A chart that I came up with earlier this year. Blue line is the Dow close at the end of each calendar year. Curves are simple geometric plots, increasing at a rate such that it will intersect with the actual Dow as of the year indicated in the legend.
If you want to figure out where the Dow “should” be, you pick the rate of growth that makes the most sense to you, extrapolate to the present day, and you’re done—provided you have a talent for oversimplification.
I’m certainly no expert in finance, but I’m trying to apply a few lessons I learned in anthropology back in grad school. Namely:
- People don’t change much, even when their cultures do.
- We’re no different.
So it seems to me that if you want to believe that the years 1930-1980 have any particular relevance to us, then you come to one of two conclusions about any major delta in the rate of increase of the Dow:
- We are different.
- It’s a temporary aberration.
There are all sorts of reasons why we can call ourselves different; our grandparents didn’t spend their evenings Twittering about the lovely upgrades they made to their Hoovervilles. But most of the time, when we think we’re different, we’re kidding ourselves.
I’m perfectly comfortable with the idea that things changed after 1980; computers were arriving on people’s desks, and whether we knew it or not, the Cold War was about to end. As I understand it, that means all sorts of things about international capital flows and other financial voodoo, all of which is designed to make money too complicated for mere mortals. Hence my oversimplification: yes, the 1980s and early 1990s were different enough to account for that curve.
As for the second bend in 1994, well, sure. The Internet was becoming a major force right around then, and again, whether we knew it or not, economic forces were starting to realign.
The third bend ending in 1999, though, is clearly batshit. Even our massive housing bubble in 2006 couldn’t peak us anywhere near that growth curve.
I can see all sorts of logical fallacies in this kind of thinking, any one of which would mean that I wasted around 18 hours teaching myself how to use iWork Numbers well enough to do this chart. I’m especially unhappy with the timing; I don’t know where to intersect those curves in order to capture a hockey stick change, rather than merely intersect at its endpoints.
That said, here are the numbers at the end of each curve for 12/31/2009, in case they turn out to be illuminating or prophetic someday: 1980: Dow 1,848.40; 1990: Dow 5,124.81; 1994: Dow 6,842.23.