During my recent visit to Udon I had some problems with my back which, while restricting my movements for a few weeks, gave me plenty of time to reflect on some of the origins of the current economic mess as opposed to those propounded and propagated by the politicians, political commentators and the media (all of whom have their own political, blame avoidance and/or blame accusation agendas).

Unfortunately, when visiting Thailand I don’t carry a computer with me (I like to have a few months cold turkey away from their addictiveness) so I wasn’t able to research any of the areas while I was laid up. Now that I’m back in the cold, I have started researching some of the areas on which I was reflecting - the DJ bubble is one of them.

There were plenty of clues available that a crash was pretty well inevitable but these, by and large, were ignored by most of those in power and their supporters (and also by those not in power!) and worst of all by the media who are supposed to help keep us informed – I remember on one of the Fox Business programs someone claiming as recently as October 2007 (when the DJ had just broken through 14,000) that there was no reason for the DJ not to reach 16,000 and possibly even 18,000 by the end of 2008

One of the easiest clues to spot that there was a major bubble forming should have been the Dow Jones Index – it is obsessively reported on many times a day in almost every form of media - on the other hand how often do we see what is right in front of our eyes?

This is a chart of the Annual Average of the DJ since 1928
Notes:
1. The values do not show the peaks or troughs in any year.
2 The 2009 value is the ytd (Jan -Apr) average.

Although there are a number of exceptions the chart demonstrates fairly stable growth in the DJ from its start until the current bubble first started around 1983 with a small correction occurring in 1988 - and then it really took off until 2000 when, following the burst of the dotcom bubble, a correction occurred over the next three years and then it really took off again until peaking at over 14,000 in 2007.

Trying to keep things simple I have only comparing the compound growth rate between 1928 & 1988 with that between 1988 & 2007 when it peaked.

It showed:
• 1928 to 1988 - a compound growth rate of 3.44% over some 60 years
• 1988 to 2007 - a compound growth rate of 10.23% to get to the average in 2007 of 13,163.80 (Note: the peak for 2007 was over 14,000).

The growth of 10.23% compounded from 1988 to 2007 looks pretty ridiculous when you consider that it coincides with the decline in domestic manufacturing as it was being shut down and transferred to countries with low labour costs.

It is interesting (and rather scary) to note that had the growth rate of the first 60 years been maintained until today the DJ would now only be around the 4,200 mark (about half of its current value).

I do have the occasional suspicion that some part of the bubble may have been a result of manipulation by those who would benefit most such as corporate executives with their ever more lucrative options and financial institutions with their access to insider information.

Like all measures of the economy, the DJ only tells part of the story of what is happening and should not be looked at in isolation. It should be recognised that the DJ also acts as a barometer of “optimism” in the economy and is also thought by some parties to be a forward indicator and by others as a lagging indicator. Its values do vary quite considerably as prices of shares in corporations (and their P/E ratios) react to market sentiment. However the DJ when looked at over longer periods of time (and alongside other economic indicators) can help to show when markets have been overbought or oversold.

Note the average values for the DJ that I have used are calculated using the average of the opening and closing values for each month (which I obtained from Yahoo Finance).

Wow, very interesting chart and as I sit here I am thinking how lucky I am. Got into the market in 84 and because the present wife wanted wanted to buy the townhouse across from where we rent I got out in March 2008, a bit late as I had lost quite a bit already. Never won a big prize/lottery but feel I'm one of the luckiest guys in the world, after all I am living in Thailand;o)

The boom was especially pernicious because foreigners were willing to accept U.S. Dollars without a care in the world and to buy massive amounts of U.S. Government debt. Thus, Americans could borrow at will, refinance their houses, purchase new cars, take vacations and buy all sorts of things, all based on the imagined "equity" in their houses and value of their stocks and retirement funds. This could not continue.

Obama is now dictating that the spending that occurred during the boom must be continued at all costs. If consumers are maxed out or broke, well, it is up to the government to stimulate, stimulate, stimulate. And if no one accepts U.S. debt, then the Fed needs to print, print, print.

That is not economics, folks. That is nonsense. Actually, that is socialist tryanny!

"Obama is now dictating that the spending that occurred during the boom must be continued at all costs."
Hijacking?;o)

TJ wrote:....... Obama is now dictating that the spending that occurred during the boom must be continued at all costs. If consumers are maxed out or broke, well, it is up to the government to stimulate, stimulate, stimulate. And if no one accepts U.S. debt, then the Fed needs to print, print, print.

That is not economics, folks. That is nonsense. Actually, that is socialist tryanny!

A little bit of history:

The bubble started in the 2nd term of Reagan, carried on with Bush & Clinton and burst in the 2nd term of Bush 43 on October 9th 2007 - more than a year before BHO was elected; the bubble is non partisan.

BHO declared he was running for president on Feb 10th 2007 (admittedly that was 8 months before the bubble burst on Oct 9th that year) however as HRC was the clear Democratic front runner during that time it is extremely difficult to see how even the most bigoted Obamaphobe can connect him to the DJ bubble bursting.

The topic is about the Dow Jones bubble (and its bursting) – it is just one element that led up to the current economic crisis; how that crisis is being and/or should be being addressed is a completely different topic.

So please give us a give us a break from seeking to use every possible opportunity to inject infantile, rabid anti-Obama rhetoric - it is quite pathetic, adds nothing to the discussion and is irrelevant to the topic.

