Stocks hit a new high in the Dow yesterday. CNBC cheered and Fed economists everywhere patted each other on the back.
The unfortunate reality for this “success” is that it only works in nominal terms. A DOW at 14,296 vs. a DOW at 13,000 only means something if the rise in price occurs against low inflation. If inflation was 10% during the time period that this rise occurred, then you’ve not generated any actual wealth. At best you’ve maintained your purchasing power.
On that note, unfortunately for the Fed, real inflation in the US is nearly 10% today. Indeed, if you look at the economy the primary costs for consumers (food, energy, housing and healthcare) have been increasing dramatically.
FOOD-The severe drought that swept through much of the U.S. last year is continuing into 2013, threatening to cripple economic growth while forcing consumers to pay higher food prices.
"The drought will have a significant impact on prices, especially beef, pork and chicken," said Ernie Gross, an economic professor at Creighton University and who studies farming issues.
"Forecasts are for a four percent (price) increase in food this year, but I think that's on the low side if the drought continues," Gross said. "Food prices will likely be going up much more than the forecast."
ENERGY-After sending consumers into sticker shock the past month, how much more can gasoline prices climb?
Another 20 to 50 cents a gallon — a level that could propel the cost of gasoline, now $3.77 a gallon, to all-time highs, some experts say.
Gasoline prices typically climb from February to Memorial Day on expectations of rising consumption and costlier summer-blend gas. But so far this year, prices are surging sooner and faster than ever before — up 47 cents since mid-January.
Consumers in some metropolitan areas, such as Southern California, are already paying nearly $5.20 a gallon, up more than 75 cents since December lows.
HOUSING-Home prices closed out 2012 with the biggest annual gain in more than six years while sales of new homes spiked in January, the latest sign that the long-suffering housing market was on the mend, data showed on Tuesday.
American consumers, meanwhile, grew more optimistic in February even as payroll taxes rose and about $85 billion worth of government spending cuts were due to take effect on March 1.
"The numbers are all pretty strong. It's a significant rise in confidence and a strong rise in new homes sales -- there is not really much to argue in those numbers," said David Sloan, an economist at 4Cast Ltd in New York.
HEALTHCARE-Rapidly rising health insurance premiums and higher cost-sharing continue to strain the budgets of U.S. working families and employers. Analysis of state trends in private employer-based health insurance from 2003 to 2011 reveals that premiums for family coverage increased 62 percent across states—rising far faster than income for middle- and low-income families.
A secondary issue to the rise in stock pries pertains to dividends. A little known fact is that dividends account for 60% of stocks gains historically… going back to 1900.
U.S. equities returned 6 percent a year on average since 1900, inflation-adjusted data compiled by the London Business School and Credit Suisse Group AG show. Take away dividends and the annual gain drops to 1.7 percent, compared with 2.1 percent for long-term Treasury bonds, according to the data.
Take away dividends, and stocks underperform even Treasuries. And inflation east away at dividends too. If a company pays you $1.00 last year, and then pays you $1.05 this year and inflation is over 5%, you’re not making more money. And if you use this new dividend to buy more overpriced stock which is rallying on the back of a falling Dollar… you’re not getting any richer… at all.
Checkmate, Fed. You’re spending over $100 million per day to create a grand illusion. Stocks are hitting new all time highs, but none of us are any richer for it.
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