zondag 2 juli 2017

Examining The Stock Market Bubble

I started paying attention to the Fed in 2002, after seeing a huge graph of the Dow Jones Industrial Average (DJIA) from 1920 to the present in the Boston Globe. I took one look at the graph and could see that it was perfectly obvious that we were in a stock market bubble. Later, of course, I did the calculations and verified it. There are many reasons why I believe that mainstream economists are airheads, and one of them is the belief that you can't detect a bubble until after it occurs. In the case of the DJIA, it's rather simple. If you analyze historical values of the DJIA, you find that in the 90-year period from 1904 to 1994 it grew at an average of 4.5% per year, including inflation. So since the DJIA started growing much more rapidly than 4.5% per year, starting in 1995, the you know that it's in a growing bubble. Today, the DJIA is at 258% of its long-term trend value, as determined by the 4.5% growth rate, so we can be sure that the DJIA is in an enormous bubble. In fact, it was at 255% of the trend value when the crash began in 1929, and fell to only 24% of the trend value by 1932, after several years of crashing.
Another thing that mainstream economists are incapable of grasping is the concept of "Reversion of the Mean." This means that the average (or mean) of a value must be the same in the future as it was in the past. This is easiest to explain with the S&P 500 Price Earnings ratio (p/e ratio). The historic average value of the p/e ratio is 14, but since the 1990s, it's been well above the average, and today it's around 24. Now, airhead economists use the erroneous phrase "Reversion TO the Mean," and they say you should be prepared for the p/e ratio to revert to its mean value of 14. This would be a significant stock market correction, but it's only a small part of the story. If the p/e ratio only reverts to 14, then that means for the last 20 years, the average (or mean) value was well above 14.
That doesn't satisfy the requirement that the average before 1995 was 14, and so after 1995 it also has to be 14. That's why we say "Reversion OF the Mean," which says that the average value must return to 14, which means that the p/e ratio would have to fall to around 5 for 20 years, just as it was well above 14 for the last 20 years. This portends major stock market crash. The members of the Federal Reserve are some of the major economists of our time, each with huge staffs to do research. And yet, Janet Yellen says that the Fed has everything under control, and there won't be a financial crisis "in our lifetimes." It's just absolutely bizarre....