Dow Crash, in Real Terms

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SteveR's picture
SteveR
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Dow Crash, in Real Terms

Today, it was all over the news that the Dow has returned to 1997 levels, wiping out nearly 12 years of gains.

But...

Now that I took the red pill, I know the difference between nominal values and real values.

So, I was wondering - has anyone calculated what year the Dow has actually crashed back to, if you use real purchasing power as the criterion - perhaps using data from ShadowStats?  At an inflation rate of 8-10% per year, I wouldn't be surpised if we've lost 20 years of gains.

 

SteveR

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Re: Dow Crash, in Real Terms

Just based on the BLS's phoney CPI numbers, the S&P 500 is back to 1995 levels.  So, yeah, we've probably lost 20 years. 

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Re: Dow Crash, in Real Terms

Good point - and the other consideration is that the Dow removed all stocks under $10 according to the International Forecaster:

For
those of you who missed it the Dow Jones removed all stocks in the
industrial average priced under $10.00, effectively eliminating the
crippled financial sector. Had they been left in the Dow would be lower
and would have broken down below 7286. This is just more flagrant
manipulation. Almost every day we see it in a number of markets. This
week the Fed and the Treasury tried to push the stock market up and the
commodities and gold and silver markets down but to no avail. Downside
stock market volume has been some 65% of total volume and there are
over 300 new lows almost every day.

I don't think we have any historical data to compare as our government lies and deceives us with no remorse or accountability. 

Larry

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Re: Dow Crash, in Real Terms

this is  not true yet. It is only a rumor. Please check your facts before you post.

Dogs_In_A_Pile's picture
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Re: Dow Crash, in Real Terms

If you have been in Puts on the OEX, QQQQ or DIA do you really care what levels the S&P, NAS and Dow go to?

 

I guess my point is this - what is the utility of this kind of news?  Are we supposed to feel good or bad about it?  It is what it is (great song by the String Cheese Incident by the way) - so why bother spending time on it.  There are thousands of underlying assumptions used to come up with comparative data that has no utility.

Focus on what opportunities are being presented rather than what has been "lost" if indeed anything really has been lost.  As we are seeing play out every day - stock portfolios valued at X when the Dow was at 13,000 got there artificially.  There was no underlying 'thing' that made the company really worth the levels they were enjoying.  Now the portfolios are valued at .6X or .7X if you are lucky.

The only thing real was the folks who cashed out at 13,000 or those who saw the meltdown as an opportunity.

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Re: Dow Crash, in Real Terms

According to one of my sources, the equity markets lost about $30 trillion at the halfway mark. The federal government can't spend fast enough to make up for losses like that. And that's only stocks.

 

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Re: Dow Crash, in Real Terms

Dogs,

 I am interested mostly so that I can put it into perspective for my mainstream friends and family.  Yes, CM and company have all peeked behind the curtain, but the masses have no clue about nonimal vs. real values, for example.

For the friends and family that I'm trying to convince of the importance of broadening their perspectives and considering investments such as precious metals, it would be nice to be able to say something like this: "The Dow has crashed back all the way to 1989 levels, if you factor in true inflation.  The stock boom has been phony.  You need to pay attention to what I'm saying."

 SteveR

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Re: Dow Crash, in Real Terms

Steve,

Good point. 

I think your statement should suffice as an icebreaker.  Especially when you consider that as things get worse, more people are going to at least 'hear' all the news sources talking about it.  They may not understand it all, but at least they have heard it enough times that it may pique their interest.  We don't watch much television, but it's interesting to see how the current climate has started working its way into scripts.

I wasn't trying to be glib - my original comments were more targeted to the CM audience - but in the context of getting the message out I missed the target you were aiming for.

Getting them to hear is one thing.  Getting them to listen is even harder.

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Re: Dow Crash, in Real Terms

Greetings from a new guy. This is my first post so I will offer a little info about me. The Crash Course put some structure to many things that I have felt and/or believed for some time. I have been suspicious of much of the information put forth by the government but until becoming familiar with this group and lurking here for awhile I figured that maybe I was alone in my thinking.

