Stock market hype ignores inflation

Month-on-month changes in the US M3 money supply continue to show robust gains, with this money stock now at $15.1 trillion and some measures of year-on-year US house price gains close to 10%.

The Dow closed on Tuesday at 14,253.77 – breaking through the nominal highs of 2007, with the FTSE All-World equity index at four-and-a-half year highs. The key word is “nominal”: in inflation-adjusted real terms stock indexes in the US, UK and other countries have gone nowhere over the last 13 years – moving sideways. The volatility has offered opportunities for those with the cash (and the nerve) to buy at the bottom of the trend – think late 2002 or March 2009 – and to skilful traders, but not really for your average investor.

ZeroHedge has an interesting comparison of broad economic indicators from 11 October 2007, the last time the Dow was at current prices, versus today. Consider just the number of Americans on food stamps then and now (26.9 million then, versus 47.69 million today) and it again emphasises the disconnect between nominal stock values and the health of the broader economy.

Priced in gold of course, and the last decade-plus has been one-long rout for general equities. King World News has an interesting piece from Germany’s Approximity, which shows a “target” Dow/Gold ratio of around 0.5. Consider that in 2000 at the peak of the last business cycle, this ratio was at 40 (and is currently at 9) and you’ll get some idea of the depreciation of stocks in terms of real money.

Gold continues to consolidate, though the Mexican government is another body that appears not to have got the “barbarous relic” memo from the world’s top dismal scientists.