Nominal vs. Real Gains

We mentioned yesterday the very prominent "gap" created in the S&P 500 chart; it sits around 1075. Usually these gaps on an index will fill within 2-5 weeks, but this one has a good chance to fill sooner. Of course some gaps take much longer to fill (we still have S&P 906, NASDAQ 1800 to take care of).

In the bigger picture we remain in a hefty uptrend and until we begin breaking down out of this "channel" and/or down below a key moving average (such as the 50 day) index short positions have to be quick and dirty. Current strategy is to sit on the largest cash position I can remember and try to deploy some if/when S&P 1075 hits. S&P 1080 is the level we broke out from ("double top breakout") so that also provides a line in the sand bulls want to defend. At this point we could fall all the way to S&P 1040 (rising by the day) and nothing has changed from a big picture perspective.


As for earnings, again no surprises anywhere... and the market now has built in some of this upside. Gold and silver the previous 2 sessions have not reacted as normal to dollar weakness, which is a slight divergence - could just be resting after a dramatic run, but something to keep an eye on. Other than that, it's the same old same old - government is crafting multiple more stimulus and handouts (while not calling them stimulus) so we are a slave to those news items. And I see no change from the Federal Reserve for a very long time... easy money is the new American ethos. So the question becomes at what point does this market begin to discount some end point of the "subsidized" economy of continuous government handouts and Federal Reserve backstop of the entire US economy. When Goldman finds out when the Fed will begin withdrawing stimulus, and the government is done throwing lifeline after lifeline to the economy - I'm sure they'll let the rest of us know. With elections coming in 13 months I expect a bevy of new handouts to win votes....

In the nearer term, most of our huge financial oligarchs have reported and now we move to the regional banks who do not have trading desks to support their degrading commercial banking arms. Citigroup (C) (to a lesser degree), Goldman (GS), and JPMorgan (JPM) have simply been taking no prisoners in the fixed income parts of their business... massive growth. What has happened here is what we said would be the future last winter once it was clear Lehman would die, Goldman and Morgan would live, and Merrill was pushed inside Bank of America (BAC) (recall Bear Stearns is now inside JPMorgan). Fewer oligarchs dividing up a growing pie.

Not only that they are raising fees because there is less competition - it's almost as if this whole crisis was planned. That's the "Wall Street" economy, but as you peruse these reports and listen to what is happening on the commercial side of banking i.e. the "Main Street" economy, it's very poor. Unfortunately for most of the banks that are going to be reporting in the next few weeks they have little to do with Wall Street and are more of the traditional type of banks... so it won't be such a pretty picture for them. As for all other sectors I don't know how many more weeks/months we can be surprised by the same news.

But as said above, until the technicals take a turn for the worse, 'buy the dip' will reign. Valuation is in many cases ridiculous but one could have said that in June 1999 and missed out on countless 100%s of gains in some stocks ... lemmings will dance until the music stops. Or in the new paradigm, until the Federal Reserve is content it has destroyed the US dollar by flooding the world with fiat currency.

What I read yesterday about Canada really struck me... a global race of quantitative easing as countries vie to protect their export markets scares the living daylights out of me. But I suppose even more fiat currency from every corner of the globe only pushes up stock prices, right? Fixed amount of stock certificates chased by paper money of all colors and stripes...

Nominal versus real gains... keep those in mind; especially if you are reading this from the US or UK.

Comments

[CautiousInv...:]

Not only that they are raising fees because there is less competition - it's almost as if this whole crisis was planned. That's the "Wall Street" economy, but as you peruse these reports and listen to what is happening on the commercial side of banking i.e. the "Main Street" economy, it's very poor. Unfortunately for most of the banks that are going to be reporting in the next few weeks they have little to do with Wall Street and are more of the traditional type of banks... so it won't be such a pretty picture for them. As for all other sectors I don't know how many more weeks/months we can be surprised by the same news.
______________________...
Perhaps it was planned and who better to do it than the denizens of Wall Street who populate Treasury, the Fed and other regulators. When speaking of nominal versus real gains, it has now taken on a multitude of possible meanings: real bank earnings versus reported earnings, Wall Street earnings versus Main street earnings, inflation adjusted earnings versus real earnings and nominal earnings versus currency adjusted earnings. It's, as I have said before, a fun house mirror room full of distortions and illusions, allowing the anointed elite to see and report as they see fit.

Oct 16 03:26 PM

[DonFurio:]

I understand some of your points, but while costs have gone up for some things, if you are a good consumer some costs have gone away or reduced, ie paying a fee for a checking account, constantly have to repair or buy a new car but at the same time there a lot of new costs that people don't have to have but want to have, decked out cell phones, multiple flat screen tv's, etc.

