Tuesday, March 05, 2013

Crisis forgotten: Dow Jones sets a new all-time high

The Dow Jones Industrial Index is at 14,275 right now. It's the first day in the history when it's higher than the previous all-time closing high of 14,164.53 set on October 9th, 2007.

The 2008 downturn was often being compared to the Great Depression. After all, if our grandfathers had the right to witness an intense depression, why should we be stripped of the same right? However, the cold hard data paint a very different story than the professionally overhyping modern media (and not only media) loved to suggest.

If you bought the stocks weighted as the Dow Jones index when they peaked on a day in 1929, you lost a lot of money. In fact, you only got to your original investment in the late 1950s, more than 25 years later.

I have already written the analogous statement about the recent era. If you bought the Dow Jones stocks at the peak in October 2007, which means that you were about as unlucky as your humble correspondent, you returned to your original wealth less than 4.5 years later (I didn't because the non-U.S. stocks haven't returned to their highs yet, but it's still nothing of the Armageddon proportions). The recovery was therefore more than 5 times faster, in a certain counting.

(The Standard & Poor's 500 index is about 1% below the all-time high set on the same day in 2007 as DJIA.)

Of course, one should debate whether it really means that the situation in the recent era was less serious or whether the faster recovery is actually such a good thing. I think it's obvious that the central banks and governments have pumped lots of money to the system in recent years. Some dynamics that was mysterious 70 years ago may be understood today.

On the other hand, various assorted interventions by governments and central banks often distort (and have actually distorted) the market, lower (and have actually lowered) the long-term economic growth, and pose the risk (and may actually be going to pose the risk) of a Super-Great-Depression Collapse sometime in the future.

The public debt – and sometimes even the consumers' debt – is what is rather threatening. No doubts about it, people have learned to manipulate with the debt more rationally than they could in the 1920s or 1930s. Traders and perhaps other relevant people know how to quantify the degree of risk and they are routinely working with lots of handy financial products that may help them with various problems that the changes in the markets may create for them. However, lots of moral hazard has been inserted into the system, too. Many people – and institutions – just don't care and don't need to care about the risk because they know (or "almost" know) that they will be bailed out or otherwise helped.

The Dow Jones Industrial Index of 2013 surely incorporates companies that are technologically superior, that have learned lots of things – not only about science and technology but also about the social interactions, efficient marketing, and many other things – that their predecessors 80 years ago could only dream about. However, if I try to subtract all this "technological" progress of all these kinds, a question about the "intrinsically moral" properties of the contemporary society and the old society remains. What I mean is the people's, companies', and governments' responsibility, their perceived need to work well instead of the right to rely on someone else, the sustainability of the overall debt, and so on. In this comparison, I am not sure whether there has been positive progress in the 1930s.

What do you think?


  1. If we want to stop the reckless self-centeredness of Wall Street and assorted banks, we need some executives to do hard time in a real prison to set an example for the rest to repent and reform.

  2. ...Dead cat bounce...just waiting for Taleb's Black Swan.
    To get a sense of the virtual reality of the markets read the darkly hilarious "Liar's Poker" by former Salomon trader, Michael Lewis.

  3. How about self-centeredness of politicians?
    I do not think that they should be necessarily arrested and imprisoned. They should just be hold responsible for the debt they cause and made to repay it from their private funds. That way, budgets would be balanced within the year. ;-)

  4. Don't you think you should have some idea of a law they broke?

  5. That graph looks like a hockey stick to me.

  6. Actually 3 and a half of hockey stick.

  7. opportunity cost of your resources for investment, not the dow or s&p dollar index, should be the key

    the s&p-to-gold ratio is revealing:


  8. The people who are popping champagne corks about the DOW are the same people who lament the widening gap between the rich and the poor and the erosion of the middle class. Anybody got a wall I can use? I need to bang my head on it for awhile.

    With 53% of the population earning $30K or less per year, there is no question there is an asset bubble. There will be more and more attempts at redistribution until the whole thing pops. Enjoy the ride (up and down).

