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EJ
03-02-09, 05:09 PM
http://www.itulip.com/images/RDrecDJIA111708SM.gifReal DOW Update: Still looking for a bottom?

We first published the Real DOW (http://www.itulip.com/realdow.htm) when we re-opened iTulip.com March 2006. At the time the DOW traded around 11,400. Today the DOW closed at 6763, nominally off 41% since our Real DOW warning, and below the 7552 level that so many stock market watchers called a “bottom” at the time we published our warning, Beware Relief Rallies (http://www.itulip.com/forums/showthread.php?p=62889#post62889) in November 2008. Are we finally close to a bottom? The Real DOW, so reliable for so many years, still says, No.

Back in 2006 – seems so long ago, doesn’t it? -- we received numerous objections to the Real DOW analysis, along the lines of “You aren’t counting dividends!” and “You guys are so negative!” Most were not that polite.

We figured that when the market finally tanked that companies that paid dividends were likely to cut the dividends to conserve cash. GE’s recent move to cut dividends by nearly than 70% is a good example. In any case, dividends or not, the market was entirely over-inflated, as any sentient being could see by looking at our chart. The mean reversion trip to the 1.64% curve started off slowly in 2006 due to inflation while the nominal price rose, and has accelerated downward at a fast and furious pace since early 2008 in nominal terms. Expressed in the Real DOW, it all looks like one continuous correction.


http://www.itulip.com/images/RDrecDJIA111708.gif


The good news is that the DOW may be more than half way or more through the mean reversion process. The bad news is that we may still have a long way to go.


http://www.itulip.com/images/realdowfuture2012.gif


If the Real DOW overshoots as much as it did last time the stock market reflected a relatively minor debt deflation, we are only about half way through the correction.

Keep in mind our Real DOW is, well, real – that is, inflation adjusted; during the previous debt deflation bear market, stocks declined rapidly in nominal terms then in inflation-adjusted terms. Note that in Real DOW terms, the entire 1966 to 1983 period appears as one continuous bear market, first disinflationary then inflationary. Likewise, the more extreme debt deflation bear market that started in early 2006 during the inflationary weak dollar period and continued into the disinflationary period that started at the end of 2008; in Real DOW terms, the decline is continuous.

There are several ways that the DOW can go on to the queasy lows shown above. One way is for inflation to rise and for the DOW to fall only moderately further in nominal terms. We might, for example, see the DOW fall to 5000, our long-term DOW target, while inflation rises into double digits as occurred between 1975 and 1980, in early 2012. But that's just a guess, of course.

Trying to figure out exactly how the Real DOW will finally meet up with the 1.64% curve and how much it may overshoot -- and when -- keeps us busy, but we have since March 2006 not doubted that it eventually will.

How deep a Modern Depression?

We started to talk about The Modern Depression back in April 2006 (http://www.itulip.com/forums/showthread.php?p=3393#post3393). October of that year we pegged its commencement to Q4 2007, and with Friday’s Commerce Department announcement of GDP contraction in the US at a 6.2% annual rate in Q1 2008, 60% higher than the consensus forecast of 3.8%, we now issue a range of forecasts for the length and depth of the Modern Depression.

Our first analysis focuses on US GDP. Later analyses will delve into output, exports, tax receipts, savings, investment, current account, and other key measures of the Modern Depression economy.

Methodology

We weigh major macro-economic antecedents, economic policies, and policy results comparing The Great Depression and the Modern Depression to arrive at best, medium, and worst-case scenarios.


http://www.itulip.com/images/realVSpotentialGDP1930-1933.gif
Economy contracted to GDP reached 10 years previous


Current Modern Depression GDP Forecast


http://www.itulip.com/forums/../images/realVSpotentialGDPmedium2008-2011.gif
Eight year cycle: Economy contracts to GDP reached 5 years previous, recovers in four years


Subscribers can read the complete analysis at Modern Depression: Focus on US GDP ($ubscription) (http://www.itulip.com/forums/showthread.php?t=8401)

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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rabot10
03-02-09, 05:48 PM
EJ,

This whole thing is starting to get funny. I have gone from bars on the windows, guns guns guns, and a lot of freeze dried food, while sitting in my front room stroking a gold eagle chanting MY PRECIOUS.

To god damn what's up with that BS - this is not the life I want to live, I like a Foie gras appetizer, bone-in ribeye with a nice chocolate souffle for dessert. There arn't any freeze dried chocolate souffles btw.

Something happened to me not sure what but I decided to kick some ass, U know the old "I'm mad as hell and can't take it anymore" stuff.

Any ideas on how best to do that? I have three daughters 12, 14, and 18, I will do whatever I have to do to protect them, but what can we do as a group to handle this situation? You have connections in government, who do we back? Who should I throw my support behind?

Your forcasting has been second to none, but now for me it is time to act. The old live or die in the attempt - play for blood thing. (I have never lost any big battles this lifetime and this won't be the first - and U can take that to the bank)

Hey Jim sorry for my inappropriate posts - I wish you nothing but good fortune.

your friend
rick

Mega
03-02-09, 06:53 PM
Its Amazing Ej, everyone has been thrown by this.....Hudson/Schiff/My Dog Tara......They don't know if Gold is going to $500 or $5000..........Its like the rule book has just been tossed out the window & it being made up as we go along.......i hope you keeping notes!

Mike

goadam1
03-02-09, 07:20 PM
I like how EJ has become (on a relative scale) an optimist.

Sharky
03-02-09, 07:27 PM
We might, for example, see the DOW fall to 5000, our long-term DOW target

On the Real Dow graph, we're at about 59, with a possible low-end target of around 25, or a decline of another 58%. In today's dollars, that would be the same as going from Friday's close of 7000+ to about 3000.

Another way to look at it is that if you optimistically exclude GM, the P/E of the Dow is currently around 10. The Great Depression saw average P/Es of around 5 before the index recovered; that would be a drop of another 50%, assuming constant earnings -- or from 7000 to about 3500.

However, earnings are collapsing, and current forecasts assume a significant recovery this year that won't materialize. If earnings continue their decline, that would suggest a floor much lower than 3500, and probably well below 3000 as well.

Sharky
03-02-09, 07:41 PM
Something happened to me not sure what but I decided to kick some ass, U know the old "I'm mad as hell and can't take it anymore" stuff.

Any ideas on how best to do that? I have three daughters 12, 14, and 18, I will do whatever I have to do to protect them, but what can we do as a group to handle this situation? You have connections in government, who do we back? Who should I throw my support behind?

Step 1: Realize that government is the cause of the current problems. It can therefore never cure them, but only make them worse.

I was at a similar point a couple of years ago. My solution was to withdraw from the system and move out of the country. Seemed like the safest thing to do for my family, and I'm very happy with that decision.

If I had stayed, it seems to me that increasing public awareness would be the best approach to causing real change in the system. Organize rallies, peaceful demonstrations, etc -- not on the Internet, but in real life.

orion
03-02-09, 10:17 PM
EJ,

The real Dow curve at 1.64% growth seems very similar to the Real Potential GDP curve you showed in thread (http://www.itulip.com/forums/showthread.php?p=80285#post80285) (http://www.itulip.com/forums/showthread.php?p=80285#post80285)

http://www.itulip.com/images/realVSpotentialGDP1930-1933.gif


http://www.itulip.com/images/RDrecDJIA111708.gif

From the late 1920 to say 1970 real potential GDP goes up by 3 where DOW goes up by 3.5. So is the Real Dow just a function of GDP growth? I hope I am not asking something blatantly obvious to the more knowledgable. It seems reasonable there should be some correlation but sad that DOW is fairly close so as to say we only get stock growth from population increase?

santafe2
03-02-09, 10:46 PM
EJ,

...U know the old "I'm mad as hell and can't take it anymore" stuff.

Any ideas on how best to do that? I have three daughters 12, 14, and 18, I will do whatever I have to do to protect them, but what can we do as a group to handle this situation?

Rick, I offered much the same advise here over a year ago, do the following:


Mitigate expenditures. Ensure you and your family have the financial assets to make it through the next several years.
Surround yourself with your friends and family. Do your best to make sure everyone you care about makes it through, especially your kids.
If you have the means, buy a few arable acres. Learn some farming and ranching basics. Be independent.
Learn or exercise a skill or two that will be appreciated in a scaled down economy.
Help your local government learn to understand that we're not as likely to return to the old economy as to invent a new economy. Help these people figure out a path.
Anger is not a scarce commodity and will become less scarce over the next few years. Save yours for a time when it may be more valued.
Relax and enjoy a smaller life, this downturn will pass at its own pace.

jtabeb
03-02-09, 11:05 PM
EJ,

This whole thing is starting to get funny. I have gone from bars on the windows, guns guns guns, and a lot of freeze dried food, while sitting in my front room stroking a gold eagle chanting MY PRECIOUS.

To god damn what's up with that BS - this is not the life I want to live, I like a Foie gras appetizer, bone-in ribeye with a nice chocolate souffle for dessert. There arn't any freeze dried chocolate souffles btw.

Something happened to me not sure what but I decided to kick some ass, U know the old "I'm mad as hell and can't take it anymore" stuff.