We are having tons of debates about healthcare, but part of the reason there are so many fat people is because they don't excercise. The average person would rather spend 4 hours watching American Idol or whatever stupid tv shows are out there then to better themselves or their careers.

And dividends do matter. They basically covered inflation the past 10 years, and even now, if you invested every month then you will not be significantly down, you should be even or even in the black in your investments.


On Oct 16 02:51 PM User 353732 wrote:

> 1. A large majority of Americans and maybe even a majority of retail
> investors cannot or refuse to distinguish between money illusion
> and purchasing power. People often confuse dollars with wealth or
> income because they do not have the time or wit to track the exchange
> rate of the dollar versus real assets or other stores of value or
> media of exchange
>
> 2. Money illusion is exploited fully, ruthlessly and with criminal
> malice by both Big Govt and Wall St to convince a majority of Americans
> that increasing nominal transfer payments or dollar dividends or
> rising dollar denominated equity prices are a sign of "compassion"
> and "recovery" even as real incomes and real returns compress
>
> 3. Many people routinely compare incomes or net worth or prices over
> time rather than across space and believe that the higher temporal
> number is a measure of greater well being; they often forget to translate
> across space e.g. how many hours must they work to pay for total
> housing costs( mortgage, insurance, maintenance,taxes) or for health
> care or utilities or transportation in Oct 2009 versus, say, in Oct
> 1999.
> Again this tendency to make temporal comparisons is exploited by
> Big Govt and Wall St, as in "recovery in housing prices"( a home
> that sells for the same price today as 5 years ago is obviously worth
> notably less than 5 years ago---it has not maintained value but lost
> value) or Dow 10,000(which meant a lot more 10 years ago than today)

Oct 16 03:30 PM

[Moon Kil Woong:]

Regarding QE clearly the US' adoption of it is far inferior to currency manipulation by China or outright protectionism. Given it's bad if the whole world goes protectionist, but it's worse for Americans if they are the only ones left holding the bag. For they will be the ones left jobless and homeless.

Regarding the rally lasting forever, with currency depreciation so steep I think the Fed and government may feel compelled to support it soon. But I guess they should have felt that a month ago and a month before that, etc. I guess we can expect $250 checks, interest and pay holidays on mortgages, rebates on buying cars, more financial bailouts, and all the rest of the wasteful government spending we've come to expect.

Will it help? I suppose it will help prolong the pain and thin your wallet when you convert all the cast into other currencies but that's about all.

Anyway thanks for the article Trademark. May I remind you Dow theorists are still waiting for a real correction to see if this market can be trusted or if it's all just a temporary bubble caused by dollar devaluation.

Oct 16 04:23 PM

[Alan Young:]

Since March, the US$ is down -15% (relative to other currencies), stocks ($SPX) are up 60%+ —that's a disproportionate reaction, if dollar devaluation is the main driver. And if you don't like relative valuation in "fiat currencies", what do you like, gold? That's still only a 25% devaluation (since March); US stocks have outperformed gold since the bottom by 30%. And of course most foreign stocks have done even better. So there is some real value increase in stocks, by any measure.

But we also have to distinguish between price inflation and asset inflation. Price inflation has been negligible this year, so the consumer is not losing purchasing power nearly as much as the investor is.

On Oct 16 02:51 PM User 353732 wrote:

> 1. A large majority of Americans and maybe even a majority of retail
> investors cannot or refuse to distinguish between money illusion
> and purchasing power.

Oct 16 05:03 PM

[TraderMark:]

Alan not the "Main" reason. The market was in panic mode and oversold on the basis there would be economy in a few days in March 09. So give the first 20-25% just to go back to "non Armageddon"

No one is saying its a 1:1

Otherwise if the market goes up 100% there would be no dollar would there? (100% depreciation)


On Oct 16 05:03 PM Alan Young wrote:

> Since March, the US$ is down -15% (relative to other currencies),
> stocks ($SPX) are up 60%+ —that's a disproportionate reaction, if
> dollar devaluation is the main driver. And if you don't like relative
> valuation in "fiat currencies", what do you like, gold? That's still
> only a 25% devaluation (since March); US stocks have outperformed
> gold since the bottom by 30%. And of course most foreign stocks have
> done even better. So there is some real value increase in stocks,
> by any measure.
>
> But we also have to distinguish between price inflation and asset
> inflation. Price inflation has been negligible this year, so the
> consumer is not losing purchasing power nearly as much as the investor
> is.
>
> On Oct 16 02:51 PM User 353732 wrote:

Oct 16 05:15 PM

[j-dub:]

The curtain of pyrite is slowly being pulled back by media people who are screaming on the inside and have had enough of the rhetoric they are endure externally.

