The fact that looking at market performance on a nominal basis (i.e., unadjusted for the decline in purchasing power, or the increase in hard asset prices) is foolish, has recently been understood by even some of the most garish financial tabloids. That said, Ben Bernanke could not be happier if the general public remained broadly dumb about the so-called Zimbabwe phenomenon: i.e. when the stock market goes up by a billion percent, yet purchasing power drops by a trillion. Which is why today we present a visual projection by Sean Corrigan of Diapason Securities, which looks at the S&P on a trade weighted basis, and which looks at the various market cycles not so much from a stock/PE boom-bust basis, but from the view of monetary strength of the underlying currency backing the US stock market, namely the dollar. Corrigan says: "Remember that it never does to get carried away by nominal prices, meaning one should always try to adjust for either or both of currency changes and alterations in the purchasing power of the cash in which an asset is quotes. On that first reckoning, asll you triskaidekaphobes might want to review the prospects for the S&P500, where a 50% loss of dollar-adjusted value over the next year or two, would just be neurologically exact for words." Why 50%? As the chart below shows, a 50% real retracement in stock prices is precisely where the downward channel of the lower lows of the S&P would take us. What that wouold mean is that by October 2012, the S&P will hit approximately a 20 year low. Considering all the monetary fornication that the chairman has embarked on vis-a-vis the middle class and the US currency, we will be lucky if in 2 years the market IS down just 50% adjusted for the amount of KY poured down (or as the case may be, up) the appropriate middle class orifice.
What is most interesting, as Corrigan highlights, is that over the past 10 years the standard bubble/burst cycle, adjusted for trade weighted terms, is one of 50% moves pretty much consistently. Of course as even the most introductory classes demonstrate, in the long-run a sequence of 50% up/down moves eventually tapers off to asymptote (i.e., zero).
- Tech - August 2000 +54.8%
- Gulf/WorldCom - March 2003 -46%
- SubPrime/CDO - May 2007 +49%
- Lehman/AIG - February 2009 -49.1%
- QE-China - April 2010 +45/3%
- EM/Eurozone/US Muni - 2012/2013 -50%?
And the pretty chart to go with it all: