Boom or Bust Cycle: Where Are We Now? 17 comments
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It has been pointed out that stock markets tend to move in cycles, where boom periods (think 1920s, 1950s, 1990s) are followed by sharp busts (1930s) or lengthy, agonizing, drawn-out flat periods where inflation consumes most of the gains from the prior period (like 1965 to 1982).
We know that the past years have represented a terrible bear cycle, but the question on many folks' minds is, where do we stand in this cycle now?
It's easy enough to see from a chart that the Dow Jones Industrial Average hasn't budged much in the past ten years, so it's already looking a bit like we are well into a 1970s-esque investment epoch. Many have concluded that if the 1970s is the proper analogy, we only have six or seven more years of famine to go. Hurray!
But dig a little deeper. Let us assume that inflation rates have clocked in around 3% on average for the last decade or so. In fact, I'd think the rate of inflation is probably somewhat higher, but take 3% as a conservative estimate. Let's also look at the real purchasing power of the dollar. When first introduced, the Euro traded close to parity with the dollar, dipped down to about 90 cents at one point, and then began an epic climb towards where it is today - which I'll peg at $1.44 just for illustration's sake.
Using the Euro as an baseline for comparison, let us assume the dollar today is worth about one third what it was worth during the prior decade. Again, this is a hypothetical figure just for illustration's sake, because ideally, we'd want to use a far broader basket of currencies.
Today, the Dow Jones Industrial Average trades at around 9,300. Adjust that for inflation and the demise of the dollar, and what we find is that in fact, the last time the Dow Jones hit this level in real terms was when the Dow Jones traded around 4,000 back in 1994 to 1995.
In real terms, the U.S. markets haven't actually moved anywhere for nearly 15 years.
Does that mean we've come to the end of a 1970s-like stretch? Not necessarily. The 1970s was a period characterized by runaway inflation rates, far higher than what we've experienced in the last ten years. The true wealth destruction from 1965 to 1982 was far more dramatic than what we have seen to date - perhaps in the range of 60% or more.
So, let's look at it another way. Starting at the top of 1990s bull cycle. The last great bull market cycle probably ended in 2000 when the Dow hit 12,000. True, the Dow Jones did vault above 14,000 very briefly in 2007, but in inflation adjusted terms, that's lower than the 12,000 peak in 2000. If you assume 12,000 was the peak, then adjusted for inflation, the Dow Jones stood at about 15,700 in today's dollars. And adjusted for the deterioration of the buying power of the U.S. Dollar verses the Euro (again, assuming about $1.44 buys one Euro today), the Dow Jones would now stand at about 22,500 - nearly 13,200 points higher than today.
Look at it that way, and we've already seen a real loss of 60% in the U.S. markets off their true highs at the top of the last bull cycle. That is starting to look very much like the wealth destruction during wrought by the 1970s.
I don't know where we stand in the bear market cycle, and nobody else does either. What we can know, however, is that the current bear market cycle has been almost as bad as some of the others we've seen in history. And we can also know that after a really bad stretch in the market, usually a really good stretch follows.
For those with patience and a stomach for eating more losses that may or may not materialize over the next few months or years, the future should look brighter than it may at first blush.
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This article has 17 comments:
We haven't had a REALLY bad stretch yet.
Where we are is at the middle peak of the W. The second leg down will be less steep but will actually take us down to about S&P 400 or their abouts. The low volumes show this is a complete rigged market and when the selling pressure comes back it will quickly capitulate.
And does believe those Morons that talk about paper losses. If you cannot get your cash back then you have lost your money. And even if you could it now worth a fair bit less than when you put it there. The value of that cash is going to quickly crash but having it tied up in Wall Street isn't going to get you back in the black.
I'd be comfortable describing the 1970s as "bad" for investors, and using the metrics I suggest, we're not quite as badly off now, but we're very close. It just doesn't feel as bad because if the dollar is your functional currency, you don't notice how far your wealth has dropped each time you go to the grocery store. If you were sitting in Paris holding US equities only, you'd certainly feel like an investor would have felt by the time 1980 rolled around.
On Aug 13 01:04 PM Roger Knights wrote:
> "And we can also know that after a really bad stretch in the market,
> usually a really good stretch follows."
>
> We haven't had a REALLY bad stretch yet.
On Aug 13 01:11 PM Dave Wrixon wrote:
> This guy really is as daft as his photo suggests!
>
> Where we are is at the middle peak of the W. The second leg down
> will be less steep but will actually take us down to about S&P
> 400 or their abouts. The low volumes show this is a complete rigged
> market and when the selling pressure comes back it will quickly capitulate.
