Let's Check in with the Dow!

This is not a blog about Eastern Mysticism or I would simply ask, "What is the Dao?" When I ask about the Dow, you know that I'm into something equally mysterious yet less, how shall we say, spiritually rejuvenating.

I generally start the day, now with sunrise so eerily early with Daylight Saving, by turning on CNBC about the time of the opening bell on Wall Street. 6:30 am PDT. And there she is, Erin Burnett, with that perky, Katie Holmes-like crooked grin and luxuriant dark hair, next to the old puffy guy with the comb-over and sour disposition. Mark, I think his name is. Quite a couple. Erin is the real star, of course, because what these cable channels are selling now are pretty young women. The information is useless because the market is stagnant and the only people making money are the players, the short-sellers, the commodities manipulators, the arbitrage wizards.

The Dow is hovering around 12,000 now. This is a new "psychological resistance point." It dips a little below 12K once in a while, but it's almost too embarrassing for it to remain there. You see, when Bill Clinton was president, the Dow achieved an all-time high of 11,500. Bill inherited a Dow of 3,500 and proceeded to more than triple it. Ah, those were the days! I wish the Dow would simply revert to 11,500, instead of levitating 500 meaningless points above it, in order to simplify the math which follows, but there's that psychological resistance point...Bill's zenith was achieved in December 1999, more than eight years ago. In the 8.5 years since, the Dow has "gained" about 500 points. So you see the difficulties I face now. If the Dow were simply flat, I could use some reasonable discount rate for inflation and tell you how much poorer we are (measured by the Dow) today versus December 1999. Now I have to figure out...hell, do I even want to do this?

Okay. George W. Bush is too intellectually lazy to do this kind of number crunching, but someone has to carry on the great American tradition of scholastic rigor. Why not me? Let's first figure out the percentage increase by calculating the ratio of 500 to 11,500. So: 500/11,500 = 4%. (Notice that I show my work. Would W do that?) Let's divide 4 by 8.5, = .47%. So the yearly average of increase is less than 1/2 of one percent. It feels like that out there, doesn't it? I thought W was the CEO President? Oh that's right. He's being a CEO as he was always a CEO.

Now that we've got some basic numbers, we really should adjust them to reflect inflation. We can't accept flat numbers. Just for the hell of it, and to give the Bush Administration a break, and since it doesn't really matter because these numbers suck no matter how you look at them, let's use 2% per year, something like the CPI number, a contrived statistic to keep Social Security recipients on the verge of starvation, while we carry on the real business of government, wars of foreign conquest. So we have to discount the Dow by 17%. Here we go, W, follow along now! 12,000 x .83 = 9,960. That's pretty generous too, since it incorporates Alan (Let Them Eat Cat Food) Greenspan's "substitution" principle for inflation. So the Dow has lost about 13% over the last 8.5 years.

To have more fun with this number, however, let's consider an alternative way of looking at the Dow. Suppose we hypothesize a German investor who decided to invest euros in the American stock market in December 1999. Let's call him Klaus Fuchs, because he's going to get fuched at the end of this. (I apologize to anyone who finds him/herself on this site because you Googled "atomic espionage," but to make it up to you, I'll throw in a fun fact at the end about Klaus.) Klaus is tired of German investments and German life generally, with its universal health care, 8-week vacations, superb beer, great cars, smooth roads, clean bullet trains and the rest of that tedium and wants some real action, the kind you find in America. I realize that in December 1999 the euro was sort of a notional currency and didn't become paper currency for a couple of years, but the principle is sound nonetheless.

At the point of his investment (let's say Klaus puts in 100,000 euros) the dollar and euro are at rough parity. Klaus buys into a Dow Index Fund to track the overall market. The market is at 11,700 when he puts his money down. 8.5 years later, wie geht es ihnen, Klaus? Schade, nicht so gut.

Nicht so gut at all. Klaus' investment was denominated in dollars, of course, just as the vast majority of Dick Cheney's investments are denominated in currencies other than the dollar (don't you wish you were an insider?). The first of many haircuts which Klaus must endure is that his dollars are now worth 64% of the original euros, leaving him with $64,000. Which we now must reduce by 13%, the real loss over that 8.5 year period, leaving him with $64,000 x .87 = $55,860 in constant dollars. Ach du Lieber. With what Klaus lost, he could have bought a new 530i.

This may suggest why the United States may have increasing difficulty convincing foreign governments to balance our budget for us in the immediate future. It is also an object lesson in another uncomfortable fact: the U.S. economy is moribund, the banks are broke and Americans are having an extremely difficult time affording not just the cost of living, but something more basic - living.

Oh, when Richard Feynman's wife was sick during World War II, he had to leave Los Alamos to visit her in a nearby hospital. He didn't have a car of his own, so he borrowed one. It belonged to Klaus Fuchs. Professor Feynman had no idea Klaus was a spy.