Any ideas on how best to do that? I have three daughters 12, 14, and 18, I will do whatever I have to do to protect them, but what can we do as a group to handle this situation? You have connections in government, who do we back? Who should I throw my support behind?

Your forcasting has been second to none, but now for me it is time to act. The old live or die in the attempt - play for blood thing. (I have never lost any big battles this lifetime and this won't be the first - and U can take that to the bank)

Hey Jim sorry for my inappropriate posts - I wish you nothing but good fortune.

your friend
rick

If I may Rick,

Do what EVER the fuck you want to do, what's right for you, what you think is best for you, what makes the most sense for you, but what ever you do, don't do nothing and wait.

We are in one of those times and they are VERY RARE where we actually feel as though we are alive, where we have a genuine fear of the unkown, the only parallels that exist are the explores that (re)-discovered new lands or were the first to do something.

WE ALL GET to be first at DOING something this time, buy only if you choose to do something.

If you've read hemingway, then you know the concept of the hemingway hero. All it means is that you met life head on and lived and made a choice, and lived with the consequences be they good or bad. Nothing is garunteed, and life is much more interesting when we rediscover this little fact. So many have assumed so much for so long that we are now truly in the "undiscovered country". It's all new, every day the world that was dissappears at an exponenetial rate.

So lest you think me a hypocrite, I will share MY CHOICE with you.

My choice is:

I'm sick of living the life that is easy and safe, I'm sick of living where I don't want to, I'm sick of waiting for things to happen before I can do something, a perpetual victem of circumstances.

So,

I'm going Remote for a year to Iraq so I can Buy A house where I want to and move my family into it while I'm deployed. When I get back, I'm getting out of the military and going back to school.

Not the smartest thing sure, but it is the choice I choose to make because I CHOOSE to live the life I want, not the life that I'm supposed to live or the safe life.

It seems so natural, we all make choices everyday, but at this time for the first time in MOST OF OUR LIVES, making a choice now means risking DIRE conscequences that are very real if we screw it up.

So I would say to you choose to live while you can and while you are able. I don't know what comes this way, but IT WILL NOT STOP ME FROM LIVING.

I hope that helps, and no I'm not EJ, but what I bet he will say is that we are past the point of offering prognostications and advice and that we are to the point of FIATH and GUT INSTINCT (at Least I AM). So I'm going with my gut, and if I flail or fail, so be it, BUT I WANT TO FAIL OR FLAIL ON MY TERMS. And success if it comes, will be all the more sweeter.

Peace out bro!

V/R

JT

BadJuju
03-02-09, 11:21 PM
'm going Remote for a year to Iraq so I can Buy A house where I want to and move my family into it while I'm deployed. When I get back, I'm getting out of the military and going back to school.



I did not know you were in the military! :eek:

zoog
03-02-09, 11:25 PM
EJ,

The real Dow curve at 1.64% growth seems very similar to the Real Potential GDP curve you showed in thread (http://www.itulip.com/forums/showthread.php?p=80285#post80285) (http://www.itulip.com/forums/showthread.php?p=80285#post80285)

http://www.itulip.com/images/realVSpotentialGDP1930-1933.gif


http://www.itulip.com/images/RDrecDJIA111708.gif

From the late 1920 to say 1970 real potential GDP goes up by 3 where DOW goes up by 3.5. So is the Real Dow just a function of GDP growth? I hope I am not asking something blatantly obvious to the more knowledgable. It seems reasonable there should be some correlation but sad that DOW is fairly close so as to say we only get stock growth from population increase?

The source page (http://homepage.mac.com/ttsmyf/) has a lengthy technical description of how the Real Dow is constructed, including the 1.64%/year curve. From a quick read through, it looks like the 1.64% was calculated from the Dow data itself for curve fitting (http://en.wikipedia.org/wiki/Curve_fitting).

This does not necessarily mean "no" to your question, but the real dow page does not make any mention of GDP or population. There could be some underlying correlation though. Perhaps 1.64%/year is the annual population percentage equivalent of one sucker born every minute.;)

jtabeb
03-02-09, 11:56 PM
I did not know you were in the military! :eek:

It's all in my profile.

(and from what I can tell, most of my peers are sick of it too)

V/R

JT

ASH
03-03-09, 12:14 AM
Not the smartest thing sure, but it is the choice I choose to make because I CHOOSE to live the life I want, not the life that I'm supposed to live or the safe life.

In many ways, you are a man after my own heart.

It's not quite the same sentiment, but the spirit of charting your own way is close to what I was trying to express in this motto I wrote in college. Partly I was writing about choosing your own path and values, and partly I was writing about how we are ultimately the only ones who can safeguard what system we live under, and what measure of justice is achieved in life.

A cold universe admits to no purpose, nor does it
pass judgement. Senseless or inspired, noble or profane,
it can draw no distinction. These tasks are for you alone:
to define meaning for your life and values for your soul.
Compromise, yes, and band together when you can. Learn
to trade what is preferable for what is imperative, but do
not hesitate to champion your way amidst this democracy
of ideals. Blood and conflict alone - not gods nor fickle
human decency - stand between all you hold dear and
slavery to monstrous standards.



It seems so natural, we all make choices everyday, but at this time for the first time in MOST OF OUR LIVES, making a choice now means risking DIRE conscequences that are very real if we screw it up.


I've had the same feeling recently -- like all the chips are on the table, and the choices I make now will have far-reaching consequences.

jtabeb
03-03-09, 12:23 AM
In many ways, you are a man after my own heart.

It's not quite the same sentiment, but the spirit of charting your own way is close to what I was trying to express in this motto I wrote in college. Partly I was writing about choosing your own path and values, and partly I was writing about how we are ultimately the only ones who can safeguard what system we live under, and what measure of justice is achieved in life.

A cold universe admits to no purpose, nor does it
pass judgement. Senseless or inspired, noble or profane,
it can draw no distinction. These tasks are for you alone:
to define meaning for your life and values for your soul.
Compromise, yes, and band together when you can. Learn
to trade what is preferable for what is imperative, but do
not hesitate to champion your way amidst this democracy
of ideals. Blood and conflict alone - not gods nor fickle
human decency - stand between all you hold dear and
slavery to monstrous standards.



I've had the same feeling recently -- like all the chips are on the table, and the choices I make now will have far-reaching consequences.

There must be something in that Oregon water!;)

EasternBelle
03-03-09, 01:11 AM
EJ,

if you used pre-Clinton methodology to calculate inflation adjustment to the Dow (as provided by Shadow Government Statistician Williams) would that alter your chart considerably? Would we be closer to the bottom then?

EasternBelle

Vinyasa123
03-03-09, 01:41 AM
There are two ways to play this perhaps. Neither is right. Probably more to do with your personal make up and state of paranoia about what others are going to do to you if things really collapse. I believe things get worse before they get better but we have a choice and need to seperate economics and wealth from living.

1. You can join humanity and protect yourself at the same time through well managed investments in gold, silver coins, inflation hedges like Rydex rising rate funds and VERY, VERY select corporate bonds and even some equities. Companies like Cisco will own every significant technology patent because they have the cash (I am in the sector and have never seen such breakthrough's on sale in 20 years). The strong cash rich companies that can withstand massive upheavel come out on the other side and are going to dominate the world economy and they frankly aren't that hard to pick but you need a 10 year horizon for that part. That said I think we will see many of them come down another 25-30% after a potential strong rally on news of a reasonable approach to cleaning out the toxic assets and a somewhat better than socialism outcome of congressional negotiations on the packages. I voted Obama and am stunned, not by the taxes as that was a promise, but the social engineering he is doing already. Man was I a fool. I am always willing to help the weak but not just those that don't have what I have. there is a big difference.

2. You can choose to head for the hills and live in a bunker as a curmudgeon(sp) and teach your children and loved ones that when things look bleak say FU to your neighbors and fellow man. Unless you think we are going the way of Rwanda or real violent tribal war fare versus civil unrest (which I do see) and need to leave (I suppose its possible). living overseas is a wonderful experience for many reasons and now isn't a bad time but if you think we have it bad try the countries that were selling all that crap to us (whether it be lead toys, nasty pharmaceuticals or oil). At least we have a sevice sector. The US is STILL the largest mfg in the world.

I am personally and optomist and have started a couple of companies that sold for a fair amount of money. i have given back 1/3 of it thinking I was conservative and while furious and angry I fight it everyday.

Who wants to live in a world that some of you want to foster. Better to be part of the solution than to leave it to others to fix. Run and hide or help fix it while taking measures to secure your family and loved ones?

Sorry for the non economic tirade here but the guns and fall out shelter are part of the problem in this country. It is just another way of saying I'll get mine. If you have never lived anywhere else, our worst standard of living is still better than 95% of the world. FYI: New idea for fall out shelters: My fall out shelter is my wine cellar with 500 bottles and enough food for two months under the theory if it gets really bad i am going to drink my self so silly on great cabs and pinot noir)

Rajiv
03-03-09, 02:48 AM
Yes it would be nice to see a inflation adjusted DJI using the shadowstats inflation measure. You are correct in that, then we may not have that far to drop!

