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Friday, January 30, 2009

Dow 2,000: confessions of an optimist

Karl Denninger looks at one of the shapes chartists use to guess market movements, and concludes that a Dow fall to 2,000 points is one possible outcome.

Back in November, I did my own work on the "in-real-terms" Dow (i.e. adjusted for CPI), and if history repeats itself, a fall to below the equivalent of 2,000 points would merely be a repetition of what happened twice in the 20th century. But the second low (1982) was not so deep as in 1932, and in December I re-drew the graph with (sort of) reassuring curvy lines, which suggested that maybe the low point next time might only be c. 4,000 points.

This latter attempt of mine sturdily ignored two facts: debt, and its recent monetization (look at Tim Iacono's second graph here) have gone far past all previous levels; and so did the Dow in its "twin peaks" episode of years 2000 and 2007. Maybe the next low will be as devastatingly deep as the last peaks were dizzyingly high.

I will comfort myself with the illusion that the Dow will merely halve, until reality proves me wrong.


AntiCitizenOne said...

They'll mask the fall with inflation which will tend to lift it.

Sackerson said...

I've been getting that 1974 feeling, ACO. We're still veering to deflation now, but sooner or later the overcorrection on the punt is going to put us into the thornbushes on the other side of the river.

Unknown said...

I just saw that on Karl's site. A move to 2000 wouldn't surprise me, but not in the next move down. With a large wave 3 (which we just finished), the more likely move is that wave 5 matches wave 1, which is much smaller.

Sackerson said...
This comment has been removed by the author.
Sackerson said...

Hi, Steve. I've been following the Wavers a bit and they do seem to be saying we're in Wave 4 now. My instinctive feeling is much the same as yours - the ultimate destination in this cycle is down, but it's going to take a while. Of course, each time this happens there are more pople who know the theory - doesn't that imfluence the pattern?