What Inflation Means for Stocks and Natural Resources

Larry Edelson discusses the fluctuating extremes of asset prices. Mr. Edelson takes a closer look at the pricing of commodities and natural resources over time.

All asset prices fluctuate between two extremes, periods when their prices are below inflation-adjusted levels and periods when they exceed their inflation-adjusted prices. Put another way, all assets eventually seek out their inflation-adjusted real price, no matter what. For instance, in the 1980s and '90s, when investors worldwide became enamored with the stock markets, the prices of natural resources and commodities fell way below their inflation-adjusted prices, in many cases back to prices not seen since the Great Depression. When the stock market bubble burst, commodity prices soared and they are now playing catch-up with inflation and the plunging purchasing power of the dollar. For example oil, which once traded as low as $10 a barrel in the late 1990s, has now caught up and exceeded its inflation-adjusted price of about $110 per barrel. The same can be said for many other commodities, all of which were beaten down as stocks became the investment of choice in the '80s and '90s.

U.S. stock markets, however, have been losing massive ground to inflation, and as a result, they have been in one giant stealth bear market since the year 2000. By Edelson's calculations, they have already lost 75% of their value, making the period from 2000 to 2008 one of the worst bear markets for U.S stocks on record, ever.

Although the Dow Jones Industrial Average is trading around the 13,000 level, roughly 1,000 points shy of its record high The answer lies not in the nominal price of the DJIA, but in the prices of everything outside the DJIA, from oil, to gas, to gold, to other natural resources and even to real estate prices have gone up so much in so little time, the DJIA at 13,000 buys as little as 75% of what it did just eight years ago. Even in the slumping real estate market, today the DJIA buys the equivalent of only 6.5% of the nation's median single family home than it did just eight years ago. All told, in terms of gold the DJIA has already lost as much as 77% of its purchasing power in just the last eight years. According to Edelson, this is important because investors perceive stocks as an inflation hedge that can drive share prices significantly higher, even giving a boost to the Dow. However, with the U.S. economy so sluggish, it's highly unlikely that the majority of U.S. stocks can outperform investments that are unencumbered by sluggish or falling earnings.

"Never forget that as the dollar continues to fall, stoking inflation higher and simultaneously frightening savvy foreign investors to move away from U.S. stocks. Also keep in mind that the Fed may have temporarily patched up the mortgage and credit crisis. But the credit crisis is far from over. More bank write-offs and losses are coming. And remember that corporate earnings in the U.S. are getting pinched by inflation. And while many companies are starting to raise prices to pass their increased raw materials costs on, consumers are pulling in their horns and slamming their wallets shut. So I don't think corporate earnings can grow at the rates needed to boost the stock market anything more than for a temporary rally," Edelson states.

To read this issue online, please visit:

http://www.moneyandmarkets.com/Issues.aspxInflation-What-It-Means-for-Stocks-and-Natural-Resources-1803

About Larry Edelson and Money and Markets

With nearly three decades of experience in precious metals and natural resources markets, Larry Edelson has played a pivotal role in training Weiss Research staff and in guiding Weiss Research's customers to prudent investments in the sector. His Real Wealth Report, Gold Trader Hotline and Energy Options Alert provide a continuing education on natural resource investments, with recommendations aiming for both profit and risk management. His team of technical analysts helps enhance the timing of investment recommendations with the aim of continually improving the performance results for investors.

Mr. Edelson is also a regular contributor to the daily e-letter, Money and Markets. Recognized as an expert in precious metals and natural resources, he is often called upon by the media for his investing views. Mr. Edelson has been featured on Bloomberg, Reuters, and CNBC as well as The New York Times, New York Sun, and Marketwatch.com

Mr. Edelson holds a B.A. degree from Columbia University.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.

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