The Banana Dow

DOW

Yeah, another RECORD high in the Dow. Can you hear the cheers? But what can the Dow buy you in Bananas vs. the past? What is the real Dow in Bananas1

bananas-vs-dow

Based on the wholesale price of bananas, the Dow currently buys you a whopping 15.35 tons of the tropical fruit. But this is exactly the same amount of bananas the Dow would buy back in February 2008, when the Dow was just 12,266. And it’s a massive 60% drop from June 1999 when the Dow bought 38.51 tons of bananas.  While investors are cheering the new nominal high in the Dow or S&P 500, they fail to grasp what is happening to their purchasing power. Buffett always said THE goal of an investor is to maintain his or her purchasing power. At the end of your investing period will the dollars obtained after selling your investment bring you the same amount of “bananas” as your dollars would have obtained at the beginning of your investment period.

Bear Market Dow in Gasoline

gasoline-vs-dow

Read more: http://www.sovereignman.com/finance/reality-check-the-dow-jones-industrial-average-vs-bananas-11112/

All investors should understand the effects of inflation on their equity investments. Read, memorize, and sleep with the following:

Buffett & Inflation Highlighted and Buffett inflation file and for beginners: Buffett Inflation depreciation and capex

Buffett Lecturing on Inflation

Don’t believe the lies:

shadow-stats-alternative-inflation-data-as-of-nov-15-2012-source-shadowstatscom

CPI Year-to-Year Growth

The CPI-U (consumer price index) is the broadest measure of consumer price inflation for goods and services published by the U.S. Government’s Bureau of Labor Statistics (BLS).

While the headline number usually is the seasonally-adjusted month-to-month change, the formal CPI is reported on a not-seasonally-adjusted basis, with annual inflation measured in terms of year-to-year percent change in the price index.

The chart below shows the Shadow Government Stats -Alternate CPI estimate. It figures inflation based on our own government’s official methodology for computing the CPI-U in the years through 1980.

Under the old rules US inflation has been in the double-digits for much of the preceding five years. The ‘new’ BLS numbers want you to believe price increases since 2008 have been quite mild.

The Bureau of Labor Statistics also uses a technique called ‘substitution’ to hold down their reported inflation figures. If an item in their index goes up in price they can assume consumer would simply trade down to something cheaper instead.

If your favorite rib-eye steak went from $7.99 to $12.99 per pound you’d simply eat hamburger instead. Have those organic bananas gotten too expensive. Try prunes. Need a replacement for your Lexus? Buy a Kia instead. Presto, there’s no inflation evident in any of those situations according to the BLS.

All these changes in the way CPI is calculated have been duly disclosed to the public. That doesn’t make them any less dishonest when viewed the way most people gauge changes in their real cost of living.  See http://www.beatingbuffett.com/?tag=inflation

http://www.beatingbuffett.com/?p=4436   Individual investors making poor decisions.

http://marketshadows.com/2012/12/31/covered-calls-the-hidden-risk-for-2013-and-beyond/ The danger of selling covered calls now.

More discussion about Buffett and inflation here: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/buffett-on-inflation-and-stocks-%28part-1%29/40/

You’re warned! Now plan.

3 responses to “The Banana Dow

  1. John,

    1. In your opinion, how big a risk is hyperinflation if the Fed keeps on with their QE policies? There was supposed to be a deflation to reign in the excesses due to lax lending policies but with the QE, it seems that this artificial bubble is going to just keep expanding non-stop.

    2. Even more importantly, how are you planning to protect yourself from this risk? I’ve read up a bit, but it’s really difficult since everyone has different ideas.

    (a) Property
    Landed properties are a good hedge against hyperinflation but the problem is that too much hot money has flowed to the country (Asia) where I am staying, so the yields are miserly.

    (b) Gold
    Gold seems to be everyone’s favourite, but I’m really skeptical. Firstly, holding physical gold appears risky, (fake golds, getting robbed, not easily divisible). Secondly, the only safe place to keep this stuff is in a safe with the local banks. If hyperinflation and unrest occurs, I’m not too sure how secure the gold in the banks are, either.

    (c) Stocks
    This is a possibility, but since stocks are dependent on management, we need a margin of safety before investing. Unfortunately, the Dow is now at an all time high, so it appears to not be too wise to invest in stocks at the moment….

    ***

    I’m a bit confused, worried and troubled… all at the same time. Any advice would be much appreciated, though I might be asking too much of you…. Apologies in advance.

  2. Well, you should understand hyperinflation–note the books recommended on this site. Hyperinflation is a long shot (extremely rare) because it means a total refusal to use a currency and a resort to barter. There are many steps before hyperinflation. You can have high 10% inflation with the government trying to institute capital controls, price controls which sends production falling. The US government provides indexed entitlements so unless that is changed, hyperinflation won’t help. High inflation–when ended–immediately brings price declines.

    I don’t think there will be hyperinflation but rising inflation with rising interest rates.

    I think one must use common sense. First invest in yourself so you have skill that can be applied to increase your income, buy companies that are more like inflation pass throughs but don’t over pay, diversify including jurisdictions. Singapore and New Zealand may be places to stash cash in bonds, an apartment or some gold coins. I always keep guns, money and lawyers nearby 🙂

    I am not a gold bug, gold just represents a store of value/medium of exchange that can’t be depreciated easily. An oz of gold bought you a man’s suit 100 years ago and ditto for today (A good suit). Negative real interest rates mean gold will not drop much.

    If you were stripped of all your rights within 24 hours, would you have some fail safe plan. But don’t live in a cave, not all is bad. Look at the shale gas revolution in the US and improvements in some technologoes.

    This may be a subject for an indepth post.

    Thanks for the question.

  3. Thanks for sharing your opinion,

    John. Yeah, I just bought a few books on hyperinflation as recommended, but it takes time to digest and didn’t want to get blindsided if it suddenly happened. From the very brief perusal of what happened in the Weimar Republic, it seemed that hyperinflation happened in a dribs and drabs before the final and sudden collapse. So, guess there would be clear warning signs if it’s relevant today too.

    You’re right on applying common sense but nowadays, with too much information overload, it’s easy to get sidetracked and misinformed. So, an honest and unbiased answer is always much appreciated.

    Looking forward to your in-depth post to my question of these days. Thanks 🙂

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