This is a chart of the S&P 500 adjusted for inflation (as of February 2009) vs. the total number of people employed. Why employment? Time can only move forward. Employment can actually move forwards AND backwards though, as we're currently finding out all too well. It can therefore make for a more interesting chart, at least in theory.
I have added a blue trend line channel using nothing more than my eyeball. It's nothing more than that so please don't read too much into it.
That being said, I'm going to guess that you are dying to read something into it. Therefore, here's a feeble attempt at some witty commentary.
The bulls: Yay! See that last black dot on the lower right? That's February of 2009! We managed to dip back into the blue channel! The market is finally a table pounding screaming bargain again!
The bears: Boo! We're at the top of the blue channel. What happens if we go all the way to the bottom of the blue channel again? Further, that black line drifting to the left is really freaking us out. It's like the employment clock is running backwards. Scary!
The bulls: Yeah, but stocks pay dividends and as seen in the chart, stocks keep up with inflation over the long run. No "risk", no reward.
The bears: Yeah, but "safe" TIPS (Treasury Inflation Protected Securities) pay interest and they also keep up with inflation over the long run.
No sarcasm this time. As you can imagine, I'm still a bear but I am now somewhat sympathetic to at least some of the bull arguments. I have many layers of bearishness though, much like an onion being peeled back.
Source Data:
Yahoo.com: S&P 500 Historical Prices
St. Louis Fed: Total Nonfarm Payrolls: All Employees
St. Louis Fed: Consumer Price Index
Stag,
ReplyDeleteAwesome chart! Really innovative.
Yeah, but stocks pay dividends
They do and the common wisdom is that said dividends reliably increase over time. To wit: In 2008, the S&P 500 paid ~ $29/share in dividends. The expected S&P 500 dividend payout for 2009 is ~ $21/share. BTW, the $29/share dividend was WAY above trend - due to financials of course.
What can't last, won't last.
An investor demanding a 3% dividend yield would buy the S&P 500 at 700. A 4% dividend yield equates to the S&P 500 at 525.
Of course no main stream S&P 500 valuation analyses take into account today's historic debt levels. All presently accepted financial analyses project some rate of positive earnings and dividend growth far into the future.
As far as I can tell, the closest comparisons to today's debt levels are the Great Depression and 1990s Japan. Note that those comparisons run highly counter to selling financial products and services.
I'll end with two highy technical terms - Oops! D'oh!
mab,
ReplyDeleteOf course no main stream S&P 500 valuation analyses take into account today's historic debt levels.
The debt stream valuation model I've been basing at least some of my bearishness on is in the form of a spiral. It's contained within a bathtub. There's a hair rat in the plumbing. There's massive amounts of liquidity flooding the system from the broken cold water spigot. Oh yeah, I almost forgot to mention the toy ship and the floating ice cubes.
Most modern statistical models use digital technology, but ever since the dotcom bubble busted I've been trying to rely on more reliable analog simulations. ;)
As far as I can tell, the closest comparisons to today's debt levels are the Great Depression and 1990s Japan.
Speaking of Japan, the Playstation 3 now supports copy and paste!! Hurray! Thanks to hedonics, that means my standard of living just increased slightly. Sweet!
Stag,
ReplyDeleteThere's massive amounts of liquidity flooding the system from the broken cold water spigot
There is indeed. But I'm wondering. How many life boats are on those toy ships?
One way or another (inflation or deflation), I think the S&P 500 will be visiting the bottom of your blue zone. I could be wrong though. Perhaps the credit bubble really did make us wealthier. I put those odds slightly below the odds of getting hit by Sky Lab.
http://en.wikipedia.org/wiki/Sky_lab
Skylab's demise was an international media event, with merchandising, wagering on time and place of re-entry and nightly news reports
mab,
ReplyDeleteFrom your link...
The Shire of Esperance fined the United States $400 for littering, a fine which, to this day, remains unpaid.
It seems our true national debt is the following plus $400. Good to know.
http://www.brillig.com/debt_clock/
About ten or twelve years ago I came across this fellow that argued the Industrial Revolution and the accompanying Great Depression presented to the world a crossroads. One between working more for a higher standard of living or less for the existing standard of living. Excepting a few margins in western Europe we largely choose to keep working more and "spend" the technology revolution of the day on higher standards of living, assuming that is your standard of measure is consumerism.
ReplyDeleteI had some reservations as to whether his account of history matched reality, I don't know history well enough to judge. But his thesis certainly stuck with me. Every time I read Krugman complaining about a lack of "demand" and his desire to debauch the currency to artificially induce said demand I think to myself what's so wrong with reduced consumption? The employment curves leave me thinking the same thing.
If we hadn't taken on debt up to our eyeballs to get the latest consumer trinket or faux-status symbol, reduced demand would be treated as a non-issue. Some might even appreciate a little deflation as a long overdo opportunity to slow things down and enjoy the fruits of our labor. Instead, over the years the system had created so many incentives to borrow and slave to the god of GDP that anything less than 2-3% inflation leaves us staring down the gun barrel of insolvency.
I have absolutely no idea how this is going to end. I give it long odds certainly, but my hope is after all the debt in the system gets rationalized we decide heck with it all! Let's work 25-30 hrs a week, or half a year at a time, or whatever, be content with the things we have, eat well enough, and enjoy the company of friends. Is such even possible given the human psyche? I dunno, but I hope.
