Hoping the stock market will “come back”

I posted the following as a comment on Big Money Tony’s blog as a response to his hope that the stock market will “come back”:

I’ve come to realize that what we saw from 1997 through 2000 will never happen again in our lifetime. Look at Japan: the Nikkei finished 1989 around 37,000. It’s below 10,000 now. That’s almost 20 years later and it’s down 72%. OK, so you and I don’t invest in Japanese stocks, but how about tech stocks? The Nasdaq topped 5,000 in the beginning of 2000. It’s below 1,900 right now. That’s down 62% in nine and a half years. I’m tired of hearing that stocks are a long term investment. How long does long term have to be? I citied two examples of broad indexes with terrible returns over the past 9 and 20 years. People have been waiting for those markets to “come back” for years and years.

I’m now convinced that the only way these markets will return to their previous lofty values is not through the appreciation of the aggregate growth and value of the companies that make up the market, but rather through a depreciation of the currencies that we measure the worth of these companies. Think about it this way: if there are currently 10 trillion dollars in existence and Microsoft sells for $22 a share, what would a share of Microsoft stock sell for if the money supply doubled to 20 trillion dollars? If all other factors were equal, Microsoft would sell for $44 a share. Has Microsoft captured more market share or been more productive or efficient? In my example, they have not but yet the price of the stock would still go up.

The above scenario is exactly what the powers that be in the government and the federal reserve hope will happen, that simply through money supply growth we will all perceive that we will be richer through higher asset prices (such as stocks and housing prices) when in fact they are just creating inflation which is paid by all of us in the form of a hidden tax.