  9. The people who are popping champagne corks about the DOW are the same people who lament the widening gap between the rich and the poor and
    the erosion of the middle class. Anybody got a wall I can use? I need to bang my head on it for awhile.

    With 53% of the population earning $30K or less per year, there is no question there is an asset bubble. There will be more and more attempts at redistribution until the whole thing pops. Enjoy the ride (up and down).

  10. There's the rub Tom. A lot of unethical behavior in the last 10 or 20 years has been legal. However, there is a lot more that is borderline legal that Wall Street (not all Wall street mind you, but I am generalizing for sake of brevity) does. This is due to the complexity of so many laws, that much of it is unclear and legal or illegal is in the eye of the beholder, SEC or other law enforcement. Combine that with an under funded SEC and you got a Wild West. The issue may really be that one could not get a conviction on these assholes after they lawyer up. Still though, I think if Obama wanted to send the full force of the Justice Department after some of them things might be different. A long drawn out trial that brings some of these guys lots of stress and near financial ruin might be strong disincentive as well to the rest.

    Also, don't give me that self interest is the same as greed and that is what Adam Smith 's free enterprise is all about. Yeah, self interest and the profit incentive does make the world go around and I would have it any other way. It is excessive self interest, greed, that is bad. As has already been proven when the excessive over use of derivatives nearly brought the world's economy to a halt in late 2008. Even Adam Smith wrote about greed in his famous book as being bad for an economy.

  11. I think the reason the market is up has a lot to do with the trillions of dollars the Fed has created and dumped into the banks, who can't lend so they invest most of it in the market. More cash thus more demand, ergo higher prices. I think the postwar economy has seen one false bubble after another, and each time one bursts they inflate it with more phony value assets that the time before.

    I wish I could be as sanguine as you, Lumo, in your surmise that the current gatekeepers have learned how to handle this better than their predesessors, but I rather believe that they are more desterate, not more knowledgeable. And if the American Federal Reserve is going down that path, how much worse is the prognosis for the Euro and its "Zone?"

  12. New high isn't all-time peak in inflation adjusted terms. I'd say that stocks aren't that attractive but the alternatives at the face of coming currency war are so frightening (BoJ).

  13. Bernanke has stated he will use proper monetary policy until there is a
    recovery per employment; therefore, we will get a recovery.

    Perfectly logical. And I'll keep flapping my arms until I begin to fly; therefore, I will make myself fly at some point.

    Welcome to purposeful asset mis-allocation bubble number 3 of the
    Greenspan/Bernanke era. Can't wait to see who they blame when this one
    ends in a colossal downturn, if not a severe Depression.

  14. buy cyprus bank stocks. before the crisis laiki bank was 7.5 euros and now it's 4 cents and bank of cyprus was 11-12 and now is 20 cents. when we start making money from the oil and gas in 5 years the prices will go up despite the current big economic problems.

    we are in the same situation greece was 3 years ago but we got oil and gas to save us on time.

  15. Threaten the banksters with drone fired hellfire missiles, that's what Obama did to all the OWS protestors. Or, better yet, nationalize the banks and discharge all public and private debts. God knows the "public" has purchased their own debt several thousand times over already.

    But don't ever depend on Eric Holder to throw the book at the banksters, much less give the CIA the green light use drone strikes on them. He is very much part of the criminal syndicate. Once the large bank execs go down, he goes with them. What he is always thinking but dare not ever say is : "Pursuing bankexecs will lead directly back to many like me. We're not going there."

  16. Lubos when i read the comments of the people that read your blog i get the impression that they don't get the point about what caused the economic crisis and the economic principles you advocate in your posts. many blame just the banks.

    like i have said before about physics i think you should sometime give a simple explanation of what caused the economic crisis, although i 'm sure the it won't change much!

    maybe i will put some short explanation sometime on the video game facebook page.

