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Happy Anniversary Bull Market?

The commentary below is for the benefit of our readers from opinion makers and writers not associated with Euro Pacific. We do not guarantee the accuracy and completeness of third-party authored content. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific, or its CEO, Peter Schiff.
Mark Motive of Plan B Economics
March 7, 2012

This month investors worldwide are celebrating the three-year anniversary of the stock market bull that began March 2009. The Dow Jones Industrial Average (DJIA) recently broke the psychological 13,000 barrier.

This is great news, right? Wrong!

The truth is that the bull market of the past three years is simply a 'money illusion.' A money illusion is the tendency of people to think of values in nominal, rather than real, terms. In other words, most people don’t fully appreciate inflation's effects on assets and incomes. This is precisely what the Federal Reserve is banking on.

You see, the Fed's policy has people thinking they are gaining wealth when they’re not. One of the most overwhelming elements of the market ‘recovery’ is the constant flood of monetary stimulus in various forms. This has eroded the purchasing power of the dollar to such an extent that in real terms, investors have actually lost about 10% over the past three years.

In fact, some of the biggest stock market booms in history (Weimar Republic, Zimbabwe) occurred in hyperinflationary environments. Much like today, the real value of these nominal booms was negative.

The following chart compares the current bull market in nominal and real terms. In this case, gold was used as an adjustment factor to derive the real DJIA price. As you can see, there is a massive discrepancy – while the nominal value of the DJIA has risen about 70%, the real value has fallen about 10%.

Happy anniversary bull market? I think not.

Mark Motive and Plan B Economics are not affiliated with Euro Pacific Capital, Inc. 

Data Sources: Plan B Economics, Yahoo, World Gold Council, S&P data from Robert Schiller