The corollary to that is that the Dow was not that far overinflated, and that we were not as welathy as we thought! Or that the 1.64% real growth rate is in fact unsustainable!

aa
03-03-09, 05:25 AM
Woohooo!!! Bring it on!!!!!

I am a buyer of stocks and my plan is to dollar cost average the market for the next 20 years. The lower it goes the better as far as I'm concerned.

Imagine you had bought stocks every month between 1930 and 1950 .... or every month between 1968 and 1988.

Rajiv
03-03-09, 05:41 AM
Actually, if you held the companies that made up the DJI in 1930, and you held the same stock without trading, it would probably be worth very little today

See DJI (http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average)


The individual components of the DJIA are occasionally changed as market conditions warrant. When companies are replaced, the scale factor used to calculate the index is also adjusted so that the value of the average is not directly affected by the change.

On November 1, 1999, Chevron, Goodyear Tire and Rubber Company, Sears Roebuck, and Union Carbide were removed from the DJIA and replaced by Intel, Microsoft, Home Depot, and SBC Communications. Intel and Microsoft became the first two companies traded on the NASDAQ exchange to be listed in the DJIA. On April 8, 2004, another change occurred as International Paper, AT&T, and Eastman Kodak were replaced with Pfizer, Verizon, and AIG. On December 1, 2005, AT&T returned to the DJIA as a result of the SBC Communications and AT&T merger. Altria Group and Honeywell were replaced by Chevron and Bank of America on February 19, 2008. On September 22, 2008, Kraft Foods replaced American International Group in the index

labasta
03-03-09, 05:43 AM
I'd be interested in the shadow stat inflation figures too.

To be honest (I've said this before), why does it have to be a curve? From 1924 to 1984, it could be a virtually horizontal straight line.

If the shad stats are included, then the curve just might become more of a straight line until 2008.

jimmygu3
03-03-09, 11:48 AM
Woohooo!!! Bring it on!!!!!

I am a buyer of stocks and my plan is to dollar cost average the market for the next 20 years. The lower it goes the better as far as I'm concerned.

Imagine you had bought stocks every month between 1930 and 1950 .... or every month between 1968 and 1988.

Assuming you had cash to buy through the depression, 1930-1950 dollar cost averaging would have returned 5.3% annually while CPI averaged 2.9%. 1968-1988, not so good, as your 6.8% return would be largely eaten up by 6.3% CPI. Nothing compares to the 1980-2000 FIRE economy stock boom that we are all still waking up from. You would have had returns of 13.8% with only 3.8% CPI.

But you're right- if your time horizon is long, it's not a bad time to wade in. Certainly less downside than we've had in a long time.

Jimmy

MarkL
03-03-09, 01:34 PM
If I buy not only into "Ka" but also into "Poom" (which I do) then I would also buy into this curve banking sharply upward after it bottoms.

Eric... to imply that this curve will continue into the future as shown (with moderate inflation), seems to contradict (or at least ignore) the "Poom" /inflationary portion of your own theory. Let's estimate the bailouts that have been and will be made, and include the "Poom" inflationary effects to paint this graph properly and fully reflect the amazing vision you've given to us all. What happens after it bottoms?

sn1p3r
03-03-09, 01:41 PM
So where does the 1.64% yield curve number come from? Is this backed into based on a historic controlled growth?

swgprop
03-03-09, 01:46 PM
Woohooo!!! Bring it on!!!!!

I am a buyer of stocks and my plan is to dollar cost average the market for the next 20 years. The lower it goes the better as far as I'm concerned.

Imagine you had bought stocks every month between 1930 and 1950 .... or every month between 1968 and 1988.

You might be interested in reading a recent article (http://www.2000wave.com/article.asp?id=mwo022009) by John Mauldin. He basically debunks the notion of buy and hold. Most people would consider a twenty year time frame to be "long term", but he stratifies 20 year segments showing that some are winners and some losers.

orion
03-03-09, 02:00 PM
Zoog,

Thanks for the reply. I have done some searching and found this paper from Georgia Tech (http://mgt.gatech.edu/fac_research/centers_initiatives/finlab/finlab_files/ga_tech_dow_gdp_2007.pdf) (http://mgt.gatech.edu/fac_research/centers_initiatives/finlab/finlab_files/ga_tech_dow_gdp_2007.pdf)

I can't figure out how to extract graph of nominal GDP vs Dow from 1916 to 2006 but you should look. Essentially they track each other except;

1) 1920 to 1940, when Dow peaks way above GDP especially in 1929
2) 1969 to 2000 the Dow falls below GDP line and does not catch up until 2000 or 2001

Here is an excerpt from paper describing this;


One year of departure was 1929, when the Dow industrials averaged 311.2, exceeding
GDP of 103.9($Billions) by nearly 200%. By 1932, this discrepancy had been all but erased,
with the Dow industrials averaging 64.6 as compared with GDP for the year of 58.5($B). After
another brief departure in the late 1930s, the Dow industrials correlated closely with GDP
through the late 1960s. Even in the bull market year of 1966, the Dow industrials averaged
873.6 in a year in which GDP came in very closely at 787.8($B). In 1968, the two measures
were almost identical. After 1968, the Dow industrials and GDP parted company again. GDP
moved upward as the U.S. economy continued to grow, at least in nominal terms. However, the
Dow industrials lagged, as the market doldrums of the late 1960s, 1970s and early 1980s gained
a stronghold. The disparity between the two grew as oil shocks, inflation, and high interest rates
took their toll on share prices. In 1982 the Dow industrials averaged 73% below GDP. That
year, 1982, was the first year of the super-bull market that ran into 2000.
In this light, the bull market of the 1980s and 1990s can be seen as having been a case of
catch-up, where the Dow worked its way back toward GDP after having been left behind
sometime in the late 1960s. For example, as recently as 1994, the Dow industrials averaged
more than 46% below GDP. However, by 1998, as the bull market accelerated, the difference
between the two was eliminated.
In 1999 and 2000, the Dow industrials exceeded nominal GDP. During 2001, however,
with declines in the Dow and increases in nominal GDP, the two measures were once again,
nearly identical. Continued weakness in stock prices during 2002 resulted in the Dow averaging
about twelve percent less than nominal GDP. Then, beginning in early 2003, with the Dow
average trading below 8,000, the most recent bull market began, moving the Dow to close the
gap with nominal GDP. The Dow’s recent peak above 14,000 was slightly higher than nominal
GDP of 13,700($B), annualized through the second quarter of 2007.

ASH
03-03-09, 02:04 PM
So where does the 1.64% yield curve number come from? Is this backed into based on a historic controlled growth?

It looks to me like they chose a cutoff date (say 1995?), after which the stock market behavior was deemed to be "aberrant", and then did a fit to the data before the cutoff date. Perhaps the thought was to find the average rate of real asset price growth, absent asset price inflation related to the FIRE economy. One might then think we'd see a return to the non-FIRE price levels, after the FIRE economy implodes. Of course, by choosing to discard "aberrant" data when making a fit, one guarantees that said data then looks aberrant when compared to the fit.

My impression is that this analysis has value as a "big picture" look at the stock market, but -- similar to plots of the DJIA-to-gold ratio -- has little quantitative accuracy. In other words, it was a great way to see that stocks were overpriced when they were outrageously overpriced, but probably can't be relied upon to find a quantitative bottom in the market.

Andreuccio
03-03-09, 02:11 PM
There arn't any freeze dried chocolate souffles btw.



Pre-SHTF business opportunity? :D

FRED
03-03-09, 02:26 PM
If I buy not only into "Ka" but also into "Poom" (which I do) then I would also buy into this curve banking sharply upward after it bottoms.

Eric... to imply that this curve will continue into the future as shown (with moderate inflation), seems to contradict (or at least ignore) the "Poom" /inflationary portion of your own theory. Let's estimate the bailouts that have been and will be made, and include the "Poom" inflationary effects to paint this graph properly and fully reflect the amazing vision you've given to us all. What happens after it bottoms?

Why do you say that? If the DOW stays flat and inflation spikes the Real DOW will fall like a rock.

ggirod
03-03-09, 02:55 PM
The Real Dow seems to require some interpretation depending on what you want to predict. For example, if it were to fall like a rock (which today seems rather likely) then it would hit the line at maybe 4500, but that would correspond to an actual DJI price of maybe 5500 or so. Then inflation might buoy up the prices (but not the Real Dow) after an undershoot dip below the line. We are not all that far from the projected value.

So, you have to think a lot about interpreting the results. The bleak look of the values is because they are already inflation adjusted, something that most investors do not consider all that well. In fact, if they considered inflation they might not generally be investors. However, there are some other possible interpretations. If, after a flirtation with the 4000s in Real Dow, the prices start to track the curve, then that says that the raw DJI prices would be keeping just a bit ahead of inflation whatever the rate was. That prediction would imply that acquiring stocks in the dip below the line might be a good hedge vs moderate, not hyper inflation, especially if you have some gold already.

Are my interpretations right? Are they even reasonable? Can somebody offer a clearer explanation and maybe a family of predictions?

bart
03-03-09, 05:00 PM
http://www.nowandfutures.com/images/dow_cpi_lies1900-current.png

Contemptuous
03-03-09, 05:14 PM
You can't have very high inflation, let alone hyperinflation and a collapsing stock market. One of these two variables is either lying (evidently it's not the stock market lying, as it's doing a swan dive) or that variable will have to turn right around and scoot right back towards the other one in a hurry - it's either that, or we are in an environment which has nothing whatsoever to do with inflation. My suggestion, DOW has to turn and scoot up in a hurry just as soon as iTulip's core thesis (very high inflation) manifests. Last time I checked, iTulip's thesis was that inflation would have to appear ... soon. IMO proponents of the DOW as a bottomless pit are not adding this up. Or iTulip's high inflation forecast is way early. Take your pick. You can't have both.

radon
03-03-09, 06:46 PM
Why not? Wouldn't leverage disappear in hyperinflation? In real terms hyperinflation would make things worse not better. I would expect real estate values to fall as well in hyperinflation. If hyperinflation occurs I doubt there will be too many places willing to lend a 30 year mortgage.

kartius919
03-03-09, 07:19 PM
Real estate and land would do well under hyperinflation. Under high inflation, it would depend.

When has the stock market been an accurate predictor of the economy? It is governed by manics/depressives who bid up and short the stocks with the slightest of whims. In periods of high inflation the stock market may continue to fall but commodities will improve. Under hyperinflation, many businesses will go bust while others will succeed. The indexes will rise as it drops the dead weight and adds those that are rising. However, to assume that all stocks will rise is not correct.

Lukester please stop with your gloating over the recent drop in gold prices, it is very unbecoming and annoying. First your predictions of 1-2 year decline has not fully played out yet so it may be premature to wave the victory flag. Second, no one is perfect. Learn from your mistake and be humble with your successes. Many of your predictions have not panned out let alone been coherent.

Final thought, the gold market reeks of current manipulation. They have been successful in suppressing daily gold prices.

LargoWinch
03-03-09, 08:07 PM
bart, am I correct to assume that your chart implies that the Dow is below its trend line in real (shadowstats) terms?

If so, that appears to be a divergence from iTulip real Dow chart no?

Or perhaps your trend line differs from iTulip's trend line, hence a direct comparison is not possible...?

ASH
03-03-09, 08:11 PM
bart, am I correct to assume that your chart implies that the Dow is below its trend line in real (shadowstats) terms?

If so, that appears to be a divergence from iTulip real Dow chart no?

Or perhaps your trend line differs from iTulip's trend line, hence a direct comparison is not possible...?

bart: You did a linear fit rather than an exponential, and included the entire data set -- right?

My impression is that iTulip fit a "compounding rate of growth" model rather than a straight line, and they are not including data from recent decades.

FRED
03-03-09, 08:17 PM
bart: You did a linear fit rather than an exponential, and included the entire data set -- right?

My impression is that iTulip fit a "compounding rate of growth" model rather than a straight line, and they are not including data from recent decades.

The data and calculations are all here (http://homepage.mac.com/ttsmyf/).

ASH
03-03-09, 08:26 PM
The data and calculations are all here (http://homepage.mac.com/ttsmyf/).

Ah. Average annual growth between the mid points between market peaks.

Rajiv
03-03-09, 08:32 PM
Bart,

Instead of a linear trend , could we have it log linear? log on the vertical?

Then we can have a direct comparison between EJs version, and that corrected for CPI+ lies

Also that may show what the real Dow Growth rate has been, rather than the 1.64% that EJ shows -- and possibly also GDP corrected appropriately on the same graph. :)

Thanks

bart
03-03-09, 09:05 PM
bart, am I correct to assume that your chart implies that the Dow is below its trend line in real (shadowstats) terms?

If so, that appears to be a divergence from iTulip real Dow chart no?

Or perhaps your trend line differs from iTulip's trend line, hence a direct comparison is not possible...?

First, the two charts are not directly comparable since mine uses Dow values back adjusted from the base year 2000 where iTulip's uses a ratio... but the general shape of the iTulip one matches my CPI only corrected line fairly well.

The trend lines are also different, since mine is based on the CPI w/o lies data and also covers a different time period. That's the major difference that makes valid comparisons tough.

I did just switch the chart to an exponential trend line to help out a rough comparison, and the approximate value behind the trend line is about 2.3%/year growth which seems pretty close considering that CPI w/o lies would be higher than CPI.

And yes, we are already quite a bit below the long term trend line. An overshoot is 100% normal & expected.




bart: You did a linear fit rather than an exponential, and included the entire data set -- right?

My impression is that iTulip fit a "compounding rate of growth" model rather than a straight line, and they are not including data from recent decades.

Right on both... and I mostly posted the chart to satisfy those who were also looking for a shadowstats correction. It didn't strike me that the trend line would turn into an issue, so I just switched it to exponential instead of linear to hopefully help.

It looks from here that the iTulip 1.64% value covers the period 1924-1995 (best I can tell from the referenced article), so its to be expected that my growth rate doesn't match -- even excluding that one uses CPI and the other CPI w/o lies.


Here's the new chart, the only change being to change the linear to an exponential trend line:

http://www.nowandfutures.com/images/dow_cpi_lies1900-current.png

Rajiv
03-03-09, 09:32 PM
What does your "growth rate" work out to?

bart
03-03-09, 09:42 PM
Bart,

Instead of a linear trend , could we have it log linear? log on the vertical?

Then we can have a direct comparison between EJs version, and that corrected for CPI+ lies

Also that may show what the real Dow Growth rate has been, rather than the 1.64% that EJ shows -- and possibly also GDP corrected appropriately on the same graph. :)

Thanks

I'm limited by the functions available in Excel - exponential is as close as I can get (and its basically log).
This is the best I can do on a log chart too:

http://www.nowandfutures.com/images/dow_cpi_lies1900-current_log.png





As far as the very long term growth rate, I've only calculated it for the yearly return for Dow including dividends from 1/1900-12/2007:
Nominal - 6.1%
CPI corrected - 2.9%
CPI w/o lies corrected - 2.3%


http://www.nowandfutures.com/images/dow_plus_divid_cpi_lies1900on.png




Edit/add: I just did calculate the CAGR for my CPI adjusted Dow series for 1900-2007, and its 1.88%/year. If I go through 2008, it's 1.46%/year... so EJ's 1.64% is very workable.

LargoWinch
03-03-09, 09:57 PM
Thank you bart!

The saying; "gentlemen and a scholar" certainly applies, which to that, I would add: all around good guy.

bart
03-03-09, 10:02 PM
Thank you bart!

The saying; "gentlemen and a scholar" certainly applies, which to that, I would add: all around good guy.

You're most welcome.

Too bad you're not female, single, gorgeous & rich... ;)

Sharky
03-03-09, 10:25 PM
If the goal is estimating "real" growth instead of debt-driven illusory growth, then it seems like what you would want to do is to calculate the CAGR up to right before the recent debt-driven bubble started. Then extrapolate that curve to 2009. Otherwise, if you include the recent numbers, the curve will be biased to the upside.

It would be interesting to compare that curve to one calculated the same way for GDP.

Rajiv
03-03-09, 11:20 PM
Thanks -- I think that this adds clarity to the debate.

WDCRob
03-03-09, 11:23 PM
Some pretty compelling technical analysis over at Calculated Risk tonight. (http://2.bp.blogspot.com/_pMscxxELHEg/Sa3h1scQMOI/AAAAAAAAEsA/RGs5oCxOEBo/s1600-h/SP500Mar32009-Pig.jpg)

metalman
03-04-09, 12:10 AM
Some pretty compelling technical analysis over at Calculated Risk tonight. (http://2.bp.blogspot.com/_pMscxxELHEg/Sa3h1scQMOI/AAAAAAAAEsA/RGs5oCxOEBo/s1600-h/SP500Mar32009-Pig.jpg)

sorry... what's compelling about it? all it shows is where we are. where's the calc risk chart from mid 2006 to compare it against? where is it going?

EasternBelle
03-04-09, 12:24 AM
Bart,

thanks for the charts on the shadow stat's corrections. It's interesting to see that although we are well below trendline there, the overshoots could still be quite substantial.

EasternBelle

Rajiv
03-04-09, 01:47 AM
Metalman, it appears to be a "Calculated Risk" joke -- search for "Mortgage Pig" in google.

WDCRob
03-04-09, 08:26 AM
Yes... probably wasn't safe to assume others were familiar with CR already.

LargoWinch
03-04-09, 09:25 AM
sorry... what's compelling about it? all it shows is where we are. where's the calc risk chart from mid 2006 to compare it against? where is it going?

The pig says it is going to 0!

Thats is good enough for me and probably true in real terms...

LargoWinch
03-04-09, 09:34 AM
You're most welcome.

Too bad you're not female, single, gorgeous & rich... ;)

If that was the case, I would marry myself! :p

orion
03-04-09, 09:53 AM
Bart,

Thanks for the very nice graphs. Could you do one more with the various Dow's vs GDP or GNP? Do you have any thoughts on a correlation between GNP and Dow? Thanks again.

bart
03-04-09, 11:18 AM
Bart,

thanks for the charts on the shadow stat's corrections. It's interesting to see that although we are well below trendline there, the overshoots could still be quite substantial.