I know where SteveR is coming from regarding trying to discuss the probable future meltdown events with family members. As it is I am regarded as something of an eccentric in my family when I suggest that perhaps it might be good to consider what could happen in a worst case scenario. So at this point I am trying to prepare as best I can without too much visibility from the family. I am sure that I will be seeking the counsel of those that have been preparing longer than I.

As far as the market-- I have been buying gold/silver and fortunately sold all stock positions mid 2008 before the big drop so I am not as bad off as many that I know.

Ken

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Re: Dow Crash, in Real Terms
Dogs_In_A_Pile wrote:

Getting them to hear is one thing.  Getting them to listen is even harder.

I agree with you 100% on that!  It's so frustrating to try to help friends and family when they are chowing down on what is being fed to them by the media, the financial industry, and our wonderful government.  I think most people view me as being a bit nutty - even though I was actually up for 2008 while they got killed in their mainstream investments.

SteveR

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Re: Dow Crash, in Real Terms

Good post Ken, welcome. I can relate, my family thinks I'm crazy for my hightened concerns. Most people do not want to hear this information, much less talk about it. Most people just want to ignore it until things get back to "normal"

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Re: Dow Crash, in Real Terms

Is the Dow Jones still comparable with 1997 or before? Is the index calculated from the same 30 companies, or is it changed so much that a comparison can not be made,  the same way the CPI is changed with substitutions. I don't have the names of the instruments that made up the index in 1997 to make a real comparison, anyone here has the names?

 

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Re: Dow Crash, in Real Terms

Oh, the losses are real, alright.  The 401ks have become 201ks, on the way to being 51ks.  Saying, "it was a bubble - it wasn't real" in no way diminishes the perception by the majority of passive investors that they have lost over half of their real wealth.  Not to mention the hit their house has taken, usually the largest single asset in their portfolio.

I think it is a mistake to underestimate the magnitude of this worldwide "takedown," or its likely effects going forward.  A lot of people are still in denial about the losses they have taken, knaively repeating the mantra "it will come back."

I'm afraid there's no coming back from this.

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Re: Dow Crash, in Real Terms
Brainless wrote:

Is the Dow Jones still comparable with 1997 or
before? Is the index calculated from the same 30 companies, or is it
changed so much that a comparison can not be made, the same way the CPI
is changed with substitutions. I don't have the names of the
instruments that made up the index in 1997 to make a real comparison,
anyone here has the names?

The history of DJIA components
is available, but you don't really need to recalculate what would have
happened if its composition hadn't changed. For instance, if you owned
the Dow Diamonds ETF -- probably the best way for individual investors
to hold the entire DJIA portfolio -- changes in the components would be
automatically reflected in the holdings and performance of DIA. Like
all stock indexes, the DJIA is actively managed. Owning the index means
owning a changing basket of stocks. Nothing wrong or unusual about
that. When companies are bought out or liquidated, you can't continue owning them.

Perhaps a more meaningful way to express where we are, is to
point out that you would have been as well off simply owning T-bills or
CDs since 1997, as compared to owning the DJIA. (Dividends on the Dow
during the period roughly equaled the interest yield on short-term
fixed income investments.) In fact, you would have been much better off
in terms of risk-adjusted return. T-bills and CDs appreciate in a
straight line, with virtually zero risk. Stocks, by comparison, have
been chopped in half twice in the decade -- once during 2000-2002, and again during 2007-2009.

Basically,
we're replaying 1966-1982, an 18-year period during which the DJIA went
nowhere. As the 'flat since 1997' comparison indicates, we're already
12 years into the Seventies analog. By the time a real washout occurs
and stock market investment is thoroughly discredited and mocked, the
foundations may be present for a renewed bull market. We aren't there
yet, but sometime around 2012 to 2014 would be a good bet for another
'generational low' like 1949 or 1974. The market's seasons are
ever-changing; it doesn't pay to be either a permabull or a permabear.

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Re: Dow Crash, in Real Terms
Downrange wrote:

Oh, the losses are real, alright.  The 401ks have become 201ks, on the way to being 51ks.  Saying, "it was a bubble - it wasn't real" in no way diminishes the perception by the majority of passive investors that they have lost over half of their real wealth.  Not to mention the hit their house has taken, usually the largest single asset in their portfolio.

