The Stone City

Words Made to Last

Friday, July 20, 2007


Glenn Reynolds keeps crowing about new records set by the Dow Jones Industrial Average. These are not a bad thing, but they are symptomatic of the fact that the index is measured in dollars. The Euro is now trading at a record-high $1.38 (from $1.32 at the start of the year), and Sterling at $2.05, almost back to the pre-Scargill Bretton Woods level. Large American companies have completely multinational revenue streams, so their value is not really tied to that of the dollar; thus, as the dollar weakens, their dollar price rises.

Additionally, stock in a business with a steady revenue stream is a natural hedge against inflation (since the nominal revenue stream will likely grow at the inflation rate). Thus the fear of inflation, which is always a threat to a country with a weak currency, boosts the stocks of large, established companies -- i.e., of the Dow.