Rant over.

JimboPSM wrote:

TJ wrote:....... Obama is now dictating that the spending that occurred during the boom must be continued at all costs. If consumers are maxed out or broke, well, it is up to the government to stimulate, stimulate, stimulate. And if no one accepts U.S. debt, then the Fed needs to print, print, print.

That is not economics, folks. That is nonsense. Actually, that is socialist tryanny!

A little bit of history:

The bubble started in the 2nd term of Reagan, carried on with Bush & Clinton and burst in the 2nd term of Bush 43 on October 9th 2007 - more than a year before BHO was elected; the bubble is non partisan.

BHO declared he was running for president on Feb 10th 2007 (admittedly that was 8 months before the bubble burst on Oct 9th that year) however as HRC was the clear Democratic front runner during that time it is extremely difficult to see how even the most bigoted Obamaphobe can connect him to the DJ bubble bursting.

The topic is about the Dow Jones bubble (and its bursting) – it is just one element that led up to the current economic crisis; how that crisis is being and/or should be being addressed is a completely different topic.

So please give us a give us a break from seeking to use every possible opportunity to inject infantile, rabid anti-Obama rhetoric - it is quite pathetic, adds nothing to the discussion and is irrelevant to the topic.

Rant over.

Jimbo, sorry to hear about the problem with your back.

Thank you for the analysis. This is a reminder that although people's interests extend on the scale of decades, our planning rarely encompasses such a scale. Its kind of hard to step back and see things on such a scale, especially when you are thinking of how much profit you can make in the next few months (or how large a loss, as we have seen lately).

Here is the sixty four trillion dollar question: When will we see the end of the "big screams" in financial sector news? When will we start to see real recovery?

rick I think that the problem Jimbo is trying to highlight is that everything went from long term to short term.
I entered the financial industry late in life in the 1980s (for most, but got out after 10 years too ). I was amassed at the senior (and so elder) people running the company. They were always looking 10 -20 years ahead. The "Boss" was looking at short term aims & results, but they were there to re-mind him of the likely outlook in the long term.
If you look at Jimbo's graph logical progression says that the DJ should probably not be much above 2,000 at the minute - something to worry about except there is so much manipulation in place to keep it higher....

RF It is difficult to see when this will bottom out, I think that we are currently in a bear market rally (I hope I’m wrong), however governments (quite rightly in my view) are making mildly optimistic noises about the worst being behind us.

If I were to guess, I think that we will be well into 2010 before a “real” improvement will be seen.

Much of the reporting in the media about the causes of (and the solutions to) the problem we are in is flagrantly distorted and dishonest and is based on political agendas and ideological dogma – much of which is part of the reason as to why we are where we are today.

In the west we often have what I would describe as "confrontational" pendulum democracies, in the US the GOP blame the Dems for everything and vice versa and in the UK it is the same with the Conservatives and Labour

What has happened in financial terms is so staggering it is almost beyond comprehension – the latest calculation of the actual global losses of the banks and financial institutions is 1.4 trillion dollars, putting that as a number with all the zeros it is $1,400,000,000,000.

If you stand back and think about it, it is quite possible (but I havn't calculated it) that the losses are actually more money that these institutions actually declared as profits (say) over the last five years. It would be interesting to know just how much was paid out in bonuses, commissions and dividends on this $1.4 trillion - that would probably have been in the hundreds of billions and on profits that never existed.

That $1.4 trillion of losses on its own is bad enough, but because of leveraging and the multiplier effect, the reduction in credit purely because of the lossses (in my opinion) is likely to be in the region of some 10 trillion dollars give or take a few trillion.

In addition to this there is the fall in individual wealth (your house value, pension funds etc), I haven’t seen any calculation of what that may be and I’m not even going to try and guess just how large it is.

The only bonus from all this is, that to all intents and purposes, we have seen the end of inflation for some time to come – any talk about the various stimulus and rescue packages around the world as being inflationary is utter hogwash; the stimulus packages at best will considerably soften what would otherwise have been a very hard landing - the packages fall well short of the total bank losses and only go a small way in ameliorating the credit crunch.

The stimulus packages around the world will inevitably result in a lower standard of living and higher taxes down the road – but IMHO will probably lessen the severity of the fall.

Bob, you are right, pretty well everyone these days is obsessed about short term profits, in my day we used to do rolling corporate plans covering a good number of years into the future. I did do a calculation of where the DJ might be today had it increased at the average compound rate of the first 60 years, not quite as low as your estimate but I did have the advantage of having the actual figures to work with:

...... It is interesting (and rather scary) to note that had the growth rate of the first 60 years been maintained until today the DJ would now only be around the 4,200 mark (about half of its current value).

Jimbo, I believe I may be right in thinking that these losses, incurred by the banks and financial institutions, exceed the assets of their respective countries' governments?

I would hope we and the markets are over the worst, though inevitably with a few more roller coaster hiccoughs throughout the rest of this year, particularly if news of another previously undisclosed loss pops out. Surely, then from late this year, there should be some consolidation in stock markets, followed in early 2010 by some real recovery.

In such situations, isn't it usual that markets, - being markets, - over-react to situations, and ultimately as grim as this situation has been, investors will start to see stocks as being undervalued and start to buy in again, albeit cautiously?