EasternBelle

You're welcome, and very much so on overshoots. Its just another view on the basic truth that EJ shows in the iTulip chart too.

bart
03-04-09, 11:19 AM
If that was the case, I would marry myself! :p

It seems like this might apply to both of us then:

http://www.nowandfutures.com/grins/kinky.wav ;)

bart
03-04-09, 11:27 AM
Bart,

Thanks for the very nice graphs. Could you do one more with the various Dow's vs GDP or GNP? Do you have any thoughts on a correlation between GNP and Dow? Thanks again.

I've never done much with GDP or GNP or GDI analysis and the Dow, mostly because my focus and time is spent on inflation, the hard vs. paper asset cycle, and money creation factors. I'm sure there's some correlation though.

All I have on GDP, etc. are charts like these.

http://www.nowandfutures.com/images/real_gnp.png



http://www.nowandfutures.com/images/real_gdp.png


http://www.nowandfutures.com/images/real_gdi.png

Rajiv
03-04-09, 11:46 AM
Bart,

Actually these are quite interesting -- also keep in mind the points that I raised earlier about the shift over the last thirty years from single income families to double income families, and of course how the income/wealth is distributed across the population, and you may come to some very interesting conclusions.

Rajiv
03-04-09, 12:02 PM
Also two links for you
(TABLES AND FIGURES UPDATED TO 2006 in Excel format, July 2008) (http://www.econ.berkeley.edu/%7Esaez/TabFig2006.xls)

and
Summary for the broader public "Striking it Richer: The Evolution of Top Incomes in the United States", updated March 2008 (http://www.econ.berkeley.edu/%7Esaez/saez-UStopincomes-2006prel.pdf)

from Emmanuel Saez' site

orion
03-04-09, 12:15 PM
Thanks Bart. I was hoping you would have more of the time line for this graph to compare with DOW;

http://www.nowandfutures.com/images/real_gdp_williams.png

I have found a graph at (http://soffistique.livejournal.com/320943.html);

http://pics.livejournal.com/soffistique/pic/0002gasd

Unfortunately they don't discuss implications of graph. Maybe the relationship is just too general, at least the two normally trend upwards.

What I am looking for here is a comparison of the 1.64% increase for the Real DOW that iTulip uses and the real potential GDP that EJ uses in the Modern Depression thread (http://www.itulip.com/forums/showthread.php?p=80285#post80285). The RP-GDP is such a smooth curve it must be based on some fixed assumption of growth but I can't find it.

bart
03-04-09, 12:28 PM
Bart,

Actually these are quite interesting -- also keep in mind the points that I raised earlier about the shift over the last thirty years from single income families to double income families, and of course how the income/wealth is distributed across the population, and you may come to some very interesting conclusions.

Very much so, Rajiv, and thanks for those links to the income decile data too. I've added a task on my ever growing list to both study them and incorporate the data into some new charts.

At one time I thought that I had an ok handle on the major factors, but the more I dig in and research the area the more I realize how much I'm missing in order to paint a truly inclusive picture.
I was aware of the strong trend in the last 30+ years to dual income families, and view it as the primary method for most families to help counteract inflation... while not realizing that what they're fighting is inflation itself and not all the other horse puckey that media, Wall St. etc. are pushing.

bart
03-04-09, 12:53 PM
Thanks Bart. I was hoping you would have more of the time line for this graph to compare with DOW;

http://www.nowandfutures.com/images/real_gdp_williams.png

I have found a graph at (http://soffistique.livejournal.com/320943.html);

http://pics.livejournal.com/soffistique/pic/0002gasd

Unfortunately they don't discuss implications of graph. Maybe the relationship is just too general, at least the two normally trend upwards.

What I am looking for here is a comparison of the 1.64% increase for the Real DOW that iTulip uses and the real potential GDP that EJ uses in the Modern Depression thread (http://www.itulip.com/forums/showthread.php?p=80285#post80285). The RP-GDP is such a smooth curve it must be based on some fixed assumption of growth but I can't find it.


Thankfully, I have the data before 1980 and it was trivial to put together a new chart. I elected to use a log based chart since it seems to show the relationships better.

http://www.nowandfutures.com/images/real_gdp_williams_log.png


I hope it helps, but I suspect you'll have to ask EJ about GDP or RP GDP vs. the Dow, and also his assumptions. It's far from my strong suit and I don't want to second guess him.

I've kept quiet about that 1.64% figure he uses, even though it has some problems, since it truly is close enough and is quite workable too. Almost any way one can statistically approach something like Dow real returns has problems and shortcomings, and that very much includes my own work.

orion
03-04-09, 02:59 PM
Thank you Bart. Very interesting the GDP adjusted for CPI and lies. Looks like GDP started down as the FIRE economy took over.

bart
03-04-09, 05:43 PM
Thank you Bart. Very interesting the GDP adjusted for CPI and lies. Looks like GDP started down as the FIRE economy took over.

My pleasure, and do also note that I'm playing a bit fast & loose with replacing the GDP deflator with CPI or CPI w/o lies, but they sure are closer than the bogus deflator.

Nothing like the way things come together when the truth is the basic goal.

wayiwalk
03-04-09, 06:15 PM
Just curious - when working this data - have adjustments to the DOW been made for the companies that were removed (due to their failure) from the DOW and replaced with "similar" companies?

How would the current DOW look if the current batch of failures (avoided by bailout) were allowed to fall to their true values.

Just questions that come to mind when trying to use this data.

I'm tempted to dig up notes from a financial analysis course I took around '99. Many iin the class thought the prof a fool (not me, maybe because I wasn't a future master of the universe type) but the guy had two good major points:

1) Include all of the factors that Bart used to come up with a real rate of return - he did his own analysis at the time and got a similar result as EJ; he strongly disagreed about the notion of 8% annual growth long before the financial folks stopped using that as a baseline.

2) Never assign a probability of zero to something that COULD happen...which in hindsight is reminiscent of the black swan theory.

ASH
03-04-09, 09:21 PM
I've kept quiet about that 1.64% figure he uses, even though it has some problems, since it truly is close enough and is quite workable too.

"Some problems" include that it is, apparently, an exponential fit to just two data points -- and the two data points were found by averaging across a pair of 35-year periods. Taking the average value is basically a zero-growth model, so that is kind of inconsistent with turning right around and fitting the two averages to an exponential growth model.

I'm actually much relieved to learn that your data treatment is turning up similar types of numbers.

LargoWinch
03-04-09, 10:21 PM
http://dshort.com/charts/dow.html?dow-since-1900-real-notesbart, I have some too!

(small difference [insert sarcasm]: unlike you, I am not the author however :p )

http://dshort.com/charts/dow-since-1900-real-notes.gif

Data source link (see bottom right):
http://dshort.com/charts/dow.html?dow-since-1900-real-notes

http://dshort.com/charts/SP-Composite-real-regression-to-trend.gif

bart
03-04-09, 11:16 PM
"Some problems" include that it is, apparently, an exponential fit to just two data points -- and the two data points were found by averaging across a pair of 35-year periods. Taking the average value is basically a zero-growth model, so that is kind of inconsistent with turning right around and fitting the two averages to an exponential growth model.

I'm actually much relieved to learn that your data treatment is turning up similar types of numbers.


You can pretty much count on me to challenge any data that's more than a little outside of the results of my own efforts -- it's the least I can do since I've been busted a few times myself. ;)

EJ & Co. are damn good at ferreting out the truth in an area that is so incredibly full of false and misleading data. And there are honest differences of opinion too, which is why I keep quiet when things like that 1.64% figure are close... and the real point of that chart with the above trend growth is to show where we are, not so much about very high accuracy which is damn near unobtainable anyhow.

bart
03-04-09, 11:20 PM
http://dshort.com/charts/dow.html?dow-since-1900-real-notesbart, I have some too!http://dshort.com/charts/dow.html?dow-since-1900-real-notes

That deserves at least one rimshot. :D
http://www.nowandfutures.com/grins/rimshot.mp3




http://dshort.com/charts/dow.html?dow-since-1900-real-notes(small difference [insert sarcasm]: unlike you, I am not the author however :p )

[chart]



Data source link (see bottom right):
http://dshort.com/charts/dow.html?dow-since-1900-real-notes

[chart]



I've noticed Mr. Short seems to have picked up a few of the concepts from various charts on my site, and presents them quite well... more power to him. It's all about getting real facts out there and counteracting the BS etc. being spewed from Wall St. etc.

bart
03-05-09, 12:07 AM
Just curious - when working this data - have adjustments to the DOW been made for the companies that were removed (due to their failure) from the DOW and replaced with "similar" companies?

No - not from me, and it would *hugely* surprise me if iTulip adjusted for it either.



How would the current DOW look if the current batch of failures (avoided by bailout) were allowed to fall to their true values.

Off the top of my head, 10-15% lower minimum.