I think it is a mistake to underestimate the magnitude of this worldwide "takedown," or its likely effects going forward.  A lot of people are still in denial about the losses they have taken, knaively repeating the mantra "it will come back."

I'm afraid there's no coming back from this.

Downrange -

It most certainly will come back - just not in the form and function people want it to.  Unfortunately, most people will listen to their financial advisors about adopting 'defensive' strategies to ride this out.  To me, all that means is they will find the securities that are losing value the slowest.  All of that stems from the green market bias 99% of all brokers, fund managers and financial advisors have.  And I don't get it - they understand that the market has two sides and moves in two directions, yet they only know how to make money for their clients to the updside??  Seems like another layer of the banking conspiracy to me.

One small disagreement - I don't think your house can ever be an asset.  Robert Kiyosaki addresses this in "Rich Dad, Poor Dad".  You pay a mortgage for 15, 20 or 30 years, which is a cash outflow = liability.  All along the way and after it's paid for you pay property taxes, another cash outflow (liability).  The only way a house can be an asset is if you are turning them over at a profit - and that's a bit volatile an approach to include in one's portfolio IMO.

I think a more accurate term for a home is a "liability with some tax benefits"

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Re: Dow Crash, in Real Terms

Dogs,

"I don't think your house can ever be an asset. "

I believe Kiyosaki defined an asset as something that brings you a return on your investment, not something that you have to put money out for each month. I read the book a few years ago then loaned it out so I can't give an exact reference. I think either residential or commercial real estate could be considered an asset if they are leased or rented at a rate higher than their monthly costs. My sister recently inherited a house in Monterey CA, it is payed for and in a upscale neighborhood, she recieves a nice passive income from renting this asset.

Now if you mean only the house you live in that too could be an asset if you figure in the rent you would have to pay to live elsewhere and if you owned it outright, just as long as you come out ahead money wise it would be an asset. I'm thinking that about the only way residential real estate could be an asset is if you inherited it or bought it at a ridiclously low price, you would have to figure in the mortgage payment and other expenses minus what you would pay for rent and see how much money you have tied up in it, you might be able to invest a similiar amount  elsewhere and get a better return.

Thanks again,

Greg

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Re: Dow Crash, in Real Terms

Hello everyone,

My opinion on the Dow (or any other indicator of the markets world wide) is that they serve several purposes, depending on how you take it:

1) an indicator to the health of economic systems ((monetary systems)).

2) an indicator of how people like/dislike government policy or current events.

3) propaganda to instill fear or hope into the population in general. 

4) a point of discussion around the water cooler ((if you still have a job)).

5) meaningless waste of time, with the understanding that we have no control over it what so ever.  In many cases, what ever digital money you have in there, taking it out you lose 40% for tax and an additional 10% penalty (in the USA).

 

 

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Re: Dow Crash, in Real Terms

Greg -

I don't think you can count opportunity cost as revenue (or maybe more accurately, non-opportunity cost).

I think you have evolved the original statement - you have described situations that don't apply to the 'average' homeowner.  Specifically, residential or commercial rentals.  As long as more money comes in than goes out it is a positive revenue generator therefore an asset.

Somehow I don't think you get to take credit for the rent you aren't paying because you live in a house you have no mortgage on and own outright.  You still pay property taxes and cash outflow is a negative revenue stream - to me that makes it a liability.  Now if you sold it and took away a sum greater than all the interest and property taxes you paid, and at the time you sold the house the assessed value was greater than the inflation corrected value you paid for it then it was an asset.  But now you have to start all over unless you are going to live in a lean to in the woods somewhere.

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Re: Dow Crash, in Real Terms
Dogs_In_A_Pile wrote:
Downrange wrote:

Oh, the losses are real, alright.  The 401ks have become 201ks, on the way to being 51ks.  Saying, "it was a bubble - it wasn't real" in no way diminishes the perception by the majority of passive investors that they have lost over half of their real wealth.  Not to mention the hit their house has taken, usually the largest single asset in their portfolio.

I think it is a mistake to underestimate the magnitude of this worldwide "takedown," or its likely effects going forward.  A lot of people are still in denial about the losses they have taken, knaively repeating the mantra "it will come back."

I'm afraid there's no coming back from this.

Downrange -

It most certainly will come back - just not in the form and function people want it to.  Unfortunately, most people will listen to their financial advisors about adopting 'defensive' strategies to ride this out.  To me, all that means is they will find the securities that are losing value the slowest.  All of that stems from the green market bias 99% of all brokers, fund managers and financial advisors have.  And I don't get it - they understand that the market has two sides and moves in two directions, yet they only know how to make money for their clients to the updside??  Seems like another layer of the banking conspiracy to me.

One small disagreement - I don't think your house can ever be an asset.  Robert Kiyosaki addresses this in "Rich Dad, Poor Dad".  You pay a mortgage for 15, 20 or 30 years, which is a cash outflow = liability.  All along the way and after it's paid for you pay property taxes, another cash outflow (liability).  The only way a house can be an asset is if you are turning them over at a profit - and that's a bit volatile an approach to include in one's portfolio IMO.

I think a more accurate term for a home is a "liability with some tax benefits"

Hi Dogs,

Well, I wish I understood what you mean in that first paragraph.  How does it come back if the post above yours has it correct (we're in a flat like fifty years ago, and haven't even hit bottom yet)?  I guess if your time frame is long enough, say fifty more years, you can rely on "it will come back," but I'm afraid the boomers have taken this right in the shorts, pun intended.

There are houses and there are houses; whether a house can be an asset is a complex question, based on when and where it was bought, its intended use, and when it is to be sold back into the market.  I think it's pretty clear that the model has been that the house is indeed the largest asset most people own.  The problem is that the bubble so distorted the valuation that many of them bought what they could not afford, or cashed out "equity" through the "home ATM" machine, effectively destroying much of that asset's value. 

I will give a personal example:  I bought my home in the early 90s.  I watched its value go up with the bubble, and it now is going slowly back toward a norm somewhere in the middle of that range.  Since I did not cash out my "equity" at its peak, and since I didn't finance with a horrendous predatory loan in the first place, I have been able to utilize considerable tax benefits from home ownership.  Also, since I have some land, there is additional value added to the asset; I could farm some of it if need be.  There is also a security aspect to the location, but I won't go into that now.  Suffice it to say, it's not in a city, is fairly defensible, and is located in an area that could be relatively easily made more or less "self-sufficient" and remote from city problems.  I call that an asset.  Now, a McMansion in the suburbs, bought in 2005, with an Option-ARM, that's not such a great asset, lol!

Anyway, interesting discussion here.  Appreciate everyone's comments.

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Re: Dow Crash, in Real Terms

"Mr. Kiyosaki’s primary philosophy, in summary, is that the rich own businesses or real estate that generate income, rather than work as an employee. He considers these items as assets.

Therefore he only considers things that produce income as assets, narrowing the accounting definition. A personal home does not generate income (in the simple sense) so it is not an asset.

Many homeowners, however, do carry mortgages on their personal homes. Mortgages, by any definition, including Mr. Kiyosaki’s, are liabilities. His Rich Dad only considered one side of the equation."

http://accounting.suite101.com/article.cfm/is_your_home_an_asset_or_liability

Dogs is talking about Mr. Kiyosaki's definition of an asset from the book "Rich Dad, Poor Dad". In most current use an asset is defined as pretty much anything you own.

Greg

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Re: Dow Crash, in Real Terms

Downrange -

What I meant by the first part is that the market will continue to function and opportunity to trade and invest will still exist.  There may be more oversight and regulation internal to the business sectors, but markets will still have equities to transact, commodities to trade, etc.  Back in '29, the market was still open and stocks still traded.  Will we see the Dow at 13,000 again?  Not any time soon, but if it drops to where I think it's going (3000), there will be plenty of opportunity to make money going down to that level and coming back up off of it.  The key is putting the money to good work - eliminating personal debt, taking care of family and friends and then putting it to use in a meaningful way to help others.

I thinnk we are in violent agreement over the house asset v. house liability issue.  I see it simply this way - if the combination of my mortgage and property taxes vs. tax benefits results in a negative revenue stream then the house is a liability.  I think the real estate and banking industries have done a masterfully sinister job marketing the concept of a home as an asset.  I am only talking about primary residence here - if you are flipping or renting and making money then clearly that would make the property involved an asset since you are operating it as you would any other product.