The real question remains is as the curtain is slowly being pulled away, do Americans have the stomach to look behind? Or do they continue to enjoy pretending that the curtain does not even exist, let alone the goings on behind it?


On Oct 16 02:51 PM User 353732 wrote:

> 1. A large majority of Americans and maybe even a majority of retail
> investors cannot or refuse to distinguish between money illusion
> and purchasing power. People often confuse dollars with wealth or
> income because they do not have the time or wit to track the exchange
> rate of the dollar versus real assets or other stores of value or
> media of exchange
>
> 2. Money illusion is exploited fully, ruthlessly and with criminal
> malice by both Big Govt and Wall St to convince a majority of Americans
> that increasing nominal transfer payments or dollar dividends or
> rising dollar denominated equity prices are a sign of "compassion"
> and "recovery" even as real incomes and real returns compress
>
> 3. Many people routinely compare incomes or net worth or prices over
> time rather than across space and believe that the higher temporal
> number is a measure of greater well being; they often forget to translate
> across space e.g. how many hours must they work to pay for total
> housing costs( mortgage, insurance, maintenance,taxes) or for health
> care or utilities or transportation in Oct 2009 versus, say, in Oct
> 1999.
> Again this tendency to make temporal comparisons is exploited by
> Big Govt and Wall St, as in "recovery in housing prices"( a home
> that sells for the same price today as 5 years ago is obviously worth
> notably less than 5 years ago---it has not maintained value but lost
> value) or Dow 10,000(which meant a lot more 10 years ago than today)

Oct 16 09:15 PM

[Plan B Econ...:]

You want to see nominal vs real???

The S&P 500 from 2000 peak to 2009 trough was down 83% in gold-terms. That, my friends, adjusts for the devaluation of the dollar.

In fact, the 2003-2007 rally was entirely a money-illusion.

www.planbeconomics.com.../

Oct 17 12:08 AM

[K-Lew:]

Mark, do you have a link to what you read about Canada?

"What I read yesterday about Canada really struck me"

Oct 17 09:00 AM

[Ricard:]

"But I suppose even more fiat currency from every corner of the globe only pushes up stock prices, right? Fixed amount of stock certificates chased by paper money of all colors and stripes..."

I am now fully convinced that shorting this market will be a disastrous undertaking. The economy is centrally planned.

Oct 17 10:35 AM

[bob adamson:]

K-Lew

I don't know specifically what Mark was referring to regarding Canada but Canada has experienced a 25% increase in value of the CAN$ since March measured against the US$ and this is having a significant adverse effect for many producers and manufacturers here in Canada given that 30% of our economy is geared to the international market (i.e. production costs are paid in CAN$ and selling price received in US$).

Our central bank and national government will therefore take the necessary steps to slow this upward trend of our dollar in US$ terms. This should not be interpreted as a competitive devaluation but rather as a continuation of Canada’s long term ‘sticky float’ exchange policy. As a middle sized economy highly dependent on foreign trade and the valuation of commodities we have needed to seek a middle course between a rigid peg and allowing our currency to fluctuate wildly as international markets change. This “sticky float” allows Canada to maintain a reasonable degree of control over our internal economic development while continuing to participate in the international economy on a realistic basis.

The US, because the US$ is the global reserve currency, has been in a different position for most of the post WW II period and has enjoyed many benefits from this reserve currency status. New York became the world’s financial centre with all the economic benefits that entailed. US importers and exporters could essentially deal in their own currency. Insofar as the US experienced inflation, it could avoid the adverse effects for its exports that would have been experienced by another nation experiencing inflation (i.e. US inflation was largely ‘exported’ in these circumstances to other countries whose currencies were pegged to the US$). Interestingly, the first cracks in the US$ reserve currency status occurred during the Nixon administration when the US unilaterally devalued its currency in response to the oil shock and cost of Vietnam. Over the past decade in particular, the US has lost many of these advantages as it has lost its former economic preeminence (i.e. as other economies approached co-equal status with the US economy, the US$ remains the international currency of account but it has lost much of its other attributes as a reserve currency). It now appears that the US is adopting its own version of the “sticky float” policy.

Is the “sticky float” an inherently bad policy, especially if adopted by the country whose currency is the world’s reserve currency? Arguably (the Austrian School folk will surely disagree!) it is a good policy provided it is followed with moderation and only to promote orderly adjustments of (a) exchange rates and (b) national economies to international trends. It is an illusion in today’s world to assume that one nation can unilaterally set the pace for the world economy and it follows that all must adjust to each other. The trick is to maintain orderly adjustments of national economies and currencies to global economic realities; not try to hide from those realities by competitive devaluations.