I'm tempted to dig up notes from a financial analysis course I took around '99. Many in the class thought the prof a fool (not me, maybe because I wasn't a future master of the universe type) but the guy had two good major points:

1) Include all of the factors that Bart used to come up with a real rate of return - he did his own analysis at the time and got a similar result as EJ; he strongly disagreed about the notion of 8% annual growth long before the financial folks stopped using that as a baseline.

2) Never assign a probability of zero to something that COULD happen...which in hindsight is reminiscent of the black swan theory.

Nothing like getting your own facts, and things like the scientific method. I wish I'd saved the link, but EJ had a great recap of his "secrets" of success and they just boiled down to very simple things like confirming facts and using the scientific method.

When I first started to try and come back up to speed in 2003 in the economics and investing areas, I was strongly struck by things like three different analysts quoting very different money supply figures... and that's what got me started doing my own data collection. It pays lots of benefits, one of the best ones being that it makes it very easy to judge who is spinning or spewing BS & outright lies.

On your item #2, very much agreed -- while Taleb and the concept of black swans can be quite helpful, the real basic is that life has surprises. Unfortunately, 'life has surprises' is not a trendy concept even though there's no one I know who would disagree with it... sort of like how uncommon common sense really is.

Rajiv
03-05-09, 12:32 AM
One problem I have with using indices like the DJI, is the fact that they are in fact reconstituted from time to time -- Which may be fine from a theoretical point of view -- But the fact remains that each time a company goes in or out of the DOW, or the S&P or any other index, it in reality represents a discontinuity. Because if in fact those trades were to occur, they would impact the prices at which those stocks are/were traded -- so that replacement of stock is therefore never price neutral -- so in practice, the growth rate of these indices is probably overstated -- particularly given the magnitude of the FTD problem (http://www.deepcapture.com/)

jimmygu3
03-05-09, 11:35 AM
Here's the new chart, the only change being to change the linear to an exponential trend line:

http://www.nowandfutures.com/images/dow_cpi_lies1900-current.png

Bart was kind enough to let me play with his data to calculate a new chart: deviation from trendline. In the chart below, the CPI+lies adjusted Dow is charted as a multiple of its long term trendline. A value of 1 indicates unity. I found the trendline to be 1.54%, pretty close to EJ's calculation of 1.64%.

As you can see, in the past a value above 1.7 has indicated a long term top and below .5 has indicated an imminent bottom. We are very close to .5 now (6277 nominal). Our last 2 big bottoms, 1932 and 1982, took us down to .34 and .40, respectively for the absolute bottoms. Ratios like that would put us right around EJ's target of 5000, depending on when we get there and what CPI+lies does.

Jimmy

http://i275.photobucket.com/albums/jj317/jimmygu3/RealDowDeviation-1.png

orion
03-05-09, 11:38 AM
LargoWinch,

The S&P Composite chart is a real eye opener. Taking a quick shot from that we are in for a real bear market that is just starting (as we plunge below trend line and not from the high) and will last 17 years! Think of all the folks saying the bear started in 2000 and we only have 7 more years to go.

Also all these charts get me to looking at the mid 60's to 80's. I never realized what a tough period that was. I realize stocks were pretty beatup and in early 80's most people talked about their CD rates. I will read up on that era more as the war, great society, inflation story seems lacking.

LargoWinch
03-05-09, 01:09 PM
Jimmygu3, I must admit that I am itching to buy...

Cash is well...so boring.

Then again, I think of the Nikkei and EJ's article and the itch simply go away.

FRED
03-05-09, 02:15 PM
Jimmygu3, I must admit that I am itching to buy...

Cash is well...so boring.

Then again, I think of the Nikkei and EJ's article and the itch simply go away.

Later today in the Select area we cover a one hour client call by a major investment bank yesterday on the subject of the corporate credit market. A few highlights:


It's 1990 all over again, but worse. Like the 1998 - 2000 telco de-leveraging but writ large.
The period of de-leveraging is over and a period of rising defaults has begun
Credit can only be purchased selectively, there is no market investment opportunity
GE's problems are symptomatic of increasing default risk
At the same time default rates rise, recover rates will decline, valuations will decline
The corp. credit markets are more accurately forecasting the economy and the equity markets are lagging
Mortgage credit leads corp. credit leads equities -- all have further to go down
Equity markets may decline another 35%, slowly as has happened so far or in a day
Equities offer the only exit strategy, none for long term corp. debt investment. It's a trader's not an investor's market.
Investment grade corp. default recoveries will price at 20 to 40 cents on the dollar, high yield at zero
The corp. credit market will take many years to recover

LargoWinch
03-05-09, 02:31 PM
Later today in the Select area we cover a one hour client call by a major investment bank yesterday on the subject of the corporate credit market. A few highlights:


It's 1990 all over again, but worse. Like the 1998 - 2000 telco de-leveraging but writ large.
The period of de-leveraging is over and a period of rising defaults has begun
Credit can only be purchased selectively, there is no market investment opportunity
GE's problems are symptomatic of increasing default risk
At the same time default rates rise, recover rates will decline, valuations will decline
The corp. credit markets are more accurately forecasting the economy and the equity markets are lagging
Mortgage credit leads corp. credit leads equities -- all have further to go down
Equity markets may decline another 35%, slowly as has happened so far or in a day
Equities offer the only exit strategy, none for long term corp. debt investment. It's a trader's not an investor's market.
Investment grade corp. default recoveries will price at 20 to 40 cents on the dollar, high yield at zero
The corp. credit market will take many years to recover


Gulp! this is just like the trailer for a very scary horror movie.

That is why I cannot wait for the full feature film!

Thanks for the preview Ed.

jimmygu3
03-05-09, 03:15 PM
Later today in the Select area we cover a one hour client call by a major investment bank yesterday on the subject of the corporate credit market. A few highlights:


It's 1990 all over again, but worse. Like the 1998 - 2000 telco de-leveraging but writ large.
The period of de-leveraging is over and a period of rising defaults has begun
Credit can only be purchased selectively, there is no market investment opportunity
GE's problems are symptomatic of increasing default risk
At the same time default rates rise, recover rates will decline, valuations will decline
The corp. credit markets are more accurately forecasting the economy and the equity markets are lagging
Mortgage credit leads corp. credit leads equities -- all have further to go down
Equity markets may decline another 35%, slowly as has happened so far or in a day
Equities offer the only exit strategy, none for long term corp. debt investment. It's a trader's not an investor's market.
Investment grade corp. default recoveries will price at 20 to 40 cents on the dollar, high yield at zero
The corp. credit market will take many years to recover


Thanks for the info, Fred. Regarding my chart, a 35% Dow decline from yesterday would put it around 4600, a .37 trendline multiple, just like the 1932 and 1982 bottoms.

Thanks for helping me resist covering my shorts. :D

Jimmy

goadam1
03-05-09, 04:10 PM
Are we moving faster than the great depression in the market because of ultra-shorts and other short instruments? Are we entering a "shorting bubble."

FRED
03-05-09, 04:44 PM
These screen captures were both taken today at 4:30PM after the markets closed. The first is from Google News, the second from Yahoo! Finance.


http://www.itulip.com/images/googlenewsfox.gif
FOX News Market Fantasy at 4:30PM EST March 5, 2009

http://www.itulip.com/images/yahooreality.gif
Yahoo! Finance Reality at 4:30PM EST March 5, 2009



FOX News, where the stock market always goes up, even when it's tanking!

ASH
03-05-09, 04:52 PM
FOX News, where the stock market always goes up, even when it's tanking.

Well, Fox News is one day behind everyone else, at least. The article did say Wednesday.

Look -- if we all just lived in the past, it could be the height of the tech bubble again with portfolios climbing effortlessly, during a period of unchallenged American power and security. I could be in my 20's again, and dreams of easy technology startup wealth could again seem tangible! Who's with me? Who wants back into the Matrix?

jtabeb
03-05-09, 04:59 PM
Well, Fox News is one day behind everyone else, at least. The article did say Wednesday.

Look -- if we all just lived in the past, it could be the height of the tech bubble again with portfolios climbing effortlessly, during a period of unchallenged American power and security. I could be in my 20's again, and dreams of easy technology startup wealth could again seem tangible! Who's with me? Who wants back into the Matrix?

I like steak!

orion
03-05-09, 05:02 PM
LargoWinch, The site you used has another graph with shadowstat data and looks better (we have been in bear market since 2002). Thanks again for the site reference, very interesting .....

http://dshort.com/charts/SP-Composite-real-regression-to-trend-alt-cpi.gif

rabot10
03-05-09, 06:47 PM
Hey EJ

I asked a question, do you have no interest in it, or just no answer?

thanks for all the stuff u have done - love your work. cya

rick

CanuckinTX
03-05-09, 10:02 PM
The pig says it is going to 0!

Thats is good enough for me and probably true in real terms...

