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Is the Stock Market Rising?

May 30, 2007

Tags Financial MarketsPrices

I rather like this chart from the New York Times showing the value of the S&P 500 Index in the dollar, three foreign currencies, gold, houses, oil and corn. While the index shows appreciation in currency values, it has been meandering sideways or even lagging when measured in terms of the physical assets. Two important points that these graphs make very nicely is that what matters is relative prices, not nominal prices, and that relative prices change all the time.

Oil, corn, and houses are a reasonably good proxy for the things that people need to buy in order to keep their life going - food, energy, and housing. If the price of your assets is increasing more slowly than the price of goods that you buy, then you are losing purchasing power over time.

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