Saturday, October 02, 2010

What's going on in the stock market? Market comments on Oct. 2nd.

It's time for charts, plenty of them. I have been looking at where we are regarding the U.S. stock market lately and comparing it to a number of other indicators such as, the price of Gold, the Nikkei 225 stock market index, the U.S. Dollar and the Japanese Yen. All this to get a better picture of the real value of our assets and the implications for the future. I have also been compiling charts on 10 year Treasuries vs. the S&P 500, because all of these measures do have a connection to each other and therefore paint a truer picture of reality.

The average person has no clue as to what is going on. They are too busy using Facebook, Twitter or other Social Media, they don't watch the News either. They work, play, connect and as long as they have some money in their checking accounts, they are happy, sort of. But the country is changing all around them and so far only some have been upset. Those upset have been labeled as crazy Tea Baggers, and while many don't really understand the data, they know what is happening is not only bad, but it is also making them furious. So let's take a look at the charts and see what is going on.

The first set of charts below are of the price of Gold in U.S. Dollars and in Japanese Yen over a 5 year period. The charts show that during this period, the price of Gold went up 172.7% in U.S. Dollars but went up only 107.5% in Japanese Yen. This doesn't mean you could have made a bigger profit if you bought Gold here vs. what someone in Japan made. It means that our currency has devalued much more than Japan's. Or to put it another way, your ability to buy goods and services are being diminished when this happens. If prices of goods and services remain the same here in the U.S. over the 5 years, then this means that the real value of these goods is declining relative to the rest of the world. Japanese Consumers could buy the same goods and services for much less Yen over the same period, than what we must pay. It means our Homes values are dropping more than what is apparent by looking at the current price realtors list homes at. If you add in the depreciation of the currency, the drop is staggering.

The second set of charts below are of the Nikkei 225 vs the Dow and the S&P 500 over a 2 year period. You can see from both of these charts that the spread between the Nikkei and Dow has been widening to its greatest disparity over the 2 year period. The same is true for the S&P 500. Of particular interest is the Sept. 1st point of the Nikkei which was at the lowest point since May 2009. These Indexes have tracked over many years, but lately (since May of 2010) the spread has been widening. Notice that the spread is wider between the Nikkei and the Dow than the Nikkei and the S&P. I have said that the Dow is much more easily manipulated as there are only 30 stocks in the Dow Index.

To show how these 2 indexes have tracked over a longer period I have included 30 year charts on each index. You might want to know why I have selected the Nikkei Index and wanted to show the comparison to our Dow and S&P. It is because Japan has had several decades of similar financial troubles with their economy and tried many of the actions we have tried and continue to try to get out of our biggest recession since the Great Depression of the 1930's. Japan's time has been called the "Lost Decades". So here are the charts, complements of the web site, "Interactive Mathematics". I am going to post their charts below here and also their commentary, which I found illuminating.

Here is chart of the DJIA up to the end of August 2010.

In the late 1980s, Japan had explosive growth in sharemarket prices, similar to the DJIA in the late 1990s. The euphoria in Japan was driven by healthy export growth, but especially by a housing and construction boom. The real estate bubble burst in the early 1990s and the Japan market started to plunge. Japan has been in and out of recession ever since, and the latest stock meltdown from late 2007 has seen the value of the Japanese stock market return to values last seen in early 2003, and before that, in 1983.

Investors who were in the market during the 1980s did very well, but since then, many people have lost a lot of money.

The main stock market index in Japan is the Nikkei 225, which is an index of the top 225 companies in Japan, something like the DJIA in the USA.

The graph of the Nikkei 225 from 1967 to end August 2010 is as follows:

The early part of this chart is quite similar to the exponential rise of the DJIA and it is interesting that both stock bubbles were in part fuelled by real estate bubbles. If the DJIA unwinds over the next 20 years in a similar fashion to the Nikkei, we might see a return to values last seen in the 1980s.

In this next graph, I have superimposed the DJIA (in dark red with red scales) and the Nikkei (in dark blue with black scales). The period from 1970 to the peak in 2007 for the DJIA has a remarkably similar shape to the runup for the Nikkei from 1977 to its peak in Dec 1989.

The wipeout that followed the peaks is also very similar. The Dow's low of near 7500 in Oct 08 corresponds to the Nikkei's low of around 20000 in late 1990.

Since its peak, the Nikkei has basically been on a downward spiral.

Here's an exponential decay model for the Nikkei, from its peak at end 1989 to the end of August 2010. (Note the negative in the exponential term):

Many commentators are saying that the Japanese did not address the issues regarding bank disclosures early enough in the 1990s and that's why their economy has never really recovered. However, the US Federal Reserve has already reached 0% interest rates (like the Japanese did) and have nowhere else to go now except for stimulus packages (like the Japanese have been trying, with little success, for 20 years.)

So are we headed like Japan? I don't know, but many of the actions the Fed has taken is similar and this comparison has not been lost on commentators. The comparison continues to be made. So when you see the indexes diverging to extremes, we could be facing a snap back in our Dow shortly.

It is important to continue to look at charts as they do show what is truly going on. Lastly I will show the Fed's action in managing 10 year Treasury yields through "Quantitative Easing" or QE 2, as it has been referred to. This chart clearly shows that the Dow has lost its tracking to this index and most likely is because of Fed intervention.

In summary, people are unaware of what has happened to their wealth. It has been the biggest transfer of wealth in the history of our country. It is the fault of the Fed and people like Larry Summers, Hank Paulson and others in dealing with these issues in the methods they have chosen to use to resolve them. None will work. In fact, they have made things worse as now the stock market has no real connection and tracking to the real economy. It is being manipulated by Institutional Investors who rely on market gains for their bonuses. It is irrelevant to them that the real intrinsic value of our currency has been declining rapidly. They figure they make so much money, even if it is depreciated in value they are making it up in Volume. Sad, sad days. And if you think a change in the mid term election is going to fix this, you are sadly mistaken. We need a complete mindset change to fix these problems and we aren't conscious enough as a society. Unfortunately change most often happens at the lower levels of consciousness. That is where our society is right now.

Labels: , , , ,


Anonymous Anonymous said...

Thanks for the insight! This was really illuminating.

1:35 PM  

Post a Comment

<< Home

Technorati Profile