  17. For what it's worth, I worked with "The Human Piranha".

  18. Banks lend money. Between 2003 and 2007 credit risk was totally mispriced by the markets largely due to Greenspan holding rates too low and Chinese imports suppressing inflation. Banks lent too much and to people who were a high credit risk. And these people did not say "no". But the banks did not do this without encouragement. They were encouraged to do so by both democrat and republican administrations in the interests of helping minorities. There was very little that was done that was illegal although a lot of it was unethical. It was the standard "credit bubble".

  19. Derivatives only played a role in AIG. The subprime crisis was about fraudulent securitisation. Subprime cashflow CDOs are not derivatives.

    Also, the banks did get fined for the Libor fixing. You see if the banks were committing other crimes they would almost surely be known since everything you say on a trading floor phone is recorded, and every email is stored.

  20. Look the only problem is the debt. And the plan is clearly to use quant easing to inflate it away. So there may not be a crash. Just a slow and gradual inflation which will eat away the debt and cause the debt to GDP ratio to fall.

  21. AIG was the lynch pin that started everything else tumbling. You can fine banks all you want, but until those fines are big enough to have a real hurt on the company or the big guys can do serious time, lobbying and money will keep the status quo insulated until the next crisis where the tax payer has to get involved again, if he can pay taxes because he still has a job.

    Just to be sure, are you advocating laissez-faire free enterprise and that the banks and CEO's have no fault or didn't do anything wrong or are we both arguing on the same side.

    Free enterprise is great, but it needs real common sense laws to keep the excesses reigned and the playing field level. Many Republicans who view the economy as the simple model created by Adam Smith just don't get that the world is complex, modern economies are complex, and that simple philosophies just are not the solution. This is not the same as saying that I advocate socialism. Getting money out of the campaign system, making lobbying illegal and common sense simple transparency and accountability is what I think is needed. Emphasis on simplifying.

  22. The U.S. stock market is fueled by the Fed. The credit and dollars that the Fed is pumping into the financial system is stuck in the financial system in a huge liquidity trap. Look at QE (what ever number we are on now) which is the Fed buying the US Gov’t debt. Massive new federal debt and low interest rates. Look at net free reserves from late 2008 to now, and compare that to the stock market. Look at High Frequency Trading where the financial system trades with itself. One result of the money and credit staying in the financial system and not getting to the public is the low rate of inflation compared to the growth of the monetary base.

    I think that the current reality is that the stock market is much more a reflection of the financial liquidity trap than the general economy.

  23. That's plain wrong. AIG was a victim of subprime not a cause of subprime. They insured the securities that the banks had held. Without AIG the banks would have borne the losses and there would have been the same mess but this time split across banks rather than located in one insurance company.

    Note also that those subprime securities have all paid in full and so AIG was correct to insure them on an insurance basis. It was the market's loss of faith in subprime and overreaction that caused the market to crash and AIG to be taken over. And this combined with collateralisation and mark to market.

    I am not saying the banks did nothing wrong. But I do not agree that they are all criminals. They were doing what they are supposed to do which is to make loans. But the cost of credit was wrong and so too many loans got made to the wrong people who in an ordinary world should not have got them. I especially find the step up loans pretty unethical. But we must recall that the groupthink at the time was that the property would always go up in value!

    There was also a race to the bottom as banks competed with eachother to make these loans.

    All of this should have been spotted and controlled by regulators. So I blame Bush for failing to do that. Also, the failings I am talking about here is basic stuff. Basic lending. Nothing to do with derivatives or fancy products.

    Sure there was some fraud. And it should be prosecuted.

    The fact that bankers get paid too much is a side issue. As is the whole issue of bonuses. If the bankers had been paid 10% of what they were being paid the same thing would have happened.

  24. Central banks can either inflate assets or have asset wealth die by
    deflation. The only way to support consumption in an era of declining
    wages is to enable more borrowing, and the only way to enable more
    borrowing is to: 1) lower interest rates to near-zero so stagnant income
    can leverage higher debt, or 2) inflate assets to create phantom
    collateral that can then support additional debt.

    Marx calls this fictitious assets.

