So, what do you think of the bull market in stocks that we've been in since 2003? In 2002 the Dow bottomed out at 7701. It recently closed at about 13,000, and has been as high as 14,000. That means the market has gone up about 81% during that time.
The S&P also doesn't look that bad. It bottomed out at 800 in late 2002. It currently sits at about 1423, which is about 78% higher.
However, during most of this time, the dollar index has been declining against most other major currencies in the world. In 2002 the dollar index topped out at about 120, today it sits at 73, which is a decline of 39%. That means that the dollars you hold can purchase, on average, 40% less than they could just 5 short years ago.
So what, you say? After all, if your investments are up 80% and the dollar is down 40%, then that means you are still up 40%, right? Actually that's wrong. Losses are magnified on the way down. A 50% decline wipes out a 100% gain.
It's important to view our market from a foreigners perspective. After all, they have lots of money and they choose where they want to invest it. Many foreigners like to invest in the United States and our stock market because it has been such a good place to keep their money for many years. That is, until this latest bull market.
From 2002 to 2004, the stock market was in major rally mode. Aggressive rate cutting by the Federal Reserve (down to 1% on the Fed funds rate) gave the stock market a reason to rally. The market jumped up 33% during this time, but to foreigners the rate was not that great because the dollar declined 30% during this time. So all the gains in the market were not realized by foreigners, they essentially broke even on a nominal basis.
2005 was a more interesting year. The Federal Reserve decided to start raising interest rates again. They steadily moved the Federal Funds rate up from 1% in mid 2004 to 5.25% in early 2006. During this time the dollar rallied 10%. However, on the stock market side, it was the weakest year of the rally. The stock market went up about 5% in 2005. For American investors, this was a so-so year. Foreigners, on the other hand, had their best year of the current market because the 10% gain in the dollar juiced their 5% market gains to give them a 15% return for the year.
Then, starting in 2006, the dollar resumed it's slide down from 90 all the way down to where it currently sits at 73. That's a 19% decline in the value of the dollar. However, on the stock market side, the S&P 500 went from 1285 to it's current value at 1423, that's only a 10.7% gain. This means the market has been declining for foreigners during this time, they're down 8% even if nominally the market is higher.
So, over the past 5 years the average foreign investor has not made any money in the stock market. I could make the argument that it's the same for American investors because our dollars buy so much less than they did back in 2002 (thank you inflation).
I have talked in the past how dependent we are on foreigners to fund our excesses. If you were from France, or China or Saudi Arabia, how much longer would you have patience in the American stock market if it's earned you a big fat goose egg for 5 years running? I've got a feeling that their patience is wearing thin and they're looking for any excuse to pull their dollars out of our market and go invest it in something else.
Of course, everyone is talking about how the dollar is set to rally right now. After hitting an all time low of below 71 in March, it has moved up to 73 currently. However, what is going to cause foreigners to want to buy more dollars (more demand for dollars will cause the dollar to rally)? I don't see any rally in the dollar until Ben Bernake grows a pair and starts to raise interest rates.
Despite the tepid rally in the dollar right now, I think it's setting itself up for another 10% plunge before the end of the year, maybe more. In the meantime, any rally in the stock market will be completely offset by declines in the dollar.
There is no new wealth being generated in our country, there hasn't been for a long time.
The S&P also doesn't look that bad. It bottomed out at 800 in late 2002. It currently sits at about 1423, which is about 78% higher.
However, during most of this time, the dollar index has been declining against most other major currencies in the world. In 2002 the dollar index topped out at about 120, today it sits at 73, which is a decline of 39%. That means that the dollars you hold can purchase, on average, 40% less than they could just 5 short years ago.
So what, you say? After all, if your investments are up 80% and the dollar is down 40%, then that means you are still up 40%, right? Actually that's wrong. Losses are magnified on the way down. A 50% decline wipes out a 100% gain.
It's important to view our market from a foreigners perspective. After all, they have lots of money and they choose where they want to invest it. Many foreigners like to invest in the United States and our stock market because it has been such a good place to keep their money for many years. That is, until this latest bull market.
From 2002 to 2004, the stock market was in major rally mode. Aggressive rate cutting by the Federal Reserve (down to 1% on the Fed funds rate) gave the stock market a reason to rally. The market jumped up 33% during this time, but to foreigners the rate was not that great because the dollar declined 30% during this time. So all the gains in the market were not realized by foreigners, they essentially broke even on a nominal basis.
2005 was a more interesting year. The Federal Reserve decided to start raising interest rates again. They steadily moved the Federal Funds rate up from 1% in mid 2004 to 5.25% in early 2006. During this time the dollar rallied 10%. However, on the stock market side, it was the weakest year of the rally. The stock market went up about 5% in 2005. For American investors, this was a so-so year. Foreigners, on the other hand, had their best year of the current market because the 10% gain in the dollar juiced their 5% market gains to give them a 15% return for the year.
Then, starting in 2006, the dollar resumed it's slide down from 90 all the way down to where it currently sits at 73. That's a 19% decline in the value of the dollar. However, on the stock market side, the S&P 500 went from 1285 to it's current value at 1423, that's only a 10.7% gain. This means the market has been declining for foreigners during this time, they're down 8% even if nominally the market is higher.
So, over the past 5 years the average foreign investor has not made any money in the stock market. I could make the argument that it's the same for American investors because our dollars buy so much less than they did back in 2002 (thank you inflation).
I have talked in the past how dependent we are on foreigners to fund our excesses. If you were from France, or China or Saudi Arabia, how much longer would you have patience in the American stock market if it's earned you a big fat goose egg for 5 years running? I've got a feeling that their patience is wearing thin and they're looking for any excuse to pull their dollars out of our market and go invest it in something else.
Of course, everyone is talking about how the dollar is set to rally right now. After hitting an all time low of below 71 in March, it has moved up to 73 currently. However, what is going to cause foreigners to want to buy more dollars (more demand for dollars will cause the dollar to rally)? I don't see any rally in the dollar until Ben Bernake grows a pair and starts to raise interest rates.
Despite the tepid rally in the dollar right now, I think it's setting itself up for another 10% plunge before the end of the year, maybe more. In the meantime, any rally in the stock market will be completely offset by declines in the dollar.
There is no new wealth being generated in our country, there hasn't been for a long time.
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