In short, the US remains the first among equals but with a growing emphasis on the ‘equals’ part. This needn’t be a bad thing for the US or anyone else.

While some (cue the Austrian School proponents!) will argue for a return to the gold standard, that case is hard to maintain in light of current realities. Look at the experience of the UK in the 1920s following WW I.

bob adamson

On Oct 17 09:00 AM K-Lew wrote:

> Mark, do you have a link to what you read about Canada?
>
> "What I read yesterday about Canada really struck me"

Oct 17 12:38 PM

[TheHague:]

I have been reading and listening to the hand wringing with regards to the decline of the dollar. Yet every time the dollar drops my stocks such as PG JNJ GLD TS etc go up! I hate to say this but I almost look forward to the drop in value of the dollar! My wealth improves! All of these companies have a strong international presence. It seems to me my time would be better spent protecting my wealth by purchasing stocks that are integrated into the world economy so that there is a hedge for weakness in the dollar!

Oct 17 12:54 PM

[Doomdog:]

I don't think the general public will give a rip about the dollar steady decline until food prices go up even more as well as gas at the pump. Then it should hit home. Anyone remember limits on bags of rice at Costco last year? Of course markets anticipate everything 6-9 months ahead, and available hedges will have already gone up i.e. GLD, USO, XLE, DBA ect. Also look out for a countertrend dollar rally and be ready to add.

Oct 17 03:55 PM

[Did U Think...:]

"Fewer oligarchs dividing up a growing pie."

That pie is no longer growing. Sure the fixed income business is as everyone tries to float new debt but soon enough there will be nobody who wants any part of other people's promises to pay because default rates will be extreme.

Oct 17 04:40 PM

[Jeff Nielson:]

Given the title of this article, I think the author was MUCH too timid in pointing out how ILLUSORY are the current "profits" being made on U.S. equities.

TEN YEARS just to get back where you STARTED? That means there ARE no "nominal gains" - just huge, real losses for buying this index. I read elsewhere that using the government's phony, inflation numbers the Dow has produced a "real" rate of return of -23% for the last ten years.

Put ACTUAL inflation numbers into that calculation and owning the Dow for the last 10 years would have netted greater than a 50% loss.

If anything is going to shock zombie-investors out of their mindless buying, surely the idea of ANOTHER ten years of going nowhere should do it.

Keep in mind that only the same market-pumpers who NEVER saw this crash coming are predicting that the U.S. economy will "grow" as much during the NEXT ten years as it did during the last 10.

For anyone/everyone living in the REAL world, we KNOW that U.S. economic performance over the next decade will be nothing short of disastrous - meaning the likelihood of ANOTHER decade of less-than-zero returns from the Dow is VERY likely (if not certain).

Oct 17 07:52 PM

[rennert:]

It is unbelievable how every thing from groceries to doc and vet has gone up. What planet are those people living on that tell us there is no inflation? Of course their Butler is doing all their buying for them while they dine at the splendidly delicious Hedge Fund Cafe up in the sky overlooking Washington and Wallstreet..

Oct 17 08:50 PM

[Steve Soden:]

The World's ajusting to a new Economy.
The old one blew up and it was bad enough
to require a new system but nobody is bothering
to do the work that's needed so expect more and
greater damage with next wave.
With " The Big One, coming soon".

Oct 18 01:12 AM

[dsrtwriter:]

Many years ago, a very successful Canadian investor, in his book "Anyone can make a million" (ok, the title is a bit much), said that when it comes to the future valuation of a currency, you "just need to read today's newspapers". Everyone reads the news but few really think about what it means.

The Obama Administration and its Democratic congressional majority are making it clear in news story after news story: they are not in favor of entrepreneurship, they believe government is the answer, and their various support groups believe it is now their time to "take back America" from working taxpayers, by taxing them more and devaluing their dollar assets through massive debt.

They do not believe that the United States should be an economically or militarily strong country; in fact they feel that we are the source of most of the world's problems (the apology tours).

So read the papers. They are telling you what to do. And placing a portion of one's assets in gold and other currencies is probably not a bad idea, in addition to some multinational firms

Oct 18 01:52 AM

[jabez:]

Here is yet another wild card thesis to think about: post-Galleon Wall Street now has to think about the wonderful neo-Stalinist world of 24/7 electronic surveillance. Technology has reached a critical point; sensors are now effectively undetectable and cheap enough to deploy in massive arrays, and data storage capacity is effectively infinite. From the perspective of law enforcement personnel, warrantless surveillance cannot produce evidence usable in court (yet). However, once persons engaged in ongoing illegal activities are identified, then a warrant can always be obtained, and subsequent data is then admissible. Therefore, why not spy on anyone making large sums of money?

