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Rising U.S. equities markets from the October, 2002 lows (or, for that matter, the 2005 lows) through the July, 2007 highs have lulled some investors and several commentators into believing that they had gains as of July, 2007. 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 five-year rise in the United States equities 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 U.S. 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 the Summer, 2005 until late April, 2006, the S & P 500 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 30%. Since many, if not most, of the prices of goods and services we purchase are determined in an international economy, this loss of purchasing power is quite substantial. Thus, a person whose increases in U.S. dollar income from January 2002 through April 2006, have collectively amounted to less than 30% has actually suffered a loss of purchasing power in the international economy in that period. 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 regular 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 golden "ultimate" valuation measure with caution because the prices of the aforementioned metals and other commodities are subject to interventional action by The Fed and other major central bankers*. Indeed, some Interventions are conducted quite publicly. The August 17, 2007 Fed discount rate cut is one example. Less visible, but not less potent, for example, are the nearly daily Repurchase Agreement (“Repo”) injections. Also salient are the $400 billion plus in derivatives that are apparently used to suppress, and periodically attempt to take down, Gold and Silver prices. Thus the price of Gold and Silver on any given day may not reflect anything near their ultimate value. [*See Deepcaster’s October, 2006 summary overview of Intervention entitled “Juiced Numbers IV: How the Government Gets the Statistics It ‘Wants,’ Markets Get Manipulated, Citizens Get Deluded, and Worse” at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org for information on precious metals price manipulation. Virtually all of the evidence for intervention has been gleaned from publicly available records.] Unfortunately, there are also Interventions in markets other than the Gold and Silver markets. They are especially visible in the U.S. equities markets via the nearly daily Repo injections. Thus, importantly, as we explain in our postings on www.deepcaster.com, this fact of intervention is one major reason a mere “Buy and Hold” strategy increasingly fails, especially so far as equities are concerned. But, notwithstanding the Interventions, 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.] CONCLUSION: Comparative Valuation and the Shape of the FutureSo long as the United States Federal Reserve continues to profligately expand the supply of money and credit (M3 is now increasing by 13%/yr according to shadowstats.com), it risks the continuing debasement of 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. Indeed, the U.S. Dollar has depreciated over 30% since January, 2002. In sum, 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 a substantially decreased purchasing power.] Specifically, for example, measured (as of May 1, 2006, just to pick a salient date) against gold or even other currencies, the ostensible appreciation of financial assets from late 2002 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 - - enabling an unhealthy “borrowed liquidity” to use Dr. Kurt Richebacher’s (R.I.P.) term. Given this reality, the ostensible appreciation reflects only the depreciation of the purchasing power of the dollar. Deepcaster makes it a high priority to take the aforementioned considerations into account in its portfolio selections, since it is important that investors achieve real gains and not chimerical ones. Specifically, Deepcaster’s Fortress Assets and High Potential Speculative Portfolios are designed to take account of, and to achieve, “real gains”, in light of “baseline asset” considerations. Since investors increasingly compete and buy and sell in the international economy, this U.S. Dollar 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. Ultimately, the authentic stores and measures of value are Gold and Silver, not paper Fiat Currencies and Treasury Securities.
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