Sunday, October 19, 2008

Do-it-yourself Dow prediction

I've battled Windows Vista to produce the above graph, which takes the Dow at the beginning of October each year from 1928 on and adjusts it for CPI.

The red dot is where we were on Friday; some are saying it could hit 6,000 or 4,000, also indicated (adjusted for CPI as at the end of September 2008).

The question is, how much of the fantastic gain of the past 20 years or so will be undone, and over what period? Where would you say we "ought" to be? (Not that Mr Market cares, obviously.)

Connect up the lows of the early 30s and the 70s and extend the line, and you get what? An implied 2,500 or so. Connect up the highs of 1929 and the 50s and extend the line, and you end up about where we were at the start of this month, nudging 11,000.

"Faites vos jeux, Mesdames et Messieurs." Too rich for me, I think.


Karl Denninger is now talking about the S&P 500 falling to 500 points, a level it first broke above in March 1995; this would mean a further c. 50% drop from its close on Friday.

And he gives his reasons (plausible to me) why the American economy is in worse shape to overcome the setback, than it was in the 1930s.


James Higham said...

How do you see it going now, Sackers?

Sackerson said...

G.O.K., James. It's scary to see that if we ignore the speculative and phoney-money-financed madness of the past 10/15 years, the previous Dow PEAK in real terms equates to just over 6,000, and 4,000 looks like merely a median. Now if there was no "new paradigm" after all, what is to stop a slide back to somewhere like that? And as with housing, all the worse for having risen so far beforehand. A terrible loss of real wealth, with what social consequences?

The fall could be achieved by a stagnation in nominal terms, eaten away in real terms by inflation, but the result would surely be similar.

My previous fears now look almost like optimism, and I'm not the only one re-calibrating.

No-one know the time-frame - Mr Market is perfectly capable of sustaining an illusion for a long time - but the floor could be a lot lower than the "pessimists" thought a year ago - except possibly Michael Panzner.

In a way, I wish I'd followed the path of that hedge fund manager whose letter I excerpted a day or two ago. Security may depend on having enough money to be well away from the disaster zone.

dearieme said...

Never invest with anyone who pronounces "leverage" in the American style.

dearieme said...

Here's a rather vivid analogy by a Mr Kuntsler.
"To switch metaphors, let's say that we are witnessing the two stages of a tsunami. The current disappearance of wealth in the form of debts repudiated, bets welshed on, contracts canceled, and Lehman Brothers-style sob stories played out is like the withdrawal of the sea. The poor curious little monkey-humans stand on the beach transfixed by the strangeness of the event as the water recedes and the sea floor is exposed and all kinds of exotic creatures are seen thrashing in the mud, while the skeletons of historic wrecks are exposed to view, and a great stench of organic decay wafts toward the strand. Then comes the second stage, the tidal wave itself -- which in this case will be horrific monetary inflation -- roaring back over the mud flats toward the land mass, crashing over the beach, and ripping apart all the hotels and houses and infrastructure there while it drowns the poor curious monkey-humans who were too enthralled by the weird spectacle to make for higher ground. The killer tidal wave washes away all the things they have labored to build for decades, all their poignant little effects and chattels, and the survivors are left keening amidst the wreckage as the sea once again returns to normal in its eternal cradle.
So, that's what I think we will get: an interval of deflationary depression followed by a destructive wave of inflation that will wipe out both constructed debt and constructed savings, scraping the financial landscape clean."

Sackerson said...

By golly, that's well-expressed, DM. I love the exposed exotic creatures etc.