Ben Buchwalter


moveon.economy?
March 6, 2009, 2:09 pm
Filed under: Economy | Tags: ,

Kyle’s blog recently posted the above graph showing the Dow since 1928. I was struck by the fact that the Dow remained under 2,000 until the second half of the 1980s. But as far as I know, we did not spend half of the 20th century in a jobs crisis.

So here’s my thought (and I recognize that I might be WAY off base on this):

As the Dow continues to drop closer to 6,000, maybe we need to reconsider the ideal endgame here. Maybe the goal should not be restoring the Dow to 10,000 or above, but to learn how to create jobs in a world where the Dow is below 7,000, as it was before the mid 1990s. If we could do it then, something tells me we can do it now.

As of February 1997 (when the Dow was roughly where it is now), the unemployment rate was 5.2%. We learned today that as of February 2009, the unemployment was 8.1%.

The Dow is not the best way to judge our economy. But as far as I’m concerned, the lower the unemployment rate is, the better our economy is. So when do we decide that rocketing back above 10,000 isn’t going to happen and start to adjust?

I’d love for someone who knows a lot about this stuff to explain.

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4 Comments so far
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To all Liberals who, while in an Ivy League School majored in “Screw The USA”, you have achieved your goal. at the current rate of decline, the Dow Jones Average will, in 23 days of trading, hit “)”. Of course it matters not to you that your children’s college funding will be wiped out; you will opt for a “Stimulus Grant”.

Comment by llabesab

huh?

Comment by Ben

Everyone knows that there’s an inverse relationship between the unemployment rate and the general level of economic health…and the economy is clearly not healthy when the stock markets are in a free-fall. And there is a lag…the stock market will likely start to rebound about 6 months before the economy starts showing life, and the unemployment rate starts to decline.

It is really difficult to get any insight into this by looking at the level of the stock market indices themselves. Much better to normalize the larger indices by looking at stock price averages divided by earnings per share numbers, resulting in price/earnings trends. Two great links:

http://dshort.com/articles/2009/regression-to-trend.html (Check the link to Robert Schiller in this one)

http://www.ritholtz.com/blog/2009/03/historic-pe-ratio-for-the-sp-500/
(This is a great blog to bookmark)

The bottom line: the long term average of the S&P500 P/E ratio is 15…you can see that the US economy was WAY over-valued for the last 17 years and was do for a major correction…this is the fundamental thesis of Schiller’s book “Irrational Exhuberance” [Princeton University Press 2000, Broadway Books 2001, 2nd ed., 2005].

Schiller himself is saying that market bottom will likely be hit when the P/E ratio hits 10…we’re currently at around 12. Others (like me) have been maintaining that the current levels (6,600 on the Dow) are pretty close to the market botton.

Comment by cbuckbuchie

Please refresh this page! We miss your voice!

Comment by lisabu




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