The Dow’s Purchasing Power Is Declining

CHISWICK, WEST LONDON – The Dow Jones Industrial Average peaked at 980 in January 1966.

By August 1982… 16 years later… it was at 777… a real loss of 72%…

Wait a second, Tom. Your math is wrong. From 980 to 777 is a fall of only 21%. Why are you claiming the Dow fell 72% from ’66 to ’82?

After-School Activities

Greetings from West London…

For the past three years, we’ve been a traveling family. Two weeks ago, we had an epiphany… that we should settle down in Chiswick for a while. So far, so good. We love it here. And we’re having a great time.

The kids do their homeschool. And I study economics. Then, in our spare time, we’re signing the kids up for after-school classes. Penny has been doing gymnastics. And this week, she’s attending a dance and drama school.

The boys have been playing cricket. Dusty represented Chiswick Cricket Club “Under 13s” against Acton last week. (Chiswick lost, and Dusty was out for zero runs.)

And this week, they are learning to row on the River Thames.

Here’s Dusty (13) rowing past Richmond-on-Thames…

The Fall of the Dow

Meanwhile, back to the Dow…

The basket of goods and services they use to calculate the consumer price inflation (CPI) cost 32 cents in January 1966. In August 1982, that same basket of goods and services cost 98 cents… which means the dollar lost 67% of its purchasing power over the years 1966 to 1982.

When you combine the 21% loss in the Dow over the period – with the dollar’s 67% loss in purchasing power – investors in the Dow ended up losing 74% of their purchasing power between 1966 and 1982.

Here’s another example…

The gold price hit $850 an ounce in January 1980. Today, it’s at $1,900 an ounce… an apparent gain of 124%. But the CPI index was at 78 in January 1980. Today, it is 267, which means the dollar has lost 71% of its purchasing power since January 1980.

In other words, the gold investor appears to have made a return of 124% with the currency, but the gold investor actually lost 35% of his or her purchasing power by holding gold over the last 40 years.

The point I’m making is this: When looking at investment returns as a long-term investor, it’s absolutely essential to look at returns in terms of purchasing power, not the currency, if you want to see the real return on your wealth over time.

This brings me to our Dow-to-Gold ratio bet.

(As a reminder, my wife, Kate, and I have gone all-in with our life savings on a bet that the Dow-to-Gold ratio is going to fall from its current level of 18.)

Another way of looking at this is that it is a bet on a decline in the stock market, measured against inflation instead of U.S. dollars (where gold, in this bet, is the proxy for inflation).

In Terms of Gold

Is it wise to bet on a decline in the stock market in gold terms?

To win this bet, we need one of two things to happen… Either the stock market must decline (as it did in March 2020) or gold must rise, or both.

I’ll let you know in 10 years how we get on. But here’s how I see it. Stocks are near their most overvalued levels in history, in terms of traditional valuation metrics, like earnings (which are themselves inflated) and sales. They’re at the end of a 40-year bull market.

Gold hasn’t even kept up with the CPI over the last 40 years. It’s very cheap.

Second, the Federal Reserve has created a binary situation where there’s either going to be runaway inflation or a crushing deflation. There is no muddling through at 2% inflation and consistent 3% GDP growth anymore.

Runaway inflation should propel gold higher and hurt stocks. We should win. A negative inflation rate (deflation) will hurt stocks and should not affect gold (as in 2020).

We should win again. If my thesis is right, it’s like heads we win, tails we win… and the only way we lose is if the coin lands on its edge.

Here’s the bottom line: When analyzing investment returns, it’s essential to consider returns against purchasing power, not the currency. That’s what our Dow-to-Gold bet is… a bet against the stock market in terms of purchasing power.

I think the Dow’s return in purchasing power terms is likely to decline over the next 10 years, whether we get inflation or deflation. I’m so confident in this, I’ve staked my family’s savings on it… Watch this video to learn more.

– Tom Dyson

P.S. While there are no tourists in London, and all the local kids are at school, we’re taking advantage of the fact the museums and tourist attractions in London are all empty.

Here we are at the Tower of London yesterday, meeting one of the ravens that live here. The Tower of London is normally the busiest tourist attraction in the nation. Yesterday, it was empty…

Like what you’re reading? Send your thoughts to [email protected].

Last week, Tom was worried his choice to purchase his late mother’s London home was a hasty decision. Readers chime in on that…

Reader comment: Only you can ultimately decide what is best for you and your family, but it does appear that you are making a quick decision based on emotional tugs that you feel in being in your mother’s house. The concerning thing to me is that you are changing course of your very thought-out course of action based on emotion.

Reader comment: I’ve been enjoying your Postcards since you were in China. My idea regarding your mum’s house is to take out a mortgage large enough to buy your brother out. Then, only sell enough gold to make the monthly payments if your other income is not enough.

When you get the urge to travel, you might find a reliable person to rent the house at a very low rent in exchange for hosting the home as a B&B. This could generate good income while you’re away, to cover the mortgage payments until you are firmly decided on whether to keep the home permanently (or sell it). Just a thought. Please keep writing!

Reader comment: For what it’s worth, I don’t think you are making a hasty decision about your mum’s house and its contents. Once you own them, you have the rest of your life to decide what to do with them. Were you to sell them now, they would be irreversibly gone from your life forever. That, in my humble opinion, would be a hasty decision…

Tom’s note: Thanks for sharing your thoughts with us. We read every message you send in. Please keep your comments and questions coming at [email protected], and I’ll do my best to answer them in a future Friday mailbag edition.