All very interesting but the author fails to discuss the survivor bias inherent in the Dow Jones Index (or any other index, for that matter). This is the results of the companies that survived. A lot of companies have dissappeared over this time, both through poor performance or going bankrupt. In fact, GE is the only company that has remained on the index since it's inception.
So unless you're buying index funds that track the DJIA, the chart loses it use. Because when we look at this, we see that the stock market always goes up with time. But what we are looking at is the fact that the 30 largest/most successful companies in the USA keep pace with inflation. Which is hardly a shock.
Note that I'm not arguing some of the authors points, I'm just encouraging an open mind when viewing graphics like this - you've got to know what you're looking for.
Keep in mind that the majority of the success and growth in the companies in the Dow happened BEFORE they were added to the index, so it isn't factored in. If holding the top 30 US companies was inherently a market-beating strategy, investing would be easy.
There is not actually survivorship bias in the DJIA, because changes to its composition are not retroactive. If an index member goes bankrupt, it will absolutely bring the index level down substantially.
That is if they are high flying one day, and bankrupt the next. What usually happens is that they slowly sink in size until they are excluded from the index, and some other up-and-coming company is included. It's not common for a company to go bankrupt and be delisted, but it is common for companies to sink lower and be removed, and then perform very badly from then on as index funds sell them down.
So you're correct in that bad performance by a firm in the DJIA will affect the index, however, really bad performance by a company will not be completely reflected in the index, only the first part of their decline. And that will be somewhat mitigated by the inclusion of their replacement, which is usually a growing company.
Of course Korea and First Gulf War are not here, since they would ruin the author's argument. Cue the chorus of people arguing why Korea and First Gulf are "different."
I don't know if I'm the chorus you're talking about, but they were both much shorter than the ones marked (gulf war 1: 90-91, korea: 50-53). If he shaded those boxes as well to the graph, I don't see it "ruining" his argument. The growth in those four years wasn't exactly spectacular. Very slightly up at best.
The U.S. was only in WWII from 41-45. It was only in WWI from 1917-1918.
Also saying "The war on terror" is kind of misleading since troop levels have varied greatly. To give one example the initial Afghan offensive only involved about 1,300 ground troops. As of 2003 that number was still only at 10,000 (http://www.cbsnews.com/stories/2009/12/01/ap/government/main...)
That's around the same number we had in Somalia (5,300), the '89 Panama invasion (30,000) and several other conflicts. So the fact that the chart starts to level off as of 2001 while these other conflicts don't seem to have made an impact undermines the implied point
Also saying "The war on terror" is kind of misleading since troop levels have varied greatly.
Only if you believe the cause is troop levels. There are lots of things about a war that could be responsible for a correlation that are not directly correlated with number of troops deployed.
The author is contending that armed conflicts have an impact on the economy. I'm offering other conflicts with similar troop levels to disprove that theory. I'd be open to any other factors you think distinguishes the Afghan conflict from these other conflicts but just saying there could be other unnamed factors doesn't further the debate.
Rereading the article, I don't think the author is claiming that at all. The wording of the original yc comment framed the question in terms of whether wars are good or bad or what constituted a war, etc., and that's how we followed, but all the author claims is that wars=inflation and that good dow years follow inflationary spikes.
I would imagine that the only reason why someone would posit this correlation would be to say something on how to view our current situation, and I think he's saying that we've had a bad 10 years (logarithmicly speaking), but once we're out of this war (by him, inflationary) period, things will be great.
I'm not sure if I buy this argument or its implications, but the omission of korea, panama, gulf war 1 and somalia and the inclusion of the GWoT don't "ruin" it for me, at very least.
Thing is, I don't necessarily buy the original authors assertion. It's just that there are lots of other things that could easily have an effect, such as investor mood, government spending tie-ins like growing debt (or debt ratio) and inflation, diversion of investor money from things with higher growth potential into things that have immediate profits, like Xe...
None of those necessarily have a great deal to do with troop strength, but they do all seem to correlate with (some) wars.
They aren't different. There was a post-Korea inflationary period and subsequent recession in 1953-1954 as the Fed restricted monetary policy to quell the inflation:
The trend still holds up, it just wasn't worth mentioning in those cases. I'm more interested in why we got the Great Depression in a period of relative peace.
>I'm more interested in why we got the Great Depression in a period of relative peace.
Speculation. There were very few regulations on the stock market, which led to massive growth across the board. As a result, average people invested their savings in the stock market, because they were all but guaranteed double-digit ROIs. Problem is, stock prices were based on the inflationary pressure of increased investment, not the actual revenues of the companies themselves. When the bubble burst, it hurt everyone. People were worried that their savings would be lost, so they rushed to the banks to withdraw all their money, but the banks didn't have enough to cover their balances, so they shut down. Now, savings weren't insured back then, so when the banks closed their clients lost everything.
