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Rising U.S. equities markets from the October, 2002 lows (or, for that matter, the recent October 2005 lows) through April, 2006, have lulled some investors and several commentators into believing that they have gains. Unfortunately, when properly measured, many of these ostensible gains actually are not. Deepcaster contends that the proper measure for gains is "purchasing power." Consider, specifically, the recent rise in the United States stock markets. If one has owned shares in the S&P 500 (SPX - - the market basket of S&P 500 Securities) for the 12-month period ending April 30, 2006, the value of that market basket of securities would have risen in dollar terms. But it would have declined over 30% since the Summer, 2005, when measured by the price of gold. The point is that, from late 2002 until late April, 2006, the Dow was in a bull market in dollar terms, but in a bear market in gold terms. Consider also the United States' dollar. From January, 2002 through late April, 2006; for example, the United States Dollar as measured by the USDX (the United States Dollar's value as measured by a market basket of other currencies) lost purchasing power in an amount exceeding 20%. Since many, if not most, of the prices of goods and services we purchase are determined in a global economy, this loss of purchasing power is quite substantial. Thus, a person whose increases in U.S. dollar income since January 2002, have collectively amounted to less than 20% has actually suffered a loss of purchasing power in the global economy. The key point is that one must decide what asset or asset class one will use as the "baseline asset" against which to measure one's wealth and/or income increase or decrease. Assets and asset classes rise and fall vis-à-vis each other, as readers of Deepcaster know. Deepcaster's view is that the ultimate measures of value should be gold (first), and then silver and the other precious metals and the strategic commodities (i.e. tangible assets rather than paper assets). But one must employ this "ultimate" valuation measure with caution because the prices of the aforementioned metals and other commodities is subject to considerable manipulation and thus may not, at a particular time, reflect anything near their ultimate value (see Deepcaster's March 2006 Article "Juiced Numbers….) Importantly, as we explain in our postings on www.Deepcaster.com, this fact of manipulation is a major reason the “Buy and Hold” strategy increasingly fails. But, notwithstanding the manipulation one can still utilize a "comparative valuation" approach. The benefit of the "comparative valuation" approach outlined above is that it actually gives one a different and illuminating perspective on asset inflation, asset deflation, and purchasing power. [For example, if the reader chooses not to use the gold (Deepcaster’s “baseline asset” of choice) or precious metals as a “baseline asset,” we invite the reader to consider the consequences of using the energy asset class instead.]
So long as the United States Federal Reserve continues to profligately expand the supply of money and credit, it debases the U.S. dollar. Thus much of the financial asset appreciation, in terms of U.S. dollars, which we have seen in recent years, is really only dollar depreciation. Therefore, if one holds appreciated (in dollar terms) financial assets one must consider "appreciation" vis-à-vis what. Depending on one's choice, one may find that the ostensible appreciation is really depreciation. [And especially so, if one factors in the tax consequences of being taxed on a larger number of U.S. dollars which have substantially decreased purchasing power.] Specifically, for example, measured (as of May 1, 2006) against gold or even other currencies, the ostensible appreciation of financial assets through the end of April, 2006 is arguably only a delusion. That is, it is arguably only an artifact of the Fed's profligate printing of paper money and increase of credit. Given this view, the ostensible appreciation reflects only the depreciation of the purchasing power of the dollar. Deepcaster makes it a high priority to reflect the aforementioned considerations into account in its portfolio selections, since it is important that investors achieve real gains and not chimerical ones. Since we increasingly compete and buy and sell in the global economy, this depreciation is not good for anyone in the market to buy anything with U.S. dollars. Thus the negative effects of this depreciation are not limited only to senior citizens relying on fixed incomes. DEEPCASTER NUGGET: Prospective buyers of MITTS should consider carefully the siren song of those who claim the worst that could happen is they will "get the same amount of money back that they invested." Yes, they may get the same amount of U.S. dollars back, but in those years down the road when they cash out the purchasing power of that depreciated dollar will likely not be nearly what it used to be.
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