Monday, May 24, 2010

Historical Dow Revisited

I created the following chart shortly after I turned bearish in 2004. It was the first economics chart that I posted publicly. It could be seen in my Yahoo profile. I also posted this chart on the first day that I started this blog.

August 31, 2007
Historical Dow

It's on a log chart. Constant growth rates therefore show up as a straight line.

In the spirit of what ifs, what could cause the stock market to head back down to the green line? Where do I start?

1. Near record low unemployment. Bulls love it. I wonder what would happen if it reverts to the mean.
2. Near record profit margins. Bulls love it. I wonder what would happen if it reverts to the mean.
3. Credit crisis. Don't think many people love that, myself included.
4. Housing crisis. Let's see. Rising inventory, falling sales, falling prices, rising foreclosures, rising inventory, falling sales, um, I think I just fell into a feedback loop. Sorry about that.
5. Banks. Need I say more? Just how many do we really need?
6. Payday Loan Centers. Didn't I just cover this one as #5? Just how many do we really need? 20,000+? Seriously?
7. China. Just how many more paper dollars can we ship them in exchange for cheap goods? Let the grand experiment continue!

Would could go wrong, did go wrong.

Here's an updated chart that I created today.

First the good news. We're back to the long-term growth trend line. The market may be fairly valued now. I say may be.

Now the bad news. The market was on the long-term growth trend line in 1969. We put a man on the moon that year. As seen in the chart, it did not stop us from having 15 straight years of lousy stock market performance though.

I'm not done with the bad news yet. Unlike 1969, about the only thing we're shooting up into space this year is our national debt. It is not sustainable.

I'm still not done. In order to justify being on the long-term exponential growth line that's been in place for 80+ years, then you must continue to believe in the long-term exponential growth story and a return to business as normal. I must admit I'm not all that much of a believer these days. At best, I think growth will slow. At worst, well, watch out below.

See Also:

Trend Line Disclaimer

Source Data:
Yahoo: Historical Prices for the DJIA


G.H. said...

Stag, a comment on point #7 -

In Lawrence MacDonald's book about the collapse of Lehman he puts China's role in the U.S. meltdown into good perspective. He says based upon the fact that all the Chinese investment in treasuries was keeping yields down, it was the chasing of yield by all manner of institutional investors (you know, the sophisticated ones) that led them into MBS and CDO's even though the yield spreads between them and the safety of treasuries was relatively tight. (Oh, and of course there were those AAA ratings too.)

So, it wasn't China's fault, but they certainly had an important role to play. The had to find somewhere to stash all that cash we exchanged with them for flat-screens at Wal*Mart. Thus the low yields on treasuries, thus the chasing of garbage.

Another interesting part of that book was the explanation of how Lehman (and others) ran out of US buyers for that crap and started peddling it overseas, anywhere they could find a sucker, er, um, sophisticated investor.

Stagflationary Mark said...


#7 is a great one for you to point out. It is easily the most complex one on the list.

I think your summary of the situation is pretty good.

G.H. said...

Here is an interesting link about the "flash crash" (I can't help laughing) and comparing 1929 with today:

Technical Implications from Last Week’s Equity Plunge

Stagflationary Mark said...


From your link...

There have been just 2 instances in the history of the US stock market (as measured by the DJIA) when a 10% intraweek decline followed a top that was preceded by a 52 week rate of change of at least 50%. Those 2 occurrences were the weeks that ended October 25th 1929 (week before the 1929 crash) and last week.

That sure is comforting. Not! ;)

G.H. said...

HA! Then you should find this comforting as well:

Index Futures

Dow down 108 at 10:30PM EST!

It's a race to the bottom.......

EconomicDisconnect said...

I can vouch for the science parts of Wiki; all good as best I can tell with my inside eye. Maybe the Paris Hilton section is bad, but would you hack TRPV4 ion channel article, really?

Stagflationary Mark said...


Normally I could stop the decline with a musical tribute but these are not normal times, lol.


Wikipedia:List of controversial issues

Great Depression

Deny! Deny it ever happened!

Morality and ethics

Morality and ethics. Ethics and morality. It's so controversial these days, lol.

New World Order (conspiracy theory)

Shhh!!! They are out to get me. ;)


I read Battlefield Earth. I thought it was okay. I then saw the movie. Worst decision ever, lol.

Astrology as a "science"

Oh, come on. It's at least as accurate as economics as a science, but no better. Can't we at least agree on that?

Criticism of Windows Vista

Say it isn't so, lol.

Global warming and global cooling theories

Surely one or both or neither of them must be right.

Paris Hilton


GawainsGhost said...

Astronomy is the oldest science. Few people realize this, but it is true. In fact, all of mathematics descends from the study of the movements of the stars.

As far as astrology goes, well, read Chaucer's The Knight's Tale. It's the definitive study of the Zodiac on the behavior of men. Then read Chaucer's Retraction, in which he says that the movements of stars have no influence on the actions of men.

Also read The Physician's Tale, in which he says that doctors base their diagnoses on the movements of stars and write their prescriptions based on which of their friends in the pharmaceutical business need the money. That was over 600 years ago before the advent of modern medicine, but is it any less true today?

And The Merchant's Tale is a must read. It's the story of a rich earl, he of the landed gentry, who blows all his money on fancy clothes and extragavant parties, then has to borrow from a common merchant, who manages his estate. The earl only knows spending, but the merchant knows money and understands markets. This is the definitive study of the rise of the middle class.

Economics has a long way to go to reach the accuracy of astrology. And economists have a long way to go to reach the understanding of businessmen.

Chaucer really is the best and deserves careful study.

By the way, Mark, all graphs are reflective, not predictive.

Stagflationary Mark said...


A graph of a baseball's flight path can be used to predict where the ball will ultimately land.

That said, a chart is useless without a theory to go with it. Even then it can be useless if the theory is useless. Garbage in, garbage out. My favorite useless chart theory is the one that thinks prices must go up because the chart shows that prices have been going up.

I had a friend tell me several decades ago that he didn't believe in astronomy. I found that shocking. I exclaimed, "You don't believe in astronomy?!?!" He replied, "Oops. I meant astrology!" I'll never forget that, lol.

GawainsGhost said...

Well, a graph of a baseball's flight path can be used to predict where the ball will PROBABLY land. But if a bird swoops in from out of nowhere and slams into the ball in midflight, it could land anywhere. Right?

There is a difference between reasonable expectation and absolute certainty. That's all I'm saying. Charts and graphs serve a useful purpose and can be illustrative, but danger lies in relying on their predictive capability. Anything can happen, and the future remains unknown.

When I was in high school, one night a friend of mine and his family were sitting on their couch, watching tv. Suddenly, a softball-sized chunk of hail came crashing through the roof and exploded the tv set right in front of them. How often does that happen? What are the odds? I mean really.

Incidentally, when Newton was developing his calculus to predict the movements of planets, he kept trying to calculate the path of a canon ball. But that's a nonlinear equation, and his primitive pencil and paper calculations wouldn't work. So instead of trying to calculate the curve, he theorized that instead he could divide it into a series of points, representing the placement of the canonball at a particular moment in time. He could calculate each point and estimate where it would be in the next moment, then connect the dots to draw the curve and predict the canonball's path. From this, he ultimately derived his theory of atoms.

Interesting little side note on the history of mathematics.

Stagflationary Mark said...


There is a difference between reasonable expectation and absolute certainty.

Absolutely. That's why I always try to include a trend line disclaimer.

If finding a suitable wobbly line that matched past data was all it took to predict the future, I could tell you what the weather will be like 10 years from now. Not going to happen, lol.