PETER BRIMELOW

Charting the long run

By Peter         Brimelow & Edwin S. Rubenstein, Last Update: 12:01 AM ETApril 14, 2003

NEW YORK (CBS.MW) -- A picture is notoriously worth a thousand words.     Two words leap out of our favorite historical financial charts:     "bear" and "inflation."

HULBERT FINANCIAL DIGEST

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For several years, we have been charting with fascination the historical     data developed by Professor Jeremy Siegel of the University      of Pennsylvania's WhartonSchool and used in his classic     book "Stocks For The Long Run."

Siegel's data and much else is available on his Web site. Note: He doesn't always     agree with our interpretation of his work.

Through heroic calculation, Siegel has established the cumulative real     return in key financial vehicles going back to 1801.

In other words, his data shows what would have happened on average to     one dollar invested in each of these assets in 1801 -- adding in each     year's capital gains, dividends and interest, and also adjusting for     inflation.

In today's column, the first of three in a special series this week, we     show the overall picture for stocks, bonds, treasury bills, gold and cash     -- what would have happened to the value of a dollar bill that was just put     in the mattress.

On Wednesday, we will zero in on what data says about the stock market     now. We think it's bearish, or at least not very bullish.

On Friday, we will focus on bonds and bills. That's the chart that we     think spells a return to inflation.

We will also report what Jeremy Siegel thinks, if we can intercept him     as he whizzes around the country lecturing and consulting.

Note that the chart below uses 1801 dollars.

This is the chart reproduced in "Stocks For The Long Run."     We've updated it with Siegel's assistance.

So as not to strain your eyes, we show in the top left corner what one     dollar invested in stocks, bonds, bills, gold and cash would be worth now.

A dollar invested in stocks would now be worth $462,502 in 1801 dollars     -- or $6.96 million in 2003 dollars. (Taxes are not included).

By contrast, a dollar bill kept under the mattress would be worth only 7     cents in 1801 dollars.

That's a measure of the two-century impact of inflation -- roughly     15-fold inflation since 1801.

The chart uses a log scale. That is, increases are proportionate. A     steady increase shows as a straight line.

You can see right away why Siegel's book has its title. The total     inflation-adjusted cumulative value of stocks has increased at a remarkably     stable rate. The trendline on this chart -- which     is actually a regression line, a statistical method of averaging the annual     observations -- increases at a rate of 7 percent a year.

This is the fundamental reality underlying the     late-1990s mantra that all you have to do is buy stocks and hold     them.

It's true -- in the long run. But what about the short     run?

We'll look at that on Wednesday. For now, however, note that the total     cumulative return line for stocks, which ran up above the long-run trend     line in the late 1990s, is finally back down just below it.

We read that to mean that stocks are not as overextended as they were --     but they're by no means undervalued.

Two other points:

Note the astonishing stability          of gold. A dollar invested in gold in 1801 is worth just over a dollar          today. Of course, the chart shows that gold's real price fell well          below $1 in mid-20th century. But that's because the nominal price of          gold was controlled by the federal government. Gold rebounded once the          price was freed. Overall, it really does seem to be a store of value.          Something to remember if inflation returns. Note that it would be          impossible to draw a regression line through bonds, bills and cash.          All of them inflect at the beginning of the 20th century - in the case          of cash, sufficiently sharply to lose most of its value.

That's a hint as to why we think inflation will return.

Editor's note: The April edition of the Hulbert Financial     Digest is now available by either e-mail or regular mail. Highlights this     month include:

A special report on how the          most popular stock picks by newsletter editors outperform the market,          and what they are. Profiles of Timer Digest          and John Dessauer's Investors World Complete performance          scorecard, and more

For more information or to subscribe to the Hulbert Financial     Digest, click     here.

Edwin S. Rubenstein is president of ESR Research in Indianapolis.

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