Saturday, July 12, 2008

Not Too Big to Fail: Tracking a Decade of Negative Stock Market Returns

I recently pointed out how the Dow Jones Industrial Average ($DJI) is down about 23% over the last decade on a real (inflation-adjusted) basis.

Here we see the Dow adjusted for changes in the value of the dollar via the U.S. Dollar Index. While the nominal Dow is only down a few percent over the last decade, on a constant dollar basis, the Dow is down about 13%. While the pundits quibble over whether or not we're in a bear market based upon the criterion of a 20% decline, it's clear that--on a dollar-adjusted basis--we are down closer to 30% just in the last year. Indeed, we're not so far from testing the dollar-adjusted lows of 1998 and 2003.

We hear about bailouts of financial institutions and how taxpayers will have to "bear the burden". One burden borne by taxpayers is created when an economy laden with debt papers it over with a weak currency. That creates an implicit tax on everything from food to gasoline. It also weighs on the real returns of financial assets.

Over the past decade, the U.S. dollar index has moved from a bit over 100 to about 72. The flip side of being too big to fail is being too small to bail. So far, there's no bailout in sight for the individual investor/consumer.