Friday, July 21, 2006

Wow, FOREIGN xenophobic bears

See, I keep telling the perpetual bears (there is nothing wrong with being a bear some of the time) that the trade deficit equals the capital surplus. (via Marginal Revolution)

UPDATE: Another common bear argument made in the Pit is that the USD has lost 95% of its value since 1913. That is absolutely correct. If you held $1 from 1913, it would only be worth 5 cents today. But let's say you held $1 of DOW and reinvested dividends. You would have take out average annual inflation of 3.5% as well, but that would be more than offset by the average dividend yield (about 4%) over the last 90 years. Adding in the capital gains, you would have $100 today, which would have been worth $2000 back in 1913.

And if you were short $1 of DOW back in 1913 and you still haven't covered, then you would owe $2000 in 1913 dollars.

In sum:

Long $1,000 USD in 1913 ==> up $50 today
Long $1,000 DOW in 1913 ==> up $100,000 today, after inflation
Short $1,000 DOW in 1913 ==> you owe $100,000 today, after inflation, or $2 million in 1913 dollars

Data sources: Bureau of Labor Stats for CPI; Dow history here.

No comments:

Post a Comment