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100 Year Dow Jones Industrials Chart (bigpicture.typepad.com)
9 points by troystribling on Aug 25, 2008 | hide | past | favorite | 19 comments



that article is a scam.

To illustrate it, I've redrawn the green and red bars differently to show that, lo and behold, there are another 15 years of bull market in our future.

http://tinypic.com/view.php?pic=5uo9q8&s=4

This type of graph manipulation is a well known trick. No reputable journalist or economist would do something like this.


Barry is operating under the assumption that we are entering a cyclical bear market, which began around the time that he started shading the graph red. He also says that it's possible that the current bear market could be over soon, but it would be historically unprecedented.

Personally, I take a lot of stock in what he has to say. He's a great economist and commentator on the markets.


Huh? I have no idea what your point is, but Barry Ritholtz is definitely a reputable economist.


Is he? From his biography (http://bigpicture.typepad.com/cv/2006/02/curriculum_vita.htm...) it looks like he's mostly a manager. He might be really good at economics, but I've read his site before, and I haven't seen a single insight there that could be published in a reputable economics journal.


Spluh? What kind of reputable economist pulls a howler like this:

What will be the catalyst to get them back into equities? My best guess is a sustained move upwards.

...umm, yeah. And what causes a sustained (or any) move upwards? ....people "getting back into equities".


Two words: covered calls.


what about them?


Assuming that we don't have a bull market that rips higher, you can use covered calls to get an extra 1-3% in premium on your positions. Per month.


I'm not sure I agree with the analysis and reasoning, but I definitely think we're due for a decade or so more of mediocre equity performance, in addition to the lackluster decade we've had.

The bull market of the 1980s and '90s came from the entrance of middle-class Americans into the stock market. Before 1980, equities were considered risky (and were so, compared to bonds and annuities) and were seen as a "rich person's game", but this changed once people became educated about the "equity premium", which may no longer exist, and diversification. The influx of new investors allowed the markets to rally, rejuvenating Wall Street, an industry that had been fading up to that point.

Given the economic problems the U.S. currently faces, I think we're looking at a decade or more of mediocre equity performance. S&P/dollar isn't terrible, but S&P/euro is pathetic. The erosion of the U.S. middle class is a troubling sign, and I don't think we'll see the next bull market until this trend is reversed so decisively that a new middle class is being created. That point seems to be rather far off, in my estimation.


Before 1980, equities were considered risky (and were so, compared to bonds and annuities) and were seen as a "rich person's game", but this changed once people became educated about the "equity premium", which may no longer exist, and diversification.

That also happened in the 60's -- mutual funds, in particular the 'performance' funds, grew pretty fast. In the 20's, diversification wasn't popular, but stocks sure were. And even earlier than that, there were investment crazes that were fairly democratic. The widespread adoption of treasury bonds for individual investors in the 1860's was nothing like the mania for stocks in the late 1990's -- except to the extent that it was a larger mania than anyone up to that point had experienced.

So I don't think looking at the 80's and 90's as new and original is all that useful. It's a cycle.


But the 21st century should give rise to a new middle class in China and India who will become a part of the global market.


Equity returns were pretty lousy during the height of the industrial revolution in the 19th century. Stock prices only loosely correlate to general growth. The 1950s were boom years with lousy returns, and stocks shut up during periods in the 80s and 90s when the economy wasn't fantastic by historical comparison.

Stocks just haven't been all that great a way to make money, historically.


The 1950s were boom years with lousy return

I don't know about globally, but it looks like prices tripled during the 1950's in the US. And that's not counting dividends, which were a bit higher at the time. Or did you mean something else?

http://leduc998.wordpress.com/2008/05/20/dow-jones-1950-1959...

In fact, I seem to remember a William O'Neill book claiming that the 50's were more speculative than the 60's. He argued that if you just treat prices as earnings and some multiple, you can demonstrate that returns in the 1950's were mostly multiple expansion, and in the 60's they were mostly earnings growth.


Perhaps a clearer picture: http://www.itulip.com/realdow.htm


I would be suspicious of inflation adjusted prices, since they do not adequately account for deflation caused by technological development. For example in 2007 inflation adjusted dollars a round trip by steamer to Europe was $2000 dollars http://equator.eftours.com/2008/05/transatlantic-t.html. I have flown to London, Madrid and Paris from Washington D.C. for prices ranging from $600 to $800 dollars. By comparison the trip cost 30% to 40% of the 1925 cost and took less than 10% of the time. Assuming that a dollar buys less over time is not quit accurate.


Hedonics are in fact used in inflation data. More likely abused. It's really quite a small number of technology heavy things that have shot up in quality in great excess over the price increases.

And what about declines in quality? Vegetables have a fraction of the mineral content they did decades ago. Many food items have substituted artificial ingredients for relatively healthy natural ingredients. Many services at hotels and on airliners that were once complementary are now charged for. A great many houses built in the last ten years will have to be torn down in less than 20 years they were made so poorly. There are many examples of declining quality and these adjustments are never made.


Do you know any data sources for these things? I'm doubtful of the mineral content claim unless the fraction you mention is something like 9/10. Housing stock that is on average lasting for much less time is also suspicious to me. The biggest reconciliation issue is that we're much much wealthier and healthier than we were decades ago so I'm not sure there are broad meaningful declines in the quality of most things.


You're confusing individual purchasing power with measures of inflation, which is about the value of money.


I'm pretty sure that you don't need to adjust for inflation as the market prices it in. Very nice charts, though.




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