The double top pig ears? Isn't that like found money? Short! Short!!

orion
03-05-09, 10:09 PM
FRED,

I am looking forward to the post you mention. I see on Bloomberg the Japanese are already moving to support corporate bonds.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aaF3WuVFU5xU&refer=home


March 6 (Bloomberg) -- Bank of Japan Deputy Governor Hirohide Yamaguchi (http://search.bloomberg.com/search?q=Hirohide+Yamaguchi&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) said the central bank may need to expand its purchases of corporate debt to prevent a credit shortage from worsening the recession.
“We can’t deny corporate financing will become even more difficult” toward the fiscal year end on March 31, Yamaguchi said in an interview in Tokyo yesterday, his first since joining the board in October. “If that happens, we’ll consider whether we can enhance operations already implemented and act if necessary.”

goadam1
03-05-09, 11:15 PM
It's getting weirder here.

ER59
03-05-09, 11:54 PM
Later today in the Select area we cover a one hour client call by a major investment bank yesterday on the subject of the corporate credit market. A few highlights:


It's 1990 all over again, but worse. Like the 1998 - 2000 telco de-leveraging but writ large.
The period of de-leveraging is over and a period of rising defaults has begun
Credit can only be purchased selectively, there is no market investment opportunity
GE's problems are symptomatic of increasing default risk
At the same time default rates rise, recover rates will decline, valuations will decline
The corp. credit markets are more accurately forecasting the economy and the equity markets are lagging
Mortgage credit leads corp. credit leads equities -- all have further to go down
Equity markets may decline another 35%, slowly as has happened so far or in a day
Equities offer the only exit strategy, none for long term corp. debt investment. It's a trader's not an investor's market.
Investment grade corp. default recoveries will price at 20 to 40 cents on the dollar, high yield at zero
The corp. credit market will take many years to recover


Fred,
Could not find it. Where in Select area?

occdude
03-06-09, 01:04 AM
From my point of view we're not really talking about economics anymore. What we're talking about REALLY is a break down in society. The economic problems did not come first, it is problems with a society that happen before economic ones.

When a society loses touch with a cause and effect mindset that man uses to guide himself throught the universe, he loses the one tool he needs most to survive, his brain. "You cant get something for nothing", "there aint no such thing as a free lunch", cause and effect, they all mean the same thing, things we do matter and we as human beings have the ability to choose. Lately our choices have been extremely poor and now the effects of that are going to be patently evident.

We, just as every other heightened civilization have lost our way. We aren't just monetarily bankrupt but MORALLY as well. I don't mean that in judgemental way, I'am no hypocrite I count myself as part of the collective to some degree and if this event touches you in any manner you'll be able to see how you are complicit.

When you have families disintergrating, communities out of touch with one another, dependence on government entities for even the most trivial concerns, distrust and foreboding of what's going to happen if your neighbor loses his toys, these are all signs of a human organization that is not NATURAL. Sure you can hide the ills of a society with financial trickery and credit but they are not sustainable. They don't manifest themselves anywhere in history or geography except for short periods of time, which become cautionary tales.
,
Traditional society has taken care of itself INSPITE of government, it will be that way again. You will get to know your neighbor, you will treat your family well and they will treat you well. You will be involved with your community, you will CARE about what happens outside your door stoop again and more importantly you will DO something about making your environment livable again. You will make real things, you will make innovations and discoveries , you will conserve, preserve and labor to make life that much better for you and yours, and in turn for them and theirs, just as our forefathers did for us in a time of considerably more optimism.

So get prepared mentally and to whatever you're able to physically. This is the opportunity of a millenium to tear down something and help rebuild it on a sustainable foundation again. To get back to that point of unbridled optimism and hope for a future that looks like it came out of the pages of a popular science or a popular mechanics magazine. One were human potentiality is nutured and all the components of that are fostered and revered. Then and only then can we take our rightful place among the stars in the universe and the bountiless imagination of the mind.

BadJuju
03-06-09, 01:26 PM
So get prepared mentally and to whatever you're able to physically. This is the opportunity of a millenium to tear down something and help rebuild it on a sustainable foundation again. To get back to that point of unbridled optimism and hope for a future that looks like it came out of the pages of a popular science or a popular mechanics magazine. One were human potentiality is nutured and all the components of that are fostered and revered. Then and only then can we take our rightful place among the stars in the universe and the bountiless imagination of the mind.

Great post, occdude! :D

MarkL
03-08-09, 01:55 AM
Why do you say that? If the DOW stays flat and inflation spikes the Real DOW will fall like a rock.

Fred: If PE Ratios/Earnings/Margins, etc all magically stayed the same, but "Poom" happened, wouldn't the Real Dow stay the same (because it's inflation adjusted) while the Dow itself went up... precisely to the percent Poom occurs?

Inflation causes the prices of things to go up... all else being equal. This includes the valuations of companies (in dollars) as reflected in the stock market. Now if you start factoring in the business-impact of inflation on specific industries it, of course, it could get much more complicated. But from a simple Macro perspective, inflation/Poom would cause the Dow (not the Inflation adjusted iTulip "Real Dow") to go up, right?

Bart/Orion: Your charts seems indicative of this and show that perhaps, after factoring in inflation, we are (somewhere) near a bottom. This is a huge paradigm difference from the original article! My gut tells me we have more to go, but I prefer to trust facts. Bart and Orion's charts with Shadowstats inflation included tells the story that we might not be that far from from a bottom... IF history is any indicator.

The next logical question then is, if Poom kicks in according to Eric's schedule, when does the Dow jump and by how much? Often the Dow prefaces these events by some number of months, right?...

bart
03-08-09, 11:27 AM
Bart/Orion: Your charts seems indicative of this and show that perhaps, after factoring in inflation, we are (somewhere) near a bottom. This is a huge paradigm difference from the original article! My gut tells me we have more to go, but I prefer to trust facts. Bart and Orion's charts with Shadowstats inflation included tells the story that we might not be that far from from a bottom... IF history is any indicator.


Sort of on being near a bottom, since a full return to the linear trend based on connecting the bottoms since the 1930s would have the shadowstats based Dow somewhere in the vicinity of 2000, and the CPI alone adjusted number in the 2500 general area, which would have the nominal Dow at 4-5000.

"It's tough to make predictions, especially about the future."
-- Yogi Berra

bart
03-08-09, 11:33 AM
One problem I have with using indices like the DJI, is the fact that they are in fact reconstituted from time to time -- Which may be fine from a theoretical point of view -- But the fact remains that each time a company goes in or out of the DOW, or the S&P or any other index, it in reality represents a discontinuity. Because if in fact those trades were to occur, they would impact the prices at which those stocks are/were traded -- so that replacement of stock is therefore never price neutral -- so in practice, the growth rate of these indices is probably overstated -- particularly given the magnitude of the FTD problem (http://www.deepcapture.com/)


Indeed - substitution bias colors the returns picture, and then there are the transaction fees and taxes when one buys & sells stock to keep tracking with the actual index stocks. The full picture on long term returns is far from as rosy as Wall St, etc, would have us believe.

bart
03-08-09, 11:41 AM
Bart was kind enough to let me play with his data to calculate a new chart: deviation from trendline. In the chart below, the CPI+lies adjusted Dow is charted as a multiple of its long term trendline. A value of 1 indicates unity. I found the trendline to be 1.54%, pretty close to EJ's calculation of 1.64%.

As you can see, in the past a value above 1.7 has indicated a long term top and below .5 has indicated an imminent bottom. We are very close to .5 now (6277 nominal). Our last 2 big bottoms, 1932 and 1982, took us down to .34 and .40, respectively for the absolute bottoms. Ratios like that would put us right around EJ's target of 5000, depending on when we get there and what CPI+lies does.

Jimmy

http://i275.photobucket.com/albums/jj317/jimmygu3/RealDowDeviation-1.png


Very interesting... I would have thought we weren't quite as close to a bottom as that data indicates.

And considering the EJ is using CPI and you used "CPI w/o lies", that difference between 1.54% and 1.64% seems about right especially when considering the different periods being compared.

Rajiv
03-08-09, 11:54 AM
Bart -- what happens if the trend is unsustainable -- (based on the concept of exponential growth vs limited earth?)

bart
03-08-09, 12:28 PM
Bart -- what happens if the trend is unsustainable -- (based on the concept of exponential growth vs limited earth?)

That's what that Yogi quote comes in?
"It's tough to make predictions, especially about the future."
-- Yogi Berra
;)


And more seriously and in much uglier mode, there are very dark scenarios that are usually only lightly covered or mentioned that could result. I've hesitated to even mention them for many reasons, not the least of which is how one assigns probabilities to them and also how extremely distasteful they are. But I guess they should be clearly stated, rather than danced around.

The biggest & darkest one includes a massive drop in total world population due to any one of a number of threats like war, pandemics, food supply, peak oil etc... in which case the Dow level wouldn't exactly be terribly important, and would also likely drop well below 1000.

To try & paint a little brighter picture, even if something that awful did come about, its my belief that humanity would bounce back within a few generations based on the concept that the worst vested interests and anti social elements would not survive in significant numbers.

I don't know if you were driving at the worst case scenario, but at least it provides a base or bottom.

Rajiv
03-08-09, 01:07 PM
I don't know if you were driving at the worst case scenario, but at least it provides a base or bottom.

