Rising Markets Could LOSE You Money

The Perils of Hidden Losses [The Daily Reckoning] September 25, 2024 [WEBSITE]( | [UNSUBSCRIBE]( Rising Markets Could LOSE You Money Portsmouth, New Hampshire [Jim Rickards] JIM RICKARDS Dear Reader, The stock market has rallied since last week’s 50-basis-point rate cut by the Fed. I think the Fed’s major rate cut indicates a poor economic forecast, but the market has predictably taken it as good news. Today, I want to show you why you should be cautious, and how you can lose money in stocks even if their nominal value increases. The fact is you can be long stocks in a rising stock market and still lose enormous wealth in real terms. How is this possible? The answer is that your stocks are denominated in dollars — and the dollar itself can lose value even as the dollar value of stocks is going up. The easiest way for the dollar to lose value is inflation (purchasing power), but there are other ways including the dollar value of gold (the best form of money) and foreign exchange markets. This type of loss sneaks up on investors because they see major stock indexes going up 10% or 20% without realizing the dollar itself might be crashing by 50% or more. Hidden Losses The most famous example of this is the behavior of the U.S. stock market from 1969–1982. The Dow first hit 1,000 in 1969. Thereafter, it suffered in the recessions of 1969, 1974, 1980 and 1981 with rallies in between those recessions. In effect, the index moved sideways with some volatility. The index didn’t hit 1,000 again until 1982. That’s a 13-year stretch with no gain. If you held the index in 1969, it took you 13 years to recover losses and just stay even. But the reality was much worse than that. Inflation grew steadily beginning around 1967 as a result of the “guns and butter” government spending of the Johnson administration. Then, between 1977–1981, the U.S. dollar lost 50% of its value measured in terms of purchasing power. Between 1971 and 1980, the U.S. dollar lost 94% of its value measured by the weight of gold. When the Dow Jones reached 1,000 again in 1982, that measure in stocks was worth less than half the value of 1,000 in 1969. An investor could tell herself, “Hey, I finally made my money back,” but that wasn’t true. More than half the value was gone even though the index said it was even. [Download This New Survival Guide Today!]( This short 54-page “Crisis Survival Guide” has everything you need to know to protect yourself and your family in times of crisis. Things like what foods to stock up on now, staying safe during periods of rioting and looting and more. [Click Here To Download Your Copy]( The valuation story gets even more complicated when you consider different ways of measuring the value of the dollar. Whenever I’m asked about a decline in the value of the dollar, my reply is: compared to what? It’s entirely possible for a currency such as the dollar to decline relative to certain measures or indexes (as shown above) even as it increases in other indexes at the same time. This is common in foreign exchange markets where the dollar can gain against Japanese yen (JPY) while simultaneously falling against the euro (EUR). Dollar Strength Is Key In broad terms, there are three ways to measure dollar strength or weakness: purchasing power, gold or exchange rates. Purchasing power is typically measured as inflation or deflation. I expect a period of disinflation (inflation, but at a slower rate) for the next year, possibly tipping into deflation (lower prices) by late 2025. So by that measure the dollar will remain fairly constant and maybe strengthen a bit. (I also expect gold prices to rise substantially over the next five years.) Using dollar indexes (based on cross rates) and the main cross rate (EUR/USD), I expect the dollar to weaken somewhat as alternative payment channels (primarily a new BRICS currency) arrive on the scene. However, this decline won’t be as dramatic as the dollar’s decline against gold because all the major currencies will be declining against gold (and a BRICS currency) at the same time. In this world, the dollar could gain against the euro, the pound, the yuan and yen even as it declines against the franc and the ruble. Taking these three metrics (inflation, gold and foreign exchange), the biggest drop will be against gold. Therefore, the best hedge against lost wealth through a dollar decline is to buy gold. Still, there are two value change vectors investors need to take into account. The first is inflation as discussed. The other is deflation. That’s where the value of money actually goes up, but asset values drop even faster, as was seen during the Great Depression (1929–1940). Lies, Damned Lies and Statistics My forecast of a coming recession has not changed. We may be in one already. It’s happening about as expected (maybe taking a bit longer to emerge) in line with the data. The Atlanta Fed GDPNow tracker estimates that Q3 GDP will grow about 2.9% on an annualized basis. That could change between now and Sept. 30 when the quarter ends (and we won’t have the official number for Q3 until late October). That measure itself does not meet the common definition of “recession” (two consecutive quarters of declining GDP). [Man Who Predicted Biden's Drop Out In October Issues Shocking New Election Prediction]( [Click here for more...]( After calling Biden's withdraw, former White House advisor Jim Rickards issues an even more shpcking election warning... [Watch This Video To Learn More]( But we’re seeing unusual behavior in certain time series. GDP is supposed to be a near-mirror image of GDI (gross domestic income), but there’s been a wide divergence in recent quarters. GDI is growing much more slowly and may soon be declining slightly. In the past, when GDP and GDI diverge, GDI tends to be more accurate and GDP plunges quickly to re-converge with GDI. The same divergence appears in two employment reports based on an employer survey and a household survey. They should be about the same, but the employer survey has held up well while the household survey has recently been declining. Again, the household survey is the more accurate of the two when the measures diverge. This means the employer survey (that’s the one that gets all the headlines) may be set to fall and move in line with the household survey. That process may have started already based on the latest employment report released on Sept. 6 in which the employer and household data were roughly the same, but both were disappointing. 86,000 Fewer Jobs Than Originally Reported Meanwhile, the latest employment report released by the Bureau of Labor Statistics was disappointing. Only 142,000 new jobs were created last month, which represents a significant decline from the level of job growth reported just a few months ago. More troubling were the downward revisions for June and July, which erased 86,000 jobs previously reported. This shows that the weakness in the labor force actually began several months ago. More than 100% of new jobs were part-time (when full-time jobs are netted against part-time jobs). The jobs created also went overwhelmingly to non-native-born Americans including illegal immigrants who tend to be among the lowest-paid workers and do the least to stimulate consumption. The bottom line is that reliable data indicates a recession while “headline” data says all is well. This means that when the headline data converges, the correction could be swift and brutal and catch investors off-guard. A nasty stock market correction (20–30% or more in one or two months) would be the last shoe to drop. Real stock values are driven by factors that are much larger than stock fundamentals and interest rates. They’re driven by inflation, deflation, currency fluctuations and business cycles. Investors need to be aware of these cross-currents in setting their portfolio allocations. Simply cheering on higher index levels isn’t enough. Gold is often a good hedge in such scenarios, but don’t ignore Treasury notes. Regards, Jim Rickards for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) P.S. This election season could see all kinds of mayhem. If Trump’s enemies succeed in their fanatical attempts to derail him, Trump supporters will be livid. If Trump actually wins the election, expect Antifa to take to the streets. In many ways, the U.S. is a tinderbox ready to erupt. [But it’s not just limited to the election.]( It also involves [the dollar itself.]( That’s why you should brace yourself for the biggest wave of civil unrest in your lifetime. [And you need to learn how to defend yourself if events unfold as I fear they may.]( That’s why I’ve created an urgent [“Crisis Survival Guide”]( that I’m making available to all of my readers. This [short 54-page document]( has everything you need to know to protect yourself and your family in times of crisis. Things like what foods to stock up on now, staying safe during periods of rioting and looting and much, much more. [Click here now to learn how to get your hands on it.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Jim Rickards] [James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. [Paradigm]( ☰ ⊗ [UPDATE PREFERENCES]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your The Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [click here,]( or manage your newsletter preferences [here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. 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