Eddy Elfenbein had a funny post up the other day that has gained some traction about how, when priced in other currencies, the US stock market hasn't done that much. Eddy counters, saying "Who cares? I don’t use euros anyway. Why not compare it to bandwidth? I use lots of that."
A couple of years ago Marc Faber said that measured in Polish zloty the US economy contracted 19% last year, referring to 2004.
Peter Schiff recently made one of these comparisons of the Dow against the price of eggs on CNBC.
So, does it make any sense to look at equity prices in this light? Some will say yes and some will say no. If you are a US based investor it won't matter most of the time but sometimes it will.
If you invest in gold you know that it is priced in dollars and usually moves inversely to the dollar. There is an equilibrium that exist between the two and many times movements in gold can be attributed to what the dollar is doing but I'll repeat not always. So if the dollar goes down gold will go up but that move up in gold becomes a nonevent for gold investors based in other countries.
So it can be for equities too. If US stocks rise 10% when the dollar declines 10% against, say, the Danish kroner, Danish investors would not benefit. In this example there is an equilibrium that exists, one goes up and one goes down with no real movement.
I would say that however often this effect matters between gold and the US dollar the frequency of this mattering between US equities and various foreign currencies is far less often. I do think it is important to understand relationship.
The consensus seems to be for more dollar weakness, I certainly fall into that line of thought too. If the dollar does fall it creates a drag on the return for foreign investors. This potentially becomes a problem to the extent that we need foreign capital invested in our market, which of course we do.
There will always be some demand for US assets so the potential effect is at the margin the vast majority of time but at times this issue will move markets and it wouldn't be a surprise if it was the tipping point for some sort of correction or worse at some point.
Eddy's comments notwithstanding it does make sense to understand the dynamic here even if it only matters occasionally.
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7 comments:
It matters because other markets priced in USD did better than their local currency indices suggests compared to the US market. So people invested in those markets did really well. Deflating the Dow by gold or whatever is just silly. Sure gold has done well but I could deflate by anything that happens to have done well.... of course I don't think gold has any particular special meaning except it has demand partially driven by goldbugs.
New Faber:
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/v5x2LlWTC524.asf
Although most do not agree on the benchmark, whether it be Gold or a basket of currencies, we have to be concerned with global purchasing power as we have a global economy. The US dollar being down 40% against the Euro means we can only buy 60% as much of their stuff as before for the same number of dollars. Wait until Oil is no longer priced in dollars and then proclaim the dollar weakness doesn't matter. It's only a matter of time.
My timing model ticked down another half point yesterday to 3.0. That's doesn't change my 100% long position, but if the Smart/Dumb Confidence model goes overbought, my long exposure will be reduced to 90%.
I'm still expecting an imminent short term correction, but that isn't to say we won't climb back to a new intermediate high before this cycle is over.
Just took a small position in UCPIX (Profunds Ultra Short Small) today as a hedge against any short term sell offs. Also, I may look at taking another position in UVPIX (Ultra short emerging) later this week.
Short term risk is high imo. I have a lot of leveraged long positions in US sectors - my timing model is 100% long in my TAA portfolio is actually closer to 125% long.
We're coming up on some bullish seasonality given the holiday, but who knows? Traders may want to dump some long positions before the long weekend.
Mr. Elfenbein's comment may be amusing, but I think he misses the point that individuals like Schiff are making when comparing the Dow to a price of eggs.
The entire objective of "investing" is NOT to achieve some nominal gain but to maintain and grow one's real purchasing power over time. Is it really beneficial if some broad market average is up 20% while one's real purchasing power has declined 50%. I think the point being made by pricing the Dow gains in eggs, or gold, or crude oil, is to illustrate the loss of purchasing power, and that the gains are to some degree a monetary illusion.
Over the past few days, I keep seeing TV story after TV story asking "why are we paying so much for gas". There are multiple reasons, but one of the big reasons is the decline in the value of the USD. We are competing with other nations like China for basic resources like crude oil, food, etc. When the USD loses value relative to our competition, those resources become more expensive priced in dollars.
I think this issue will become more important and ties into how "inflation" is measured. Barry Ritholz recently had some interesting blog posts on inflation. I personally think the official inflation numbers border on nonsense, at least for the average consumer who regularly eats food, fills up his gas tank, and maybe buys a new TV once every 5-10 years. Sometimes I think the official number should be renamed inflation minus everything that actually is inflating.
Mike, great comment.
The dynamic is very involved. The purchasing power for some items, like health care and gas clearly has diminished, clearly. The purchasing power for certain consumer items has greatly increased, even some food items if you shop at Walmart.
Everything in your basket, blended together is is your price index, just looking at eggs, as an example, would seem to be incomplete.
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