    Central banks are not providing ample liquidity to stimulate borrowing, they do it to support existing debt.

  25. America is caught
    in a confidence or credibility trap, in which the changes,
    investigations, and reforms necessary to restore trust to an economy or
    market are rendered unlikely because doing so would expose a pervasive
    corruption that the
    principals fear would destroy any remaining trust. It could also
    endanger the careers of politicians and business people who may have
    permitted and even appeared to facilitate the control fraud that cause
    the financial crisis in the first place. Personal risk trumps public

  26. Should the fact that the Dow index now isn't the Dow index that existed 4 years ago be ignored? The only fair comparator would be take out the recently added companies of the Dow 30 and replace them with the GM's etc. -- that made up the Dow in 2007. Should we also ignore
    that the "success" of the market is a function of corporate actions such as cost slashing through massive job loss and either price increases or
    the more stealth inflation of reducing the amount of product though keeping the packaging and pricing fairly stable?

    The market is not the economy and can stay irrational longer than you can stay liquid. At some point, corporations will reach the law of diminishing returns in employment reduction and will not be able to continue pushing through price increases without the bottom line being affected. When that happens, and it will at some point in time if the economy continues to contract to where the market will more accurately reflect
    the economy, and it won't be pretty. I hope the market is "forward looking" and foretelling a better economy, but I think it's safe to view that with a jaundiced eye. It is fun while it last though, no doubt, unless you're one of the poor bastards that got reduced out of a job.

    When in doubt follow the copper market. What is that canary doing?

  27. Real economic growth has inherent limits, any system with finite inputs does. Debt, and our current version of fiat money, do not.

    The check to too much debt/credit ought to be an interest rate that goes up (to discourage credit expansion); however, when top-down managed, politically unaccountable, central banks manipulate what ought to be something that maintains a market-based equilibrium, the interest rate
    becomes nothing but a tool to central planning uses to encourage MORE credit expansion. They are trying to counteract the natural balance of things and will lose. "Don't fight forces, use them" said Buckminster Fuller, and we should listen.

    There is a disconnect between the fundamental natures of debt, fiat, and economic growth. Until the growth of debt comes in-line with economic growth, nothing will be be resolved.

  28. Cynthia---do read "Liars Poker" by Michael Lewis---the Wall ST investment banks and the US govt are far,far more cynical and unethical than even you or Matt Taibbi can imagine :) He followed this up with "The Big Short"---more of the same and totally surreal what incredible a$$h@les these people are.

  29. Cynthia---the whole show is a "smoke and mirrors", dont' look at the man behind the curtain, performance.

    The statistics for inflation, unemployment etc are fraudulent. After you have read a few of Lewis' books, you won't believe anything that is reported on the economy by the MSM.

  30. Fred. Did you know Michael Lewis?

  31. Yes, the fraud will not be prosecuted by the Obama administration or the SEC. Instead, whistleblowers are intimidated and their careers destroyed. The govt(FED) colludes with the investment banks to manipulate the market for bonds, the price of gold, etc.

  32. Interesting how we totally agree on this. Why don't more people know about this? Where is the outrage? The drone thing is more evidence of an evolving police state. I don't like Rand Paul and think he is a fruit-bat, but he is right-on about using drones to kill US citizens inside the US plus "collateral" damage (kids, family, bystanders) ----why is it so hard for Holder and Obama to say that this would not be policy? By not denying it, it is apparent that it is policy.

  33. He once told me I was doing a good job in a voice that was so threatening that he scared the bejeesus out of me. I remember sitting in a large meeting and the subject came up of some investors who had bought some bonds from a company which went into default. His comment was "those guys must be shitting razor blades". I think his colorful use of language comes from the fact that he had a harvard english degree. He is now writing fiction and has some books on amazon. His real name is not however "The human piranha".

  34. No. He left before I arrived.

  35. This is the guy


  36. Lubos, when are you going to have a post about knot theory and it's interplay with physics?

  37. Hi! I am not a real expert. Previously, I posted e.g.


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