• Even though the Dow & S&P 500 are making new highs in nominal terms, when measured in real assets
    such as Gold (chart to the left) or Oil (to the right below left), the returns look less optimistic.  In fact,
    real "purchasing power" has declined.
Inflation since 2001

  • In 2001, the dollar index traded around 120 (now approx 76).
  • The median price of a home in California began 2001 at approx $244,000.  The median price peaked in April
    of 2007 at $597,640.
  • Copper has increased from $0.80 per pound to $3.10.
  • Gold and Oil have more than tripled in price.
  • China reserves have increased from $170 billion to $1.4 trillion!
  • The price of wheat is up three-fold (up more than 50% YTD).
  • While the Dow has rallied from 10,000 in 2001 to 13,200 today, this trails other markets:
  • The Goldman Sach's Commodity Index has rallied from 250-550.
  • Brazil's Bovespa index has inflated from 15,000 to 62,500!
  • Mexica's Bolsa has inflated from 5,000 to 32,500!
  • Russia's RTS has inflated from 130 to 2,100!
  • The Shanghai Composite has inflated from 2,000 to 6,000.
  • India's Sensex has increased from 4,000 to 18,000.

Official government statistics from around the world will tell you that inflation is
contained.  Consider the following price changes (courtesy of Noland, Faber, and
others) and judge for yourself if inflation is understated:

The inflation evidenced above has reduced the purchasing power (ability to buy real assets)
of all currencies.  While all currencies have declined in value due to inflation (see below)...
Charts Inflation Archive July 2007-December 2007

In my reading, I frequently come across literature that interests me (see third party research links
for some of my reading list).  Typically, I post these files to the Research Library by their
category, and as that fills up, I post them in their category archives so I (or readers) can reference in
the future (see below):
What is an Increase in Real Purchasing Power?

Investors should be concerned with the increase in their "real purchasing power" and not merely nominal increases.
 Real purchasing power is simply the purchasing power of a store of value (currency, gold coin, diamond ring, etc)
adjusted for inflation.  To measure the purchasing power of a fiat currency (meaning that there is no anchor to how
many currency units can be created as with the U.S. dollar and other currencies), it is useful to look at the value of
these currencies measured in hard assets such as gold or oil in order to measure real purchasing power.   This is
not intuitive because when market returns are reported (say the Dow Industrials were up 10% YTD) this is done in
nominal terms.  Additionally, and adding further confusion, Consumer Price Inflation (CPI) statistics such as the CPI
have been doctored by Boskin and Greenspan and the Government in general since 1980.  To illustrate real
purchasing power, I will provide an example.  Even though investors have earned healthy returns in nominal terms
in equity markets (and perhaps incomes) since 2000, the value of housing (a real tangible asset) has increased
materially faster than investors wealth has gone up (excluding housing).  Thus, an investor trying to a buy a house
in 2000 versus today (even with the housing bust starting to take hold) would have lost "real purchasing power".
Most investors do not realize this because the inflation statistics (CPI, etc) are understated.
Adjusted Inflation Statistics

  • (Nov 2007) Quality adjustments are made to about one-half of the Consumer Price Inflation (CPI) components
    to "cushion" price increases.  Example:  Since 1979, the average price paid for a new car in the has risen from
    $6,847 to over $34,000.  This is a rise of 395% (5.9% ACR).  The CPI adjusted new car series, however, is up
    only 62% (1.7% ACR).  Source Leuthold.

  • The BLS uses "Owners Equivalent Rent (OER)" instead of home prices when adjusting primary residence
    (housing) costs.  This statistic has a 24% weighting in the CPI.  69% of households own homes.  Since 1996,
    existing home prices are up 94% (6.4% ACR).  However, the BLS OER series is only up 38% (3.1% ACR)
    over this entire period.  Source Leuthold.