Nominal vs. Real Stock Prices

A friend sent us the chart reproduced below yesterday. It shows one of the best performing stock indexes, the Russell 2000 small cap index, with the same index divided by the price of gold depicted below.




The RUT in dollar terms versus the RUT in gold terms – click chart for better resolution.



As you can see from this chart, the entire cyclical bull market from the 2009 low is a result of monetary inflation, this is to say the debasement of the currency the RUT is priced in.

When priced in real money (gold), the bear market in stocks never ended – in fact, new bear market lows below the 2009 low were achieved in August/September of 2011.

In other words, even though it appears on the surface as though stockholders were 'winning' since the 2009 low, they have really not gained any ground at all – it is all an illusion created by money printing.

Keep in mind that the US broad true money supply TMS-2 has increased by nearly 75% between the beginning of 2008 to the beginning of 2012. Considering this enormous pace of monetary inflation, it is no wonder that nominal stock prices have increased a lot since early 2009.

There is a certain danger that nominal stock prices will attempt to follow real prices at some point in the future. We are saying this because in the beginning stages of the great bull market of 1982-2000, real stock prices rose well ahead of nominal ones.

Of course the Bernanke Fed is committed to not letting that happen. It will undoubtedly print more money as soon as nominal stock prices head down in earnest. Alas, it is not inconceivable that the effect of such money printing will bypass the stock market at some point in the future. There is no ironclad law that says that investors must bid up stocks if free liquidity in the economy increases. If the pool of real funding is in trouble, they may well decide that they would rather own bonds and gold, in order to preserve capital until the economy's maladjusted capital structure has righted itself.

Note that this has happened before – when free liquidity shot up due to heavy monetary pumping in the latter half of 1930, stock prices headed down anyway.

Caveat emptor. 



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5 Responses to “Is There A Bull Market in Stocks?”

  • Andyc:


    “Being that we are in a system of default and insolvency……”


    To me the entire markets worldwide boils down to what Mann is saying and this…..

    Do they pay on CDS or dont they?

    Cause if they do, banks worldwide are going down quicker than….insert dirty joke here.

    Then comes credit seizure and frantic sales of all assets……

    Economic indicators, corporate earnings…..its all meaningless until these phoney baloney markets are resolved once and for all.

    Think of just the CDS market, 100 billion in 1995 to 57 trillion at the top and ALL of it apparently bullshit with no economic value whatsoever…what a scam!!….and these characters made a fortune skimming from it.

    The greatest self dealing scandal in world history, with the citizens in the widow role and the bankers in the role of the broker that fleeces them churning phoney baloney transactions for commissions…..after all, they could not lever the entire worlds GDP 10, 20 times or God knows how many times over (they dont even know) without government money could they?…..OUR MONEY COLLECTIVELY

    I pity the serious and honest money manager that wants to do well for himself and his clients……what is there to invest in that anyone responsible could think of with this weighing over the worlds markets?…..shovels and Gold? bullets? James bond type lairs, caves to hide in?

    Then again…stentorian tones here…”no crimes were committed”

    Yea right!

    End rant


    • Andyc:

      as a ps

      You gotta wonder whats going on in the interest rate swaps market

      This is a market I have no understanding of but that’s only because these markets are DESIGNED that way…total opacity by design…but I have read that in many previous cases IRS turned out to be nothing more than fantastically leveraged one way directional bets on interest rate moves…if so?….who just got clobbered?

      Fantastically violent interest rate moves worldwide but no problemo?

      I think not, Im thinking mucho problemo.

      See what I’m saying?

      I wonder if the IRS market is the elephant in the room… wait…..herd of dinosaurs in the room…better

  • Pater,

    Any chance of you sharing your thoughts on the period 1933 – 1943 in Germany and how hitler financed their rearmament and industrialization and the role of MEFO bills and how they worked?

  • Being that we are in a system of default and insolvency, the money printing is only akin to some idiot thinking they still have money in an overdrawn account because there are still checks in their checkbook. I doubt Bernanke could pass a polygraph stating what he states publicly.

    I am a Prechter subscriber. His most recent EWT goes into this question, as the nominal wave isn’t working. Every one of these rallies have been preceded by some form of massive central bank intervention. The backlash of this intervention is the impetus is still someone’s debt. The next downturn is going to be worse.

  • juergenwahl:

    Compared to gold, the US stock market has been in the doldrums since 2001. (From 1995 through 2000, stocks had handily outperformed gold.) What I fear now is that the gold rally which began in 2Q 2001 is somewhat long of tooth and approaching a bubble-like state. Bubbles are characterised by an ineluctable increase in asset price; herd behaviour where every long seems to be a winner; and analyst reports tend to be overwhelmingly positive – conditions which are apparent in today’s gold market.

    I have spent too many years in this business to believe that obvious trends will continue forever and that gold will ultimately rise beyond the orbit of Jupiter. Also, too much politics is involved in the workings of the gold market. Remember that the entire stock of gold held by US private hands was confiscated by F. D. Roosevelt via Executive Order 6102 on 3 April 1933. In countries experiencing hyperinflation, gold hoarders either had their gold confiscated, were demonised, arrested, or even murdered. With the present day, bully-boy tactics being applied by the governments, worldwide, should a financial crisis materialise, I do not feel that the future outcome for gold holders would differ much from the past atrocities.

    The above said, as a disclosure, I first purchased gold shares in 4Q 2005, sold out in 2Q 2008, got back in in 4Q 2008, out again in 3Q 2011 during gold’s parabolic rise, and back in once again in January 2012. While I am currently long gold shares, I am very cautious about becoming a lemming and suffering the same fate as this hapless breed. I feel that we are in the early years of a decade-long deflationary period where gold will fail to perform as well as in the past.

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