I wrote previously that, in constant dollars, the Dow Jones is far from a new high (actually, some 8% away). Those constant dollars, however, were based only on inflation data, which is statistical data and not actual market data.
The following table shows the 2000 and 2007 prices in terms of different commodities. The calculation is tedious but simple: At the beginning of the year 2000 you needed 24 dollars to buy 1 barrel of crude oil, today, you need 79 dollars, that means that you need to work 3.29 more time to get the same amount of oil (if your salary was not adjusted for inflation). Adjusted for inflation (in year 2000 dollars terms), the oil is at 60 dollars a barrel. The formula I am using is Price in 2007/Price in 2000. That will give me the depreciation of the dollar with respect to the commodity, and, therefore, a price for the dollar based on that commodity.
So, I am going to suppose I bought 1 share of the Dow Jones in 2000 and I need to sell it to buy different commodities (Dow Jones 2000 will be base 0).
The question is when was I better off? During the bubble of 2000 or now? Or, in other terms, which is more of a bubble?
|You sell to buy:||Dow Jones Price in 2000||Dow Jones Price today||You win/lose|
|Crude Oil||496 market units||179 market units||-69%|
|Gas||8212 market units||4723 market units||-51%|
|Gold||46 market units||19 market units||-64%|
|Silver||2358 market units||1049 market units||-62%|
|Corn||55 market units||41 market units||-36%|
|Wheat||47 market units||16 market units||-70%|
(I use market units because I am analyzing price relations between equal market units, i.e., barrels, ounces, bushels, etc.)
As you can see, the Dow Jones’ “new high” is lower than the high in 2000. In most cases, by about 50%; in fact, the average for only these commodities is 59%. So, if you feel that you are hurting (and don’t understand why you are not as well off as you were in March of 2000 despite the new highs of the market) here you have your answer. Governments use the market levels as a proxy for the health of the country’s economy. As you can see in this table, in “useful dollars” the market is still 59% lower than in 2000. So, next time somebody tells you that the economy is doing great, you can answer him or her that it is great if you can live out of thin air.
We are not doing better, there is no new market high, and if you feel a 59% poorer than in 2000, you are having exactly the right feeling.
Franklin @ October 8, 2007