Money Management and the Economy

Thursday, August 3, 2017

The Stock Market hasn't gone up, the Value of the Dollar has Just Gone Down.

You aren't smarter than the market. It really is that simple.

The New York Times had an article about the stock market's recent gains. The story noted that while the market had gone up 11% since the election, the dollar had dropped 10% against a basket of foreign currencies during that same period. They described this as "almost a mirror image."

Unfortunately it is exactly a mirror image for people who hold those foreign currencies. Lets say they paid a $100 for a share of stock the day of the election and they exchanged 100 units of their own currency for that $100. Now if they sell that stock they will get $111 dollars, but when they exchange that $111 dollars, they will get back 100 units of their own currency. They have earned nothing, in their own local currency's terms the price hasn't changed.

In a world investment market, the price of stock is set by what people around the world are willing to pay for it. Most people are still paying the same price for stock as always when measured in their own currencies. Its only Americans who are paying more for stock. But if the value of the dollar remains where it is, we are eventually going to be paying more for everything else as well. The money we made from those higher stock prices is going to disappear in inflation.

If you read the story, there are all sorts of explanations for the stock market increase, but the reality is that in world currencies the market has been flat since the election. Its not a "bubble" or Trump's pro-business promises or "animal spirits" or "retail investors" or "growing earnings" or any of the other media cliches. Its that the dollar has fallen in the world marketplace. The real question is why that has happened and is it going to be a permanent.