Bullish on the Dow? Everything's Relative, or Not

According to Merrill Lynch's Richard Bernstein, the Q4 rally in stocks was deceiving. As reported by Minyanville's Kevin Depew, the 2006 Dow rally in Euros was far more subdued:

According to Bernstein, many of the recent rallies in various asset classes are a form of "money illusion." For example, the fourth quarter rally in U.S. stocks was almost entirely due to this kind of illusion. Bernstein writes that when priced in Euros the Dow peaked in October and... you might want to sit down for this... was actually down in the fourth quarter. The nearly 16% rise in the Dow last year was actually only about 4% priced in Euros, he notes.

Eh, so what, you might say. I get paid in dollars, I buy in dollars, so dollars are all I care about. That misses the point, Bernstein notes. Each dollar you get paid in buys less and less as the currency declines. Let's put it another way. Step back for a moment and think about this: when a currency declines so does ones standard of living.

Call it "the race to the bottom:" When a debtor nation reaches a perceived point of no return, they devalue their currency. Their exports become more attractive, tourists come to that country (and go shopping), the repayment of debts is done not for literally 50 cents on the dollar, but paying back with dollars that have become worth far less than they were due to the devaluation.

Bernstein is late to the party on this one: You can show any index is up or down, depending upon how you price it: Dollars, Euro, Gold. But I am not sure just how much insight pricing the Dow in dollars provides, if any.

These relative comparisons have been around for a long time. Why stop with the Euro versus the dollar? If you follow Bernstein's logic to its logical extreme, then the Dow Industrials, priced in Gold, is actually down since 1999.

As we noted last year:

Source: Chart of the Day

Bottom line: The big question this raises is, given these Euro based returns, will it impact the US market's ability to attract overseas investments? Other than that, the brouahaha about Euro-based returns are mostly noise...

Sources:
Do My Eyes Deceive Me?
Kevin Depew
Minaynville, Jan 05, 2007 10:42 am
http://www.minyanville.com/articles/index.php?a=11881

The Illusion of a Rising Dow
Peter Schiff
January 14, 2006
http://www.safehaven.com/showarticle.cfm?id=4432

Comments

[FIG trader_]

As a self proclaimed strategist, I'm surprised how uninformed it is. How could one possibly not consider returns for the second most important currency in the world (Euro), where the economy represents probably close to 20% of world GDP, and than suggest it would be equally as relevant to compare "Gold" returns (glad he used Gold and not another commodity). The amount of money the real Euro-based economy can absorb is relevant, as is that of Japan. Certainly not the "gold" economy or the energy business for that matter. To shrug it off by suggesting that the relative comparisons have been around for a long time seems unprofessional, since they are quite releveant for global managers using MSCI indices

2007 Jan 11 04:31 PM

[Sr. Pessimist]

You know, that's possibly a valid reaction to the statement. However, I perceive a possible ambiguity. He may be subtly implying that because the US Dollar is dead, if you invest in the Euro or gold for returns made in the US Dollar, you end up with the US Dollar all over again, which is pointless. Who cares about returns on a foreign currency if the resulting currency in cash is worth its weight in bread? Plus, what's the health of our stock market if we have the biggest rally ever (12,500 peak so far), and yet stocks lost value in the process? Does that mean that Japan owns the majority of the US shares of stock in corporate America because they were the ones who pegged their interest rates at .25% so as to allow our central bank to borrow ridiculous amounts of money and purchase futures of our major market indexes? The stock market lost real value AND any perceived gain was pure hyperinflation.

2007 Jan 12 05:01 PM