September 6, 2014 by JImbo
I’m going to preface this with the usual “I’m not a professional economist.”
However, I wanted to share this interesting tidbit and see if I can get some feedback on it.
I’ve thought for awhile that the stock market is just at “record highs” because our dollar is worth peanuts. if the price of eggs, milk and a gallon of gas are high, then stocks will be too. After all, they’re just a measure of dollars too.
Unlike eggs, milk or gasoline people cheer when the stockmarket goes up. They think it means there is MORE of something. They primitively think that the stock market measures PRODUCTION. It doesn’t. It measures the cost to buy stock.
But how to prove this?
I figured I’d take the inflation out of the stock market figures and see what they would have been worth without inflation in each year. I know the government inflation is artificially low (see previous post) so I decided to use the 6% average that seems about right given the Trillion dollar debt spending and stimulus spending by the government.
Then I’d compare this to the “official” figures of the Stock Market at yearly intervals.
I didn’t really expect it to be so…. smooth. A slow, gradual rise in REAL value of the stock market makes logical sense. After all, the companies who are ON the stock market kept growing at a steady rate for the last 10 years. By 2004 it’s about where you’d expect it to be.
What these dots measure basically is what a stock market THE SAME SIZE AS TODAY would be worth in those other years’ dollars. I realize this is very unscientific and all, but could it be that the 2008 “Crash” was just in our heads? Or that the early-2000’s growth was just overvaluation?
Maybe the stock market is right about where it’s been for the past 10 years, give or take a few percentage points?
I did just use a standard 6%. It could have been a bit off in different years. (There’s no way it’s the 1 or 2% that the US Labor Dept claims however!)
We do know that the “value” of the stock market is based on what people think stock is worth. So, it’s very subjective. People get overoptimistic in a bubble and overpessimistic on a downswing.
Play with it and let me know what you think. Does it make sense? Maybe it’s less than 6% for years before 2008? (We weren’t printing quite so much money… but still a lot)
Going back farther than 10 years runs into the 9-11 effect. Then before that the stock market was over 13,000 again. However, that looks like it was a bubble too.
Look at that HUGE jump after 1984. Our economy was NOT expanding that fast, so the stocks on the market could NOT have been worth that much.
Do we EVER have a “true” value for the stock market? Or is it always too high or too low?
I think if you moderate it a bit for years with less inflation the pattern fits pretty well. In particular, in 1990 and 1980 they changed the inflation adjustment methods so that could throw things off in those years.
Maybe some economics major wants to study it as a research project. I’ve looked this up before, but EVERY source I go to insists on using the “official” government figures.
I know I’ve got lotsa smart Readnecks on here who could take a look and tell me where I’m wrong. I know about as much about Economics as I do about Physics, Engineering and Literature.
Not much but whatever I’ve picked up along the way through reading books.
Still I find it fascinating. It’s like the old ideal of the “Renaissance Man.”
I like this definitinon: The term Renaissance man or polymath is used for a very clever person who is good at a great many different things.
I know folks in the country tend to be wood shed experts on all sorts of things. Never really put a name on it before. Maybe we can call it the “Readneck Renaissance.”
Hey, Harlem had theirs. It’s about time we had ours.