I am indebted to some very sharp Swiss money managers at BFI Capital for the information for this post. People in general just do not understand the difference between nominal dollars, real dollars, inflation adjusted dollars, etc.

These people started me into currency diversification back in the mid 1990’s. (If you have serious net worth you would like to protect and want me to get you in touch with these financial geniuses, contact me here.)

In point of fact, saying that the Dow Jones Industrial Average (DJIA) at 10,000 in October of 2009 is down 25% from the DJIA of 10,000 in 1999 is partially incorrect in that I do not think it completely adjusts for inflation. But let’s ignore that for now at look at this material and the graphs from DecisionPoint.com:

We might easily understand and accept the new-found euphoria in financial markets when we look at the following chart of the Dow Jones over the past year.

As we can see in this chart, the Dow has gone from of its low of 6500 to its current level of approximately 9800. That presents a substantial increase of almost 51%! A very nice gain indeed for those invested in the Dow over this period. And, from a technical viewpoint, in this chart, one could argue that a trend is forming which may take us even higher. Will the magical 10000 be conquered and left behind in the dust of optimism? Well, based on the above chart, from this perspective, that is reasonably possible.

What did it take?

Now the more skeptical observers amongst us, certainly a Mountaineer, may air a few words of caution. For instance, they might ask: “What has it cost to get this 51% up move.”

The following chart provides a glimpse of the answer. Courtesy of the St. Louis Federal Reserve, it depicts the development of the monetary base of America from 1997 to today. Similar charts are available for other countries, with countries like Japan — a long-time contender in this loose-money-high-debt competition, Spain, Italy or the UK fully engaged in the game.

Worldwide huge amounts have been spent by governments. The U.S. just announced another record deficit of US$ 1.4 TRILLION for the past fiscal year. It is noteworthy that the second highest U.S. deficit ever (last year´s) stands at US$ 459 BILLION.

Minus 54 Plus 51 Equals Minus 31

No, my math is not off. Admittedly, I am not a mathematician. But, I can say for myself that I can handle additions and subtractions quite well, at least with a calculator at hand. The above calculation is the result of once again simply adjusting our perspective, changing our point of reference.

The following chart depicts the Dow Jones since 1987. As one can easily see, we are still quite far away from the highs of the Dow at over 14000 in October of 2007. After losing roughly 54 percent since then, the index has climbed back up to 9800, the aforementioned 51% gain. So, after this 51% up move, another 67% from the bottom will be required to get back to 14000. Simple math, and yet very different conclusions based merely on different points of reference.

Plus 51 Equals Plus 36

More number games. The following chart depicts the US Dollar Index since 1987.

The aforementioned 51% gain in U.S. stock markets occurred in sync with a negative move in the US Dollar Index of approximately 15%. Thus, in real US dollar terms, the Dow Jones only gained some 36% from its March lows.

This is so much fun; let´s take this a little further still. Since the 2002 US Dollar Index high of 120, the Greenback has depreciated by about 37% relative to other international currencies. During the same time period, the Dow has done nothing. Back then it stood at 10000. Today, it is a bit lower. In real dollar terms, the Dow has LOST 37% since 2002. In fact, today´s level is the same as back in the first quarter of 1999. In real dollar terms, since 1999, the Dow is down 25%.

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Wild, isn’t it? So does that make you look at your paycheck any differently? After all, you have been getting those 2 – 3% cost of living adjustments all along, haven’t you?

One of the best investment newsletters I have found that keeps you well enough informed such that the above information would not only not be a surprise to you, but that you could have been profiting these past 10 years instead of losing 25% of your capital, in real terms, is the Casey Report.

The Casey Report is so cheap, and comes with a satisfaction guarantee, that I think subscribing is a no brainer.