When Big Returns Aren't That Big (The Dow hits 10,000 in Devalued Dollars)

Smart Money ^ | 10/16/2009 | Jonathan Hoenig

[SeekAndFind]

From May through October of 2008, Zimbabwean stocks skyrocketed, shooting from 72,000 to almost 400,000 by early November as measured by the S&P/International Finance Zimbabwe Index. For intrepid investors with a world bent, it would appear to be an attractive return of roughly 5,300%.

The only problem is that, while investors had indeed earned more Zimbabwe dollars, the value of those dollars over the same period had nearly evaporated amid the country's hyperinflation, meaning the "return" was actually a catastrophic loss. One Zimbabwe dollar in May of 2008 had lost 99.99% of its purchasing power by November of that same year. Investors made thousands of percent in stocks and were still wiped out.

We wrote about the specter of government-caused inflation earlier this summer. Since that time, the stock market has soared even as the value of our own currency has collapsed to 14-month lows, a Dow/dollar relationship we also highlighted a few months back.

I'm as delighted as anybody to see the Dow crossing 10,000 and now up sharply for the year. What proponents of increased government stimulus and intervention need to understand is that however, is that as the saying goes, "there is no such thing as a free lunch." Since March, US investors have earned more and more of an increasingly devalued currency -- stocks have risen 60% as the dollar has dropped about 15%.

That devaluation is a reality born in Washington, D.C., not from speculators on Wall Street, and exactly the reason why gold continues to knock up against all-time-highs. Official estimates are for the U.S. federal debt to reach $23 trillion by 2019, nearly double current levels. By 2011, the debt and will account for 100% of our GDP.

What does rampant inflation look like? In 2008, the Los Angeles Times reported how a beer in the Zimbabwe capital that cost 100 billion Zimbabwe dollars on July 4 had already risen to 150 billion an hour later. A few months after that, Zimbabwe issued the 100 trillion-dollar banknote, then worth about $30 (U.S.). Apart from being a collector's item, it's now completely worthless altogether.

In 1980, the Zimbabwe dollar was actually worth more than the U.S. dollar. What deteriorated over those 29 years wasn't the weather or the water, but the political philosophy. Once known as Africa's breadbasket, government destroyed the currency to the point where even "billionaires" were starving in the street.

The point is that having more dollars isn't the same as having more wealth. As our own government continues to expand the money supply and further intervene in private markets, here's hoping they understand that basic but essential distinction before we learn the lesson it's too late for Zimbabwe to correct.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.

[SeekAndFind]

[GeronL]

YUP.

Thats what I see too.

[allmost]

The relatively small number of stocks creating the volume should keep most sane long term investors away.

[BubbaBobTX]

Please keep it up a little longer. I am almost out of the market!

[perfect_rovian_storm]

[allmost]

Kudos. I hope you make out well.

[sickoflibs]

RE :”stocks have risen 60% as the dollar has dropped about 15%. “

Which is still a good deal. That is why I didnt pull out at the bottom.

Problem is we will in a few years reach a point where the reverse is true, “stocks have risen 15% as the dollar has dropped about 60%.

[240B]

You are, of course, exactly right. The market “surge” is just a reaction to a devalued dollar.

The only thing on my mind is when do I do the big short?

[SeekAndFind]

the dollar has dropped about 60%.

If this is inevitable, the obvious solution then would be to diversify to other currencies. The question is this --- how do you do it ?

[Atlas Sneezed]

If this is inevitable, the obvious solution then would be to diversify to other currencies. The question is this -— how do you do it ?

---

Foreign stock funds.

Or try investing in US stocks that track commodity prices, which will increase as the dollar devalues.

[Para-Ord.45]

BM

[SeekAndFind]

Or try investing in US stocks that track commodity prices, which will increase as the dollar devalues.

I've been looking at DBA for instance, an ETF that tracks a basket of food commodities. It hasn't been moving much the past year. SIDEWAYS I might add.

[TruthConquers]

There are ETF’s that are based on currencies.
FXC(Canadian), FXA(Australia),FXY(Yen),FXE(Euro),FXF(SwissFranc),FXS(SwedishKrona) etc.

And there is an online bank that does foreign currencies. I have not done this yet, so, own due diligence, etc.

http://www.everbank.com/001Currency.aspx

[Kokotele]

Morgan Stanley offers deposits in 10 foreign currencies. Gold/silver would also be an effective way to play the scenario mentioned above.....

[Toddsterpatriot]

Since March, US investors have earned more and more of an increasingly devalued currency -- stocks have risen 60% as the dollar has dropped about 15%.

Data extracted on: October 16, 2009 (6:33:27 PM)

Consumer Price Index - All Urban Consumers

Series Id:    CUUR0000SA0 Not Seasonally Adjusted Area:         U.S. city average Item:         All items Base Period:  1982-84=100
Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	Annual	HALF1	HALF2
2009	211.143	212.193	212.709	213.240	213.856	215.693	215.351	215.834	215.969					213.139

 

 

 

Since March, prices are only up about 1.53%.