So, the markets are in a raging bull mode, and stories abound of +10% profits for this early into 2006. Time to put things into some perspective.

US$ purchasing power, as measured against a basket of commodities:

since Jan 1st 2006: [color=red:e5480b027a]-11.5%[/color] (!)
since Jan 1st 2000: [color=red:e5480b027a]-49.2%[/color]
annualized: [color=red:e5480b027a]-7.9%pa[/color]


From MetaStockTools.com:

The US dollar is universally considered an absolute yardstick - most of the world's wealth is measured against it.

Yet, the mighty US$ is a fiat currency, a paper-based measurement of wealth with nothing but good faith to back its perceived value. The US$ is only worth as much as any other promissory note, and its worth is being continually diluted and devalued as the US Federal Reserve Bank continues to print more notes at an alarmingly accelerating pace.

The true value of the US$ cannot be measured against other currencies, as these are also likely to originate from overworked government printing presses. A true and objective measurement of the US$'s real value would be its purchasing power at any given time.

The US$ value index above is basically a measurement of the greenback's (decreasing) purchasing power. The index measure the US$'s rate of change (RoC) against a small but essential basket of commodities:

Gold: putting aside temporary fluctuations, it is as close to an absolute and constant measurement of wealth as can be found. An ounce of gold took as many working hours to purchase 80 years ago, as it does today with an average wage.

Oil: currently a most essential source of energy - civilization as we know it would cease to exist without it.

Wheat: one of the major sources of food for an increasingly hungry world.

US$ value index: (RoC(US$/Gold)+RoC(US$/Oil)+RoC(US$/Wheat))/3



So, what does the US$ value index mean in real terms?

• Since the start of year 2000, the US$'s purchasing power has halved.
$1,000 saved in Jan 2000, now buys around $500 worth of goods.

• US's real inflation is being massively under-reported, and in reality is closer to 8%pa.

• The US stock market's true worth is much lower than generally perceived by the public.

The bottom line is that storing one's wealth in US$ (or any other paper currency) is a recipe for diminishing returns.

Keep an eye on the US$ value index, for a true measure of the world's default currency and all that is measured against it.


jose '-)

Interesting.... as always.

Maybe I should be studying to become a barista instead of nerd!

Here's an excellent example of USD-based capital "churning" producing imaginary value:
Since 1st Nov 05, the Dow has gained almost 11% in US$ terms.

However, since the USD has also dropped more than 20% in purchasing power, the result is that the Dow has actually gone backwards by almost [color=red:bdafd46092]10%[/color] during the same short period.



Click on chart to expand.


jose '-)

For the RoC plot, I use a variation of the Yearly RoC indicator from MetaStockTools.com.

For the US$ value index, I use a similar process involving the three major commodities.

And for the "Dow in real terms" indicator, it's simply the addition of the above two RoC indicators' %.


jose '-)

For the US$ value index, are you substituting the data array variable "X:=C" with a composite of the commodoties? If so, how are you doing it? (I've never done that before).

I've tried using the USD Index (.DXY), but it's not the same. Your graphs appear more sensitive.

That is what I was looking for. Thanks. Has anyone told you recently that you rock?! :rockin:

Just as an aside, aren't "the three" commodities subject to change as indicators over the years? I mean, we won't be gauging the economy on oil forever...

When can I add pork bellies to the list? :hayseed: