Click chart to enlargeThe chart above is a chart of the Dow going back to 1900. Because it's a log chart, it's possible to draw a trend channel on it. The slope of this line represents the the rate of growth of America's economy. It only deviated from the channel twice. Once was during the Great Depression, when the market overshot on the downside. But it eventually returned to its natural slope. The second deviation began in the mid 80's, and has continued ever since. Computers and the internet revolution added significantly to progress and efficiency, so much of this recent higher slope is deserved. Still, it is an interesting study to see where the market would be if it never got ahead of itself in the first place. The bottom of the channel is now at approx 2,300 and the top of the channel is at 5,000.
The scary thing is that if companies such as GM, C, and GE were to fail, we could potentially see Dow 5,000 again, putting us back into the market's long term channel. So much for accelerated progress. Perhaps it isn't possible to grow faster than this predetermined rate. Could economics have natural and immutable laws much like physics?
13 comments:
Beginning to get jealous of Gary. He's up 1.9% over a period in which the market fell 15.9%.
We're down 9.9% over a period in which the market is down 36.7%.
And it's not just a fluke for Gary. If the market were up 15.9%, he would still be up 1.9%.
His gains may be muted, but in theory, he is always making a profit. That's got to be worth something.
Maybe part of the long-term uptrend has to do with inflation. Inflation is logrithmic so it would show up as a linear in a log plot.
Everything I'm seeing tells me we are repeating the same mistakes as the 1930's, and piling on top a great deal more mistakes. So I would not be surprised if the long term DOW chart 50 years from now shows another downward spike like we see for the early 1930's.
When you look at the spike in the DOW from 2003-2007, that spike was created by rampant inflation, which was the initial response to an inevitable bust similar to the great depression. In other words, they already tried inflation. It didnt work. All it did was transfer capital to unproductive sectors and ruin our means of recovery. They cannot do it any more. The 2003-2007 bubble was 5 trillion. It is going to take 8-10 trillion in order to stop the inevitable deflationary bust. There is no political support for such a large dose of inflation... and rightly so because it is insane. That makes a very hard crash quite inevitable. It simply must happen.
I think this chart here
http://www.geocities.com/WallStreet/Exchange/9807/Charts/SP500/InfDji200_0810.jpg
is a very conservative estimate of what is coming. That's what we'll get if we're lucky. The actual fall could be much faster.
This page pretty much sums up my thinking.
http://www.kondratieffwinter.com/kw_wave_theroxylandr.html
Note that most of it was written over a year ago! How is that for prescience!
Pay particular attention to the 2nd to the last paragraph!
Its interesting that in such a bearish day everybody turns bearish.
I fee like I am the only one with a bullish stand here.
.
Look at SKF
Who is buying at those levels?
Its on its 52Wk high.
This is what's going to happen :GM/Ford/Chrysler will get some kind of bail out.
FED will cut the rates.
And if GM doesnt get the bail out money than we will see a rally with the reason that it was already priced in.
The News is going too scream how we have reached the bottom and so and so.
The market will rrally for 3-5 days or maybe weeks.
Enough to go short again.
And thats my favorite :-)
Same thing each time.
Our life is a big cycle and so are our lives.
That includes the stock market
If you haven't done so please read
what Martin Armstrong has to say about it.
Its 77 pages but its worth the effort.
http://www.contrahour.com/ItsJustTimeMartinArmstrong.pdf
Iconoclast,
Kondratieff's theories are very similar to Armstrong's.
Interesting stuff.
Thanks for posting.
"I think the length of the Kondratieff wave (50-80 years) is fundamentally related to the length of the human life, as every cycle is repeating the human mistakes made in the previous cycle. As the pop of the housing bubble and accumulation of the credit bubble in 1920’s is not witnessed by any of the currently living people, the pumping up the bubbles was cheered and celebrated as it was back in roaring twenties."
Snot,
Assume DOW is governed by some sort of intrinsic law to trade within a channel, then how the channel is defined becomes important.
Maybe with the internet revolution, we should have more weighting towards the end of the channel. I assume your lines were drawn based on uniform weighting. Note that a slight change can put Down at 7000 for your upper line since the plot is log scale.
My 2 cents is that DOW will retrieve to 7000 and climb back to its peak in 2-3 years.
Anon123
Dow has a long way o climb back to its peak Anon. It will take 5-10 years. Maybe more.
Jumping to another subject take a look at Ambac (ABK)
It went up 55% AH.
Hopefully financials will get a boost tomorrow.
That will bring SKF down back to its channel.
Whoever bought SKF today will be loosing quite a bit.
Of course my opinion is biased toward UYG since i just opened a position today.
Time will tell :-)
Hk and Iconoclast,
Thanks for the great links. It's easy to forget that all of this has played out before. It's a little scary to read some of the excerpts from those links. Here is a series of videos from someone who spent their life studying such macro trends. His predictions are dire, but he's been dead on for about a year now.
http://www.youtube.com/user/manoftruth
Ambac.. How the hell is that company still afloat, and worse who on earth is buying into it these days. I just dont get it sometimes.
The blog is great these last few days by the way, Great insight into all manner of topics. I had a look at the Yahoo boards today for the first time in a while and it makes me wonder why i ever spent time reading there. Someone should do a thesis on the mass delusion thats rampant there.
Snot, you had asked about construction costs in Ireland the other day but i coudlnt answer it. I'm living in Vancouver now but i can tell you that construction back home has stopped dead! No one is building anything and sale prices would be falling like rocks except that no one is buying. My mate has a house for sale that was E600k last year. He is asking E420 and hasn't even had one person view the place , not to mind offer. The govt is claiming prices are down 15%. Laughable.
Vancouver is still cool by the way. Sales of houses and cars have stopped but prices have not fallen, no one is losing jobs, and companies are still hiring. People are nervous, but the shopping centers are still packed. Fingers crossed because i bought my place here only last year, neatly intersecting the top of the market!
Thanks Conor. Glad to hear the economy in your area is doing better than in the states.
Do you think the theory that because options expire this week, the market will rally because there are many put options that the writers don't want to lose money on? You're the options expert, so maybe you'll have some insight into how that works. Can't imagine there are nearly as many November calls as there are November puts out there.
Dont get me wrong, I'm short term bullish. I see support at the current level. We should get a rally from SPX 780 to SPX 860. After that, who knows.
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