AllanF,
ReplyDeleteIs such even possible given the human psyche?
Not to be a complete gloomer, but I was watching the local TV news this evening. A woman's 1 year old son was found dead in her car while she was working. They do not know the cause yet nor have they decided to file charges. They showed the other family members racked with grief as they arrived on the scene. One even fainted. I was very sad for all of them.
I was reminded once again of the income inequality gap during the Great Depression. Note that thanks to the math behind data that is averaged, it is theoretically possible for the "average" worker to afford daycare, while at the same time the vast majority of workers cannot.
Similarly, it is possible that the average worker could work just 25-30 hours and still eat well enough, but the vast majority could not. Are we there yet? I think these thoughts often as I drive by our country's many payday loan stores.
If there is one thing I could point to that best represents what has helped me weather this financial storm, it is that I was at least sympathic to what the poor must be going through. Further, I would argue that it is also the thing that represents why our leaders were blindsided. It is easy to get caught up in averages, and the Fed's Flow of Funds reports are full of them.
There is a vast difference between the following average worker examples.
1. All the workers have moderate income/savings and moderate debt.
2. Half the workers have low income/savings and high debt. The other half has high income/savings and low debt.
While both examples could look the same on average, the second example has a few major problems. First, it is clearly a "subprime" situation. Second, stimulus is less effective when applied. Giving any additional money to the half with high income/savings and low debt tends to do very little to boost the economy in the short-term.
Just a few thoughts that keep me up at night.
AllanF,
ReplyDeleteGood post. Working less seems appropriate. Most folks are working themselves into the poor house. You'd think they'd stop digging themselves into a deeper hole.
Some might even appreciate a little deflation as a long overdo opportunity to slow things down and enjoy the fruits of our labor
FWIW, most have been experiencing deflation for decades. Unfortunately, it has been wage deflation. In that CONtext, is it any wonder the majority are living a "borrow & slave" lifestyle. Somehow I don't think it was an accident that we drastically reduced income taxes at the top while increasing payroll and other soft taxes that disproportionately affect the bottom. Not to mention we run perpetual deficits which obligate interest payments back to the top. But hey, somebody has to pay for the lifestyles of the rich and (in)famous.
Oh no. As I'm typing this post, I see that the word verification has the word "greed" in it. No joke. That is beyond just weird. Back to the bunker! D'oh!
mab and AllanF,
ReplyDeleteOh no. As I'm typing this post, I see that the word verification has the word "greed" in it. No joke. That is beyond just weird. Back to the bunker! D'oh!
Back to the bunker? Good God man! Stay in the bunker!! ;)
Stag,
ReplyDeleteBack to the bunker? Good God man! Stay in the bunker!!
Speaking of bunkers, you must have one humongously large apocolypse pantry! Good grief:
http://finance.yahoo.com/news/Alcoa-reports-497M-loss-in-1Q-apf-14874319.html
Looks like Alcoa is going to have to pin their second half recovery hopes on the tin foil hat crowd. If only Oprah would wear an aluminum foil Easter bonnnet. That would jumpstart sales!
mab,
ReplyDeleteSpeaking of bunkers, you must have one humongously large apocolypse pantry!
Yeah, their stock really started to suffer once I stopped adding to my aluminum foil hoard, lol.
No fears though. I'll be buying more in 30-40 years in theory.
I'm reminded of the time well after my hoard was complete when I saw the biggest pile of aluminum foil in Costco that I had ever seen in my life. It was at the end of the aisle and it was one of those Dune moments where they had foil sign the likes of which even God hasn't seen. It REALLY had me questioning my stagflationary outlook big time, lol.
This is also rather amusing since I was just showing my girlfriend one of my posts offering a small glimmer of hope that at the very least we might not hyperinflate.
The last photo in the following link should make any metal hoarder at least a little bit nervous.
Productivity Miracle
http://illusionofprosperity.blogspot.com/2007/09/productivity-miracle.html
I'm still a stagflationist long-term, but would draw some comfort if all it took to control inflation was to bump interest rates from 0.1% to 0.10001% and let leverage unwinding do its work.
Concerning income inequality, I hear you on that. I don't know the answer, but I've felt since about 2004, when house prices went from high to ludicrous, that we had squandered our nation's wealth.
ReplyDeleteIf it wasn't for the opiate of consumer electronics we would have had something like the French Revolution on our hands. 30 years ago was no bed of roses, but the standard of living then was superior in many ways, and vastly so. Instead, we sent women into the work force, we outsourced most of our manufacturing base, and launched the middle class into an arms race against each other for housing, education, and professional jobs. Again, you subtract out what Moore's Law has gotten us, and the middle class is markedly poorer than a generation ago. We work more and get less in every respect.
Again, I hope the country on a national level does some re-evaluating of priorities. It would take a lot for us to set on a different path, but it is within the realm of possibility. Unlike a lot of countries in the world, ours does have the systems in place to react to the will of the people.
AllanF,
ReplyDeleteUnlike a lot of countries in the world, ours does have the systems in place to react to the will of the people.
Great point. Heck, I often use this blog as a pitchfork and the government allows it.
For some reason I seem to feel the need to protect the village from Frankenbenstein when I really should be running in blind terror from Monster Zero's need to be Fed!