As a result of the Great Depression, the government instituted sane financial regulations. Of course, in protecting against busts, they capped growth, so big money types hated them. Thus, neoliberals in the Reagan, Bush (I), Clinton, and Bush (II) administrations systematically removed the regulations that had been put in place to stop serious recessions from happening. There was tremendous growth, then...
This latest recession was entirely foreseeable, and in fact, my friend's grandfather called it. He said in about 2005 that the last time he had seen growth like that, and people generally acting so irresponsibly with their money was right before the Great Depression. In fact, he even called the housing market as the bubble that would pop. I promptly ignored him of course, because he was just some senile old man. Just goes to show, people will only be responsible so long as the pain of their previous irresponsibility is fresh in their minds. When it starts to fade, they get greedy and stupid again.
I think you're missing the post's author's point. He isn't saying "after wars the DJIA goes up", he's saying "after periods of inflation, the DJIA goes up" (see the title of the graph).
Note he still doesn't mention 1929-1933, which seems like a big omission, although it doesn't directly contradict the assertion.
Iraq is definitely a sink hole. But the War in Afghanistan has cost $370 billion which is $200 billion less than Korea (in inflation adjusted dollars).
Note that the chart uses a logarithmic y-axis, so it is most useful for relative comparisons. Don't try to get absolute data from it as our brains aren't built for doing exponential graph transformations.
A logarithmic graph of money! A newspaper (book?) that actually gets it. It's astonishing how many linear graphs of money exist - and they are all worthless and misleading.
And if you need proof that linear graphs of money are misleading then compare:
Because of compound interest money grows exponentially - the more money you have, the faster it grows.
Suppose I start with earning 10,000 a year, but my neighbor earns 20,000. Now suppose we both each 5% raises each year. After 10 years I earn 16288, and he earns 32577.
Now graph my income over the years and look at the gap between our incomes. In a linear graph the separation keeps getting larger and larger (we started with a 10,000 separation, and now have a 16289 separation). But that's wrong - we are both gaining equally as well. In a logarithmic graph the separation will stay exactly the same (and notice how when we started he earned twice as much as me, and he still earns twice as much as me after 10 years).
Suppose I'm in the business of selling stuff.
If I earn $1 per widget, and I can afford to keep 1000 widgets in stock, then I earned $1000. My neighbor however can stock 2000, and earns $2000. Now suppose both our profits go up to $1.50 per widget - now I earn $1500, and he earns $3000.
Now compare: In a linear graph he had $1000 more than me, and now has $1500 more than me. If you graph this over time he will look like he's doing far better than me - the income gap will keep growing - but really, he's doing exactly as well as me, it's just he has a higher base.
A logarithmic graph will show the relative difference between us - he has twice as much as me, and that doesn't change at all.
These explanations would be so much better with some graphs - is there a web service that will plot these things for me as live data?
One final example:
Suppose we are both businessmen, and we want to see who is better, I start with $100 and manage to grow it to $200, my friend started with $300 and grew it to $450. Who did better? I earned $100, but he earned $150 - clearly he did better right? But if you notice while I doubled my money, he only 1.5'd it. I'm clearly the better businessman, yet I earned less money.
On a linear graph it will look like he did better, since he now has so much more. But on a logarithmic graph the truth comes out - I did better. (And over time I will far exceed his income, and a logarithmic graph will show this correctly, but a linear one won't.)
> Suppose we are both businessmen, and we want to see who is better, I start with $100 and manage to grow it to $200, my friend started with $300 and grew it to $450. Who did better? I earned $100, but he earned $150 - clearly he did better right? But if you notice while I doubled my money, he only 1.5'd it. I'm clearly the better businessman, yet I earned less money.
Sorry, that doesn't follow over, at least not at scale.
It's far more common for a given mom and pop restaurant to double its sales than it is for mcdonald's the chain to do so. (It's also more common for a said restaurant to fail than it is for mcdonald's the chain to fail.) That doesn't imply that the folks running said restaurant are better biz folks than the folks running mcdonalds and would eventually overtake mcdonalds.
Many things that affect the economy depend upon how much "stuff" is already there. A broader technology base means more innovation (= higher real GDP) in the future, because innovations build off one another. A larger money supply (= inflation) requires a larger growth in absolute dollar terms to achieve the same effect, because the important measure is the percentage growth in the money supply, not the absolute growth. More people (= population) have more babies, which leads to more population growth in absolute terms. Whenever you have to multiply out changes instead of adding them, you get exponential growth instead of linear.
There're some notable exceptions, eg. growth in the unemployment rate is usually linear, because it's already computed as a percentage. Growth in the absolute number of people unemployed is exponential.
I love how economists make all sorts or ridiculous claims by looking at the historical stock market. Two or three data points is not a trend, if you have 3 users and they all register, that doesn't mean your conversion rate is 100%.
Sometimes we forget that 100 years of data is nothing compared to human history and does not signify anything about the future.
Moore's diagram's in his origonal paper, presumably. However, while he only plotted a few data points he presumably used his experience with the semi-conductor industry in general and so actually had more.
