Your dollars at work, continued

To add some color to the previous post, we can compare how the returns of our instruments of choice, to wit:

• FXA (corresponding to Australian Dollar money market fund).
• FXE (corresponding to a Euro money market fund)
• FXF (corresponding to a Swiss Franc money market fund)
• GLD (corresponding to physical gold)
• SPY (corresponding to the S&P 500 with dividends reinvested)
• IWM (corresponding to the Russell 2000 with dividends reinvested)

Perform in terms of constant (constant purchasing power, that is) dollars. This is not as easy as it seems, since the Bureau of Labor Statistics CPI index, which would be the natural measure of inflation, has come under considerable criticism for "gaming" the numbers, starting in roughly 1981, when the methodology for measuring inflation was changed. Luckily for us, the dilligent folks at Shadow Government Statistics (I highly recommend their web site for a wealth of data, and discussion of the related issues) have measured inflation using the more reasonable-seeming pre-1981 methodology. Their data has helped us to produce the comparison charts below. First, an omnibus comparison (the two thick lines correspond to the "Official" BLS numbers and the "Alternative" CPI measurements):

You will note that over the last five years, the S&P 500 barely holds its own even in using the BLS numbers, while the Russell 2000 beats them only modestly. If you use the "Alternative" deflator, you will find that the US equities markets perform rather pathetically, gold has performaed quite well,which could mean one of at least three things: 

1. Gold is overvalued
2. Inflation is expected to pick up even more
3. Our time series does not go back far enough, and gold had been somewhat undervalued before 2006

the Swiss franc has suffered mild inflation (losing around 3% a year over the last five years), while the Australian dollar has kept its value (if you count the interest the money market account pays).

The next chart summarizes what I had just said above, by expressing returns in alternative constant dollars (where the thicker lines are the S&P 500 and the Russell 2000):

Finally, everyone wants to know how the other (antipodal) half lives, and now we express our cost of living and returns of financial instruments in terms of the Australian Dollar:

The thick light blue line is the (alternative) CPI. Apparently, an Australian saw the price of gold peak back in late 2008, and it has been fairly constant later. The Australian who travels to the US frequently has apparently found that it has not gotten more costly over the last five years, and, if he is wise, he would not have invested in the US equities markets (which would have lost him 20% of his money). More interestingly, neither would he have invested in the Australian Equities market (dark blue thick line -- the MSCI Australia index, with dividends reinvested, as represented by the EWA ETF), which, while outperforming the US markets, did worse than keeping the Ozzies in a money market fund. Strange,  but, seemingly, true.