I am seriously considering it -- most likely cause famine and disease -- will come suddenly when it does -- once the tipping point is reached.

bart
03-08-09, 01:39 PM
I am seriously considering it -- most likely cause famine and disease -- will come suddenly when it does -- once the tipping point is reached.

Even though I assign it a low probability, I did take it into account on my long term planning too... and then promptly ignored it. I knew a few folk who "lived it" in the '70s and it didn't work out well for them in the sense that I believe that it significantly shortened their lives.

Contemptuous
03-08-09, 04:45 PM
Oil and Dr. Copper appear to be sending a broad hint that they want to mak a major turn. Stock market boom cannot be far behind them. Actually these two commodities are not just "hinting" that they want to complete a turn and break out, they already **are** breaking out. April-May-June turn is coming up right on schedule it seems.

All those inclined to smirk at technician's terminology and methods may have to wipe their commiserating smiles away in a hurry in May-June if this unfolds as described. Right? Or will they remember to despite the fact one of these technicians appears to be the earliest to note these budding trend changes below?

So while iTulip's apprehensive observers abandon all hope and begin to wallow in the most apocalyptic, pessimistically abandoned visions of our near term financial future, this humble "navel gazing" technician is pointing out such musings are already looking distinctly passe'. Will the doomers give him credit in June if or when he proves right? Going on past precedent, most likely not.

I've been suggesting this for six months. I am looking forward to all the sheepish comments if it actually unfolds this spring.

Beware short positions going into April.

http://www.clivemaund.com/charts/copper6month080309.gif
http://www.clivemaund.com/charts/wtic1year080309.gif

jtabeb
03-08-09, 05:32 PM
The economic problems did not come first, it is problems with a society that happen before economic ones.

.

If you turn that statement around COMPLETELY, then it will be correct.

As in:

The problems with society did not come first, it is the problems with an economy that happen before you have societal collapse. Cause and effect.

As in, people don't act like uneducated baffoons when it only takes one worker making median wages to support a family of four, but when it takes 3.5 workers making median wages to support a family of four your get societal problems.

Don't try any historical revisionism on this, it's just a bold face lie to claim otherwise.

(please read ANY study of socio-economics over the past 29 years to get a idea of what I'm talking about)

Put simply, your premise is ass-backwards.

Rajiv
03-08-09, 09:21 PM
I will assign a very low probablity for its occurence in North America (and I include Mexico in that geographic area) -- I think the probability is much higher in other parts of the world -- but that will have its ripple effects in North America as well.

Rajiv
03-08-09, 09:31 PM
My posts here (http://www.itulip.com/forums/showthread.php?p=59722) should add weight to your comment particularly my figures using shadowstat CPI and the discussion following it.

bart
03-08-09, 09:50 PM
My posts here (http://www.itulip.com/forums/showthread.php?p=59722) should add weight to your comment particularly my figures using shadowstat CPI and the discussion following it.

Excellent points, and I especially "like" those tax tables too. Nothing like the raw data to show those who weren't there what was actually happening - geezers need love too... ;)

metalman
03-08-09, 09:59 PM
put the hocus pocus charts away and think a minute.

what has to happen for the markets to rally?

- oligarchs roll over and take a huge loss so the banking system comes back
- some genius in the oligarch's machine room on wall street invents a brand new securitized debt thingy or other to make more credit
- $10 trillion in vanished money appears from no where

all that's gonna happen to stocks is... sooner or later... they'll stop falling like a bag of turds out a high rise window and finally hit the ground and go.... 'splat!'

then we'll spend 10 years cleaning it up.

you've been chasing this allusive stock rally all year.

here's a better use of a pan with a handle...

<object height="344" width="425">


<embed src="http://www.youtube.com/v/yEeaptjKAdY&hl=en&fs=1" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" height="344" width="425"></object>

jtabeb
03-08-09, 10:11 PM
Excellent points, and I especially "like" those tax tables too. Nothing like the raw data to show those who weren't there what was actually happening - geezers need love too... ;)

Like I said, SO BOLDFACE so as to be a waste of time.

You know how you refute someone who says that 2+2 =7. You don't, it's a waste of time!

kartius919
03-08-09, 10:45 PM
My worst case scenario is nuclear armageddon with famine and radiation poisoning quickly thereafter. We then get a mad max crossed with the hills have eyes scenario. On the bright side, no more bankers. Odds are uncomfortably more than 0% and with the end of days evangelical christians and zionist jews, who really knows. Palin '12!!!!!

cjppjc
03-08-09, 11:00 PM
My worst case scenario is nuclear armageddon with famine and radiation poisoning quickly thereafter. We then get a mad max crossed with the hills have eyes scenario. On the bright side, no more bankers. Odds are uncomfortably more than 0% and with the end of days evangelical christians and zionist jews, who really knows. Palin '12!!!!!


Something to look forward to.:eek:

occdude
03-09-09, 02:30 PM
If you turn that statement around COMPLETELY, then it will be correct.

As in:

The problems with society did not come first, it is the problems with an economy that happen before you have societal collapse. Cause and effect.

As in, people don't act like uneducated baffoons when it only takes one worker making median wages to support a family of four, but when it takes 3.5 workers making median wages to support a family of four your get societal problems.

Don't try any historical revisionism on this, it's just a bold face lie to claim otherwise.

(please read ANY study of socio-economics over the past 29 years to get a idea of what I'm talking about)

Put simply, your premise is ass-backwards.


Your saying that the bus has no driver. Economy acts as a RESULT of human action, not vice versa. If you explore cause and effect, you find that the reason why a worker needs to work harder to support himself is because his productivity isn't keeping up with his consumption. He wants more than he can produce and if he can't support that desire with current productivity he needs to borrow it. When a society borrows heavily, it leads to a artificial rise in prices which are only made possible by access to easy credit. He borrows for current consumption which means he MUST either produce more in the future or consume less to pay his debts.

The problem with society which lead up to economic ones are man has infinite desires and limited resources. This is basic human nature, codified by economic principle. Good economics should act as a brake on that base human instinct, but since human activity governs economics and not vice versa economic principles of growth can be circumvented for a while vis a vie credit and monetary debasement.


Societal virtues of thrift, savings and productivity are what drives a good economy. A good economy can easily be ruined by bad human action, whereas good human action leads to a good economy. Your argument is a determistic one and seems to assume that humans act like laboratory rats influenced by the "animal spirits" of an economy.

ASH
03-10-09, 03:05 PM
All those inclined to smirk at technician's terminology and methods may have to wipe their commiserating smiles away in a hurry in May-June if this unfolds as described. Right?

I've been suggesting this for six months. I am looking forward to all the sheepish comments if it actually unfolds this spring.

You'll get your props from me -- don't worry.

jtabeb
03-10-09, 04:28 PM
A good economy can easily be ruined by bad human action, whereas good human action leads to a good economy. .


Yes. (It is the actors in question that you an I seem to disagree on).

Read about Wiemar inflation, if you don't think people act rationally during irrational times. The will react rationally, given the situation at the time. Hence, good economic policy leads to a well functioning society, not vice versa. Yes cause and effect.

Show me any social ill that cannot be directly attributed to economic conditions and I'll change my mind. Till then, no.

Master Shake
03-10-09, 04:47 PM
Oil and Dr. Copper appear to be sending a broad hint that they want to mak a major turn. Stock market boom cannot be far behind them. Actually these two commodities are not just "hinting" that they want to complete a turn and break out, they already **are** breaking out. April-May-June turn is coming up right on schedule it seems.

All those inclined to smirk at technician's terminology and methods may have to wipe their commiserating smiles away in a hurry in May-June if this unfolds as described. Right? Or will they remember to despite the fact one of these technicians appears to be the earliest to note these budding trend changes below?

So while iTulip's apprehensive observers abandon all hope and begin to wallow in the most apocalyptic, pessimistically abandoned visions of our near term financial future, this humble "navel gazing" technician is pointing out such musings are already looking distinctly passe'. Will the doomers give him credit in June if or when he proves right? Going on past precedent, most likely not.

I've been suggesting this for six months. I am looking forward to all the sheepish comments if it actually unfolds this spring.

Beware short positions going into April.

http://www.clivemaund.com/charts/copper6month080309.gif
http://www.clivemaund.com/charts/wtic1year080309.gif

I was reading down through this thread and when I came upon this post, I just knew that the High Inquisitor of iTulip, Cardinal Metalman de Torquemada, would soon appear and punish your heresy with his withering sarcasm. Keep it up and you're sure to get the comfy chair!

metalman
03-10-09, 07:44 PM
I was reading down through this thread and when I came upon this post, I just knew that the High Inquisitor of iTulip, Cardinal Metalman de Torquemada, would soon appear and punish your heresy with his withering sarcasm. Keep it up and you're sure to get the comfy chair!

my withering posts? i don't hold a candle to *t* :D

http://www.itulip.com/forums/attachment.php?attachmentid=1202&stc=1&d=1236725140

Down Under
03-10-09, 08:35 PM
all that's gonna happen to stocks is... sooner or later... they'll stop falling like a bag of turds out a high rise window and finally hit the ground and go.... 'splat!'



Ah, that gave me a good laugh; just what I needed.