In your example, your tax benefits are likely still less than your mortgage and property tax outflows correct?  That makes it a liability.  Don't forget that until you sell the house and take away the appreciation above and beyond what you paid for the house + interest + property taxes paid then that "asset value" exists solely on paper - just like an open stock or option trade.  The money isn't in the bank until you sell to close the position.  And unless you are farming your other land and the proceeds are more than your costs to farm and the associated property taxes then agan, it too is a liability.  All of the subjective reasons you cite (farming, security, etc.) can't be viewed as an asset - otherwise the greedy bastages in DC would have figured out how to value that and tax it. 

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Re: Dow Crash, in Real Terms

Dogs, I'm certainly glad they can't tax "peace of mind."

 

Yet.

 

You make a lot of sense.  I guess my point, which I think you'd agree with, is that this is a "takedown" of monumental proportions, and that most people who counted on retiring on their 401k are now readjusting the expectations since it's a 201k, and about to become a 51k.  Most passive investors have no conception of (and usually no plan-provided opportunity to pursue) the short side of the trade.

BTW, I tend to agree with your Dow target, probably before 2012.

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Re: Dow Crash, in Real Terms

DR -

That's the frustrating part.  Why people trust others to manage their money is beyond me - but I consider myself lucky.  Mrs. Dogs and I would likely have been in that same boat had we not had the good luck to run into someone who steered us into the investing education seminars that frankly have changed our lives.

This is just my opinion and certainly not to be construed as advice in any way but I think we could see the Dow hit 5000 within a few months - S&P is stuck on 752 now, time will tell if it is a floor or a ceiling (I'm going with ceiling).  If we hit 5000 by spring-summer, the typical light trading volumes in the summer will exacerbate the volatility and we could be at 3000 by year's end. 

Dire prediction?  Perhaps, but they mocked Peter Schiff back in Dec 07 when the experts called the Dow at 11,000-13,000 by 2009 and he called 7500.

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Re: Dow Crash, in Real Terms

Today the S&P bounced hard, after falling yesterday to within a
couple of points of its Nov. 20th intraday low. This forms a potential
double bottom on the chart.

Financials, as measured by XLF,
popped 12 percent. Financials got us into this mess, and they need to
lead us out. The reason they are rallying is unfortunate -- more
government bailouts -- but the market only cares about liquidity, not
about ideology, prudence or morality.

Keep an open mind -- the
drop from Oct. 2007 until Nov. 2008 was about average, in terms of bear
market duration, and deeper than average in percentage decline. This
market could break either way -- it's a coin flip, 50/50 chance of up
from here, or fresh breakdown ahead.

I do expect a bottom to be
set during 2009. If financials keep rallying, it will increase the
likelihood that the bottom's in. Today's record low of 25 in Conference
Board consumer confidence is a strong contrarian indicator. When people
are scared witless, and the news is relentlessly horrible, stocks are
pretty cheap.

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Re: Dow Crash, in Real Terms
machinehead wrote:

Today the S&P bounced hard, after falling yesterday to within a couple of points of its Nov. 20th intraday low. This forms a potential double bottom on the chart.

'Potential double bottoms' have a nasty history of turning into "three knock rules" as the third test penetrates the 'bottom' and sinks like a stone.

IMO, the bottom feeders got lucky catching a falling knife today.

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Re: Dow Crash, in Real Terms
SteveR wrote:

I agree with you 100% on that!  It's so frustrating to try to help friends and family when they are chowing down on what is being fed to them by the media, the financial industry, and our wonderful government.  I think most people view me as being a bit nutty - even though I was actually up for 2008 while they got killed in their mainstream investments.

More so when one receives comments such as "So the economic experts, the bureaucrats, media and political big-wigs are fools and you are the only torch-bearer?"

I stopped preaching. Its like Atheism - you tell people there is NO God and that they're wasting time with their rituals, they'd ridicule you. 

On a side-note: I wish the Crash Course could be condensed into a much shorter format that people are willing to view... Most 'everything is fine' people tend to watch not more than 30 mins since its too much tech details about the US financial system. Could we make a shorter version that talks just about peak-oil, environment and some parts of the economy? Is there already one?

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