>
>
> And does believe those Morons that talk about paper losses. If you
> cannot get your cash back then you have lost your money. And even
> if you could it now worth a fair bit less than when you put it there.
> The value of that cash is going to quickly crash but having it tied
> up in Wall Street isn't going to get you back in the black.
I like articles like this that try to give some perspective related to things like inflation and purchasing power of the dollar. This is something that I, like most people no doubt, never thought about before starting to educate myself on finances and the markets.
But I do have to comment on: "For those with patience and a stomach for eating more losses ... over the next few months or years, the future should look brighter". All I can say is, I don't know anyone who can stomach losses for years.
On Aug 13 01:04 PM Roger Knights wrote:
> "And we can also know that after a really bad stretch in the market,
> usually a really good stretch follows."
>
> We haven't had a REALLY bad stretch yet.
Does he believe that the "Japanes Miracle" worked? And, as a recent graduate of Harvard told me, Iran released the hostages because they feared Jimmy Carter.
I am a committed bear (took the red pill in Feb 08) this is one of the few bullish positions that actually make sense to me. Carry on Alex.
Why do the screwballs come here to reveal themselves? "should" "may" meaning what? Tighten it up partner or just skip it. We read a lot of stuff and you just can't make here without something to say. Personally I kind of like your ideas, but not in writing.
This is a chart of market cycles based on real returns and nominal returns going back to 1871. Clearly in "real" terms we have been in a bear market since 2000. This has been the longest bear market in modern history (assuming Mar 9th bottom & we are now recovering)
www.scribd.com/doc/183....
On Aug 13 01:11 PM Dave Wrixon wrote:
> This guy really is as daft as his photo suggests!
>
> Where we are is at the middle peak of the W. The second leg down
> will be less steep but will actually take us down to about S&P
> 400 or their abouts. The low volumes show this is a complete rigged
> market and when the selling pressure comes back it will quickly capitulate.
>
>
> And does believe those Morons that talk about paper losses. If you
> cannot get your cash back then you have lost your money. And even
> if you could it now worth a fair bit less than when you put it there.
> The value of that cash is going to quickly crash but having it tied
> up in Wall Street isn't going to get you back in the black.
Many argue that they do indeed know where we are in the cycle, and have a forecasting track record to support their contention:
finance.yahoo.com/tech...=^DJI,^GSPC,SPY,DIA,QQ...
Basically, just like in the 30's real recovery won't happen until debt is paid down or liquidated.
This process has barely started, and no real reform has yet taken place, instead the can has been kicked down the road and the dinosaurs continue as zombies.
We will start making some progress when the present crew of Summers, Bernanke and Geithner are kicked out and Elisabeth Warren takes charge.
Until then the banksters rule, and will continue to strip a collapsing economy of it's remaining assets.
Don't believe this head fake rally.
On Aug 13 06:18 PM E Nuff Sed wrote:
> Rather than arguing hypotheticals look at the data.
> This is a chart of market cycles based on real returns and nominal
> returns going back to 1871. Clearly in "real" terms we have been
> in a bear market since 2000. This has been the longest bear market
> in modern history (assuming Mar 9th bottom & we are now recovering)
>
> www.scribd.com/doc/183....
Rather than predict the market, my goal is to describe it. What's the practical use of that? By describing the nature of the market, we can get a sense whether it is a better strategy to own or sell risk - trying to guess whether the Dow Jones will hit 10,000 next year or in the next decade isn't helpful or, in fact, necessary.
I say "should" and "may" by design because I don't believe in "will". With the exception of a very select few traders, most people who do believe they know for sure where the market will be in a year end up humbled and poorer.
On Aug 13 06:11 PM whidbey wrote:
> You said, "The future should look brighter than it may at first blush."
>
>
> Why do the screwballs come here to reveal themselves? "should" "may"
> meaning what? Tighten it up partner or just skip it. We read a lot
> of stuff and you just can't make here without something to say. Personally
> I kind of like your ideas, but not in writing.
this market is rigged (as most things in the United States have
been since its inception....find the word democracy written in any
of the founding documents and I'll pay you, cash!). One point of
disagreement with the author however: "compared to l929-32?, no
not as bad". Oh really? Did the national debt reach the level it is
now at, even in comparative terms? Were we a debtor nation (world's largest) as we are now? Were there awesome amounts
of toxic debit floating around unaccounted for on bank and business
balance sheets?
I think not!
E.Tippett
Chicago, Illinois