesse. it is frightening and absurd. 2 things come to mind.
why stand we here idle?
may your chains rest lightly upon you.
there was a moral hidden in catch-22. the catch. anyone can do anything to you if you allow it.

Sep 21 12:18 PM

[Tony Daltorio:]

Another great article from the author!

It's amazing how many so-called investors do NOT understand that if the stock market is up 20%, but the US Dollar is down 20% - you have made nothing!

The "sheeple" think they have made 20% and the politicians and Wall Street continue on their merry way..........

Sep 21 03:01 PM

[untrusting ...:]

coldcall,
Well we would be happy to borrow if they would just give us $$$ at the same 1/4 % that the big banks are getting. In fact we would take as much as they would give us at that rate.

Problem is when we talk to the banks they are willing to lend us $$$ but they want 15-30% for it. Who in their right mind would be interested in borrowing even 1-cent at those types of rates?


On Sep 21 07:33 AM coldcall wrote:

> Michael,
>
> Interesting point you mention about the threat of negative interest
> rates in order to get everyone spending and borrowing like druken
> sailors again.
>
> In fact here in the Uk the government has already started lecturing
> us ordinary folk that we are now saving too much and not borrowing
> enough. In other words, its all our fault that the economy isnt picking
> up as expected :-)
>
> Check this out in today's Telegraph: (BOE warns against thrift!)
>
>
> www.telegraph.co.uk/fi...
>
>
>
>
>
>
>
>

Sep 21 10:46 PM

[debtacid:]

I know it's old fashioned but one look at dividends and P/E ratios shows that investors are paying more and getting less.
GOOG

Sep 22 01:58 AM

[debtacid:]

I know it's old fashioned, maybe even blasphemy, but one look at dividends and P/E ratios shows that computers are not very good investors. They are paying more and getting less.
GOOG - 34
BAC -38
WFC - 36
TOLL - NONE
AAPL - 32
C - NONE
GS - 39
JPM - 141
YHOO - 5000 !!!!!

Sep 22 02:10 AM

[goldbug101:]

I like gold - physical gold that is.

Yes, it is old fashion, but if USD collapses, then society will start (and maybe finish) to collapse and people will freak out that USD is only worth the paper it's printed on.

Same thought process for your gold. If the fecal matter hits the USD fan, then the gold you own in some far away vault will only be worth the printout or hard drive it's written on. No gold deliveries once the riots break out.

Buy gold, and make sure some of it ends up physical and in your house.

Sep 22 03:09 PM

[hardymaine:]

Thought provoking, but ignores the stimulative impact of the additional U.S. dollars. The additional dollars facilitate the creation of real economic activity that otherwise would not happen. Although the dollar slips as he rightly points out there is real economic gain as underutilized material and human resources are put to work without triggering inflation.

Oct 06 06:12 PM