The view from Europe: Why all the fuss in the States over DOW 10,000? - Joost de Jong

[FRED]

The view from Europe: Why all the fuss in the States over DOW 10,000?

by Joost de Jong

As a European investor, the DJIA has lost 44% over the past ten years, and that's not the worst of it.

It was hard to miss the DJIA returning to the glorious level of 10,000 first achieved more than ten years ago, in March 1999. Recently various stock market pundits came together to celebrate the regaining of that level with a flood of uninformed cheer the airwaves and cable channels. Refrains of "Happy Times Are Again!" and other such show tunes inspired Wall Street euphoria came back into fashion.

We’re back, baby! Time to pay bonuses! In Goldman we trust!

From our European vantage point, things look a little different. The uncomfortable reality is that a sober assessment of that narrow index of U.S. stocks reveals the full extent of damage that the U.S. economy has endured over the period. For no, the market is not back. The overall capital position of American enterprise within the worldwide exchanges has deteriorated significantly.

Say that a European invested $1,000 into a DOW index fund when it crossed the 10,000 level on March 29th, 1999. It would have cost the investor 935 euros at that time, apply that day’s exchange rate of 1.07 dollars to the euro.

Fast-forward 10 years. In the middle of the fall of 2009, and after the worst financial collapse in 70 years, the DOW has clawed its way back up to 10,000. The dollar has had a major slide, meanwhile, and that $1,000 investment is only worth 671 euros, a drop of 28%

Add 10 years of Euro-zone inflation, a factor of 78%, and those 671 euros is only worth 520 euros on a 1999 basis. The total percentage loss over this time period to the European investor comes to 44% over 10 years to the European investor. It also means a 44% reduction in the ability of U.S. enterprise to invest and apply its capital resources on the world market. It means a significantly weakened business environment for the U.S.

Just think of those who invested in 2002, when the U.S. Dollar was riding high at 89c to the euro, and the DOW passed 11,000. Those poor European investors can add another 20 points or so to the staggering decline in stock market value that they experienced already.

Is the US economy “back”? Sorry, but no it is not. Not by a long shot. The uncomfortable truth is that the heft of U.S. capital on the world stage has been reduced by almost half in a single decade. Now the U.S. will have to fulfill its extensive international political, military, and financial commitments with only half its former capital power base, or reduce its commitments. Which do you believe is more likely to happen?

Joost de Jong is an economist and friend of iTulip who occasionally writes from Spain.

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