Real DOW Update: Still looking for a bottom? Eric Janszen

[bart]

Re: Real DOW Update: Still looking for a bottom?

Thanks Bart. I was hoping you would have more of the time line for this graph to compare with DOW;



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



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/showthr...0285#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.




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]

Re: Real DOW Update: Still looking for a bottom?

Thank you Bart. Very interesting the GDP adjusted for CPI and lies. Looks like GDP started down as the FIRE economy took over.

[bart]

Re: Real DOW Update: Still looking for a bottom?

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]

Re: Real DOW Update: Still looking for a bottom?

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]

Re: Real DOW Update: Still looking for a bottom?

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]

Re: Real DOW Update: Still looking for a bottom?

bart, I have some too!

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



Data source link (see bottom right):
http://dshort.com/charts/dow.html?do...900-real-notes

[bart]

Re: Real DOW Update: Still looking for a bottom?

"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]

Re: Real DOW Update: Still looking for a bottom?

bart, I have some too!

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

(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?do...900-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]

Re: Real DOW Update: Still looking for a bottom?

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]

Re: Real DOW Update: Still looking for a bottom?

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

[jimmygu3]

Re: Real DOW Update: Still looking for a bottom?

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

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

[orion]

Re: Real DOW Update: Still looking for a bottom?

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]

Re: Real DOW Update: Still looking for a bottom?

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]

Re: Real DOW Update: Still looking for a bottom?

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]

Re: Real DOW Update: Still looking for a bottom?

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.