Stocks and Oil: Charting a Burst Bubble

Above we see a daily chart of the Dow Jones Industrial Average priced in barrels of West Texas Intermediate crude oil (cash prices - click to enlarge). We can see that from the mid-1980s through early 2000, we had a regime in which equity prices were rising considerably relative to energy prices. Since 2000, however, the regime has gone the other way, with crude oil handily outperforming stocks.

When we price one asset class in terms of another, we gain a perspective on relative strength and where capital is flowing. The year 2000 marked a watershed in which capital flowed away from financial assets and into tangible, commodity assets.

When we think of a bubble bursting in 2000, we generally think of tech stocks. The chart above suggests that a larger burst of a financial asset bubble also occurred, obscured only by the fact that we tend to denominate stock indexes in dollars, not alternative assets.

Comments

[armadillo:]

That is an amazing chart and concept in visualizing where the money in the world is flowing and how our spending will come to an end.

2007 Oct 09 04:34 PM

[calvino:]

illuminating indeed

2007 Oct 09 06:36 PM

[Greg Pinelli:]

An interesting view of things but essentially meaningless...if silver went to $40 in 3 months..hardly impossible...and gold went to $750...again, hardly stunning...a chart showing the ratio of gold to silver decreasing in the same way the Dow is decreasing relative to oil. The conclusion?? NONE. It doesn't mean gold's bubble has burst. It MAY mean silver is forming a bubble..but we won't know that until it's essentially over.

2007 Oct 09 11:40 PM

[gambitwit:]

I AM NOT A ROCKET SCIENTIST OR ECONOMIST OR MARKET TIMER OR CHARTIST, BUT IF I WAS THE LATER I WOULD GIVE THIS CHART A D MINUS. IT IS FUN TO LOOK AT
BUT TELLS ME NOTHING ABOUT WHAT THE THE CHART IS TRYING TO TELL ME BECAUSE I AM NOT THE GUY WHO MADE IT. Nice graphics. Maybe its a mountain. Of What?

2007 Oct 10 08:32 PM

[sikarskie:]

There needs to be more free market competition in the Oil markets...Key
REVERSE ALL THE OIL MERGERS..ALLOW THE PRICE TO HAVE A FREE NON-MANIPULATED MARKET

2007 Oct 11 12:02 PM