The following chart shows the natural log of the industrial production index. When using natural logs, constant exponential growth is seen as a straight line.
Click to enlarge.
Note that the data is not following a straight line. It is following a nearly perfect parabolic trend channel (in red). Growth is therefore slowing parabolically and has been doing so since World War II. Also note that we're very near the peak should this long-term trend continue (and I see little reason to suspect it won't).
Let's zoom in for a closer look.
Click to enlarge.
I have added another trend line in blue. Since it is straight, it shows that the industrial production index has been growing exponentially over the short-term (the last four years). Yay. Due to the amazing and unprecedented consistency of the climb, many assume it has become a sure thing over the long-term too. Hurray. Good luck on that theory though. It is a temporary (cyclical) phenomenon and is not even remotely sustainable over the long-term. That's my opinion of course, but I believe it with every fiber of my being. Calling it a strong opinion would be an understatement.
I theorize that our odds of successfully breaching the long-term trend channel (in red) in a substantial way are about as close to zero as short-term interest rates currently are. The test of this theory will be made soon, when the intersection of the top of the long-term trend channel in red with the short-term trend line in blue occurs. That's currently on track to happen at the end of 2015, assuming that the blue trend doesn't fail even sooner (due to recent global economic weakness).
Why do investors extrapolate short-term euphoria and ignore long-term decay? Misguided optimism? Greed? Hubris? An irrational belief that the Fed can permanently create prosperity to fill the void? Perhaps it shall remain a mystery. The next leg down may have both short-term cyclical forces and long-term structural forces acting on it simultaneously though. Won't that be a hoot, especially if we're still stuck in ZIRP when it happens. Seriously. What a wake up call that would be. Risk abounds.
The long-term future's so blight, I gotta wear an umbrella (an upside down parabola, like the one seen in this post) to protect my eyes from the torrential industrial production downpour that's coming our way (again). It's only a matter of time. Sigh.
This is not investment advice.
Source Data:
St. Louis Fed: Custom Chart
Investing time lines have shortened. More akin to
ReplyDeletegambling than to investing.
Anonymous,
ReplyDeleteMore akin to gambling than to investing.
Agreed.
E*TRADE: Options Trading for Beginners
Baby needs new shoes. Sigh.
A financial forum I frequent carried this in a comment recently: “all of the real [US] stock market returns over the past 111 years can be attributed to just an 18 year period – the great bull market that began in August 1982 and ended in August 2000. Without those years the real, inflation-adjusted return of stocks, without reinvesting dividends, was negative.” As the commenter said "can it be true?" Still, I suppose that back in the days when dividends were non-negligible, they would have been a major part of your investment return.
ReplyDeletedearieme,
ReplyDeleteWhether it is true or not, here are two things we definitely know.
1. The 1980s and 1990s are over.
2. The 2000s began.
Yay, lol. Sigh.
Mark -
ReplyDeleteMy only disagreement is with dating the death of the trend starting in '46. I see it is as starting in about 1983.
Other than that, right on.
Cheers! [yeah, right]
JzB
Jazzbumpa,
ReplyDeleteYou might find this interesting.
I just removed all data points after 1980 that I use to form the parabolas making up the channel (two data points from the top parabola removed and three from the bottom).
The top parabola curves to the downside even more. The bottom parabola doesn't change much at all. Therefore, it is my opinion that the growth has been slowing throughout the timeframe of this chart.