nominal ka or real ka?

[jk]

looking at the market at the moment, we have the dow at a new high and the dollar threatening its all time low. can ka be purely real? not nominal at all? that is, look at the market from the standpoint of a european investor. are you making money? is the dow at a high for you, in euros? no. from the points of view of investors outside the u.s., our markets have gone nowhere. this is the argentine scenario i'm asking about. inflation of assets in nominal, domestic terms, while their value deflates in other global currencies and in gold and other commodities.

so, again, are people here convinced that the equities market is going to go down in nominal [not just real] terms? and, if so, why?

[dbarberic]

Re: nominal ka or real ka?

Almost the same question I brought up just a few moments ago...

http://www.itulip.com/forums/showthread.php?t=1217

[jk]

Re: nominal ka or real ka?

further data from randall forsyth at barron's

"While the Standard & Poor's 500 was up 15.8% in dollars last year, it gained only about 1.6% when measured in euros. And the S&P 500's 1.6% nominal gain for the first quarter was nil in euro terms."

[Finster]

Re: nominal ka or real ka?

looking at the market at the moment, we have the dow at a new high and the dollar threatening its all time low. can ka be purely real? not nominal at all? that is, look at the market from the standpoint of a european investor. are you making money? is the dow at a high for you, in euros? no. from the points of view of investors outside the u.s., our markets have gone nowhere. this is the argentine scenario i'm asking about. inflation of assets in nominal, domestic terms, while their value deflates in other global currencies and in gold and other commodities.

so, again, are people here convinced that the equities market is going to go down in nominal [not just real] terms? and, if so, why?

The equity market is about fairly priced if you look at earnings. But earnings as a proportion of GDP are abnormally high, and are historically are strongly mean-reverting. Plus equities are richly priced relative to dividends. Dividend yields remain historically low.

But the dollar itself has a lot of bearish forces at work on it. If it declines in real terms the same as equities do, nominal equity prices hold. So even if one agrees with both bearish cases, one is still faced with the question as to which one one is more bearish on!

My guess is that in the next 12-24 months, equities will lose ground even against the USD. Longer term, equities seem more likely to outperform. But the case is far from clear.

My preferred way around this is to find an easier call. Fortunately, I believe there is one, and that's equities in terms of gold. Regardless of what either does in dollar terms, it seems highly likely equities will depreciate in gold terms, or looked at the other way, gold will appreciate in equity terms. As for why, this is a case where a picture is worth a thousand words. The below shows the S&P 500 in terms of gold; currently, 35 years ago, and 35 years before that. Note that since the chart is semilog, one vertical unit corresponds to a factor of e (2.718...).

[grapejelly]

Re: nominal ka or real ka?

I'm not convinced the equity markets will fall much in the US.

My argument is that inflation is high and that people need to put their cash to work. Stocks are the place for this, along with stuff like gold, silver and commodities.

I can see money leaving bonds and needing to do somewhere. The commodity market isn't big enough to absorb all this cash. Stocks are.

[Finster]

Re: nominal ka or real ka?

I'm not convinced the equity markets will fall much in the US.

My argument is that inflation is high and that people need to put their cash to work. Stocks are the place for this, along with stuff like gold, silver and commodities.

I can see money leaving bonds and needing to do somewhere. The commodity market isn't big enough to absorb all this cash. Stocks are.

Excellent point, GJ. In the long run - over a full inflationary cycle - stocks have been an even better inflation hedge than gold. The reputation to the contrary owes to the fact that asset prices, especially the most liquid, are among the very first to respond to inflation. And while that's happening, people don't recognize the inflation as such, they just think they're getting rich. Only later in the cycle, when inflation is spilling over into wages and commodity prices, is it generally recognized as inflation, and at that point financial assets are suffering from interest rates increases and/or anticipation of the same.

My take is we're in a sort of transitionary period at this point. Stock and bond prices are both elevated due to the surplus of liquidity still sloshing around the world from the last inflationary push - the Greenspan Fed's "emergency" inflation of 2001-2005. Meanwhile, commodity prices are still responding to inflation left over from the 1990s. The superposition of these effects makes for a difficult analysis, but as long as liquidity is ample, stock prices are apt to remain elevated.

But liquidity is ample until it's not...