This very real situation creates a highly uncomfortable environment wherein everyone engaged in trading must assume that ANY communication is being monitored, and any conversation or relationship may suddenly place one in an untenable legal situation, literally at the drop of a word.

Will hedgefunds and other big players deploy money into a massively overvalued market w/out the benefit of insider information? Will they move in unison to the short side? Heh. And would short-selling then be banned, and (even more) capital abandon the US equity markets entirely?

Oct 18 07:51 AM

[TraderMark:]

I agree

Most Americans only notice economics when gas jumps and food prices jump.


On Oct 17 03:55 PM Doomdog wrote:

> I don't think the general public will give a rip about the dollar
> steady decline until food prices go up even more as well as gas at
> the pump. Then it should hit home. Anyone remember limits on bags
> of rice at Costco last year? Of course markets anticipate everything
> 6-9 months ahead, and available hedges will have already gone up
> i.e. GLD, USO, XLE, DBA ect. Also look out for a countertrend dollar
> rally and be ready to add.

Oct 19 06:26 AM

[TraderMark:]

Bob you actually hit it on the nail.

What concerned me last week was a story that central banker of Canada was willing to do QE to competitively devalue their currency in a "race to the bottom"

www.fundmymutualfund.c...

You imagine a protectionist world where many countries not pegged to the dollar are forced to print paper to try to weaken their currencies, talk about a perfect world for gold.


On Oct 17 12:38 PM bob adamson wrote:

> K-Lew
>
> I don't know specifically what Mark was referring to regarding Canada
> but Canada has experienced a 25% increase in value of the CAN$ since
> March measured against the US$ and this is having a significant adverse
> effect for many producers and manufacturers here in Canada given
> that 30% of our economy is geared to the international market (i.e.
> production costs are paid in CAN$ and selling price received in US$).
>
>
> Our central bank and national government will therefore take the
> necessary steps to slow this upward trend of our dollar in US$ terms.
> This should not be interpreted as a competitive devaluation but rather
> as a continuation of Canada’s long term ‘sticky float’ exchange policy.
> As a middle sized economy highly dependent on foreign trade and the
> valuation of commodities we have needed to seek a middle course between
> a rigid peg and allowing our currency to fluctuate wildly as international
> markets change. This “sticky float” allows Canada to maintain a reasonable
> degree of control over our internal economic development while continuing
> to participate in the international economy on a realistic basis.
>
>
> The US, because the US$ is the global reserve currency, has been
> in a different position for most of the post WW II period and has
> enjoyed many benefits from this reserve currency status. New York
> became the world’s financial centre with all the economic benefits
> that entailed. US importers and exporters could essentially deal
> in their own currency. Insofar as the US experienced inflation, it
> could avoid the adverse effects for its exports that would have been
> experienced by another nation experiencing inflation (i.e. US inflation
> was largely ‘exported’ in these circumstances to other countries
> whose currencies were pegged to the US$). Interestingly, the first
> cracks in the US$ reserve currency status occurred during the Nixon
> administration when the US unilaterally devalued its currency in
> response to the oil shock and cost of Vietnam. Over the past decade
> in particular, the US has lost many of these advantages as it has
> lost its former economic preeminence (i.e. as other economies approached
> co-equal status with the US economy, the US$ remains the international
> currency of account but it has lost much of its other attributes
> as a reserve currency). It now appears that the US is adopting its
> own version of the “sticky float” policy.
>
> Is the “sticky float” an inherently bad policy, especially if adopted
> by the country whose currency is the world’s reserve currency? Arguably
> (the Austrian School folk will surely disagree!) it is a good policy
> provided it is followed with moderation and only to promote orderly
> adjustments of (a) exchange rates and (b) national economies to international
> trends. It is an illusion in today’s world to assume that one nation
> can unilaterally set the pace for the world economy and it follows
> that all must adjust to each other. The trick is to maintain orderly
> adjustments of national economies and currencies to global economic
> realities; not try to hide from those realities by competitive devaluations.
>
>
> In short, the US remains the first among equals but with a growing
> emphasis on the ‘equals’ part. This needn’t be a bad thing for the
> US or anyone else.
>
> While some (cue the Austrian School proponents!) will argue for a
> return to the gold standard, that case is hard to maintain in light
> of current realities. Look at the experience of the UK in the 1920s
> following WW I.
>
> bob adamson
>
> On Oct 17 09:00 AM K-Lew wrote:

Oct 19 06:28 AM