The Long Decline in Equities

Megan McArdle ridicules an analysis that looks at stock market returns adjusted for the dollar’s value (based on a basket of currencies).

Short story, by that measure investors have been big losers (chart) over the last seven years. The author uses it to bash Bush’s "ownership society."

Megan, who seems to be responding more to the Bush-bashing than to the analysis, thinks it’s "silliness." Which seems really silly.

First, let’s forget about whether any of this is "Bush’s fault." I have no doubt that everything that’s not to my liking these days–notably the outrageous bill I got last week from my dog’s vet–is his fault. Bastard.

But putting that well-founded certainty aside, does Megan’s critique really make sense? Nobody seems to be addressing that in the comments to her post. Does the dollar’s decline mean that equity investors are worse off?

Heck yes. (Or as my fourteen-year-old would say, "no duh.") Megan’s arguments only say that "it’s not that bad." Her ridicule of the currency-adjusted analysis isn’t justified.

She points out that:

most US imports are from "places like Mexico and China [not sure what ‘places like M and C’ means], whose currencies haven’t really altered much against ours. (To be fair, a lot of it is also with Canada and Japan, that have seen higher currency appreciation)."

Okay, maybe the currency basket being used for the calc should be imports-weighted. But the larger point remains.


"many of those places have dropped the prices of their goods and taken lower profits rather than lose sales volume."

First, note the use of "many." Which means some or many have not, will not.

And Megan knows that this is temporary stuff. In the long run the market will balance this out, and imported goods will be (even) more expensive. Wal-Mart’s got leverage, but not infinite, market-defying leverage.

So if:

1. All my wealth and income is from the market,

2. I’ve had a real (inflation-adjusted) return of zero percent since 2001 (not counting dividends, which are running what, two percent these days?), and

3. A large proportion of goods I buy are, have been, and will be more expensive (increasingly, as the lagging currency effect gets more market teeth),

I’m certainly worse off now than I was then.

And yes, it’s all George Bush’s fault!

Seriously, Megan: don’t diss the analysis (refine it instead) just because you don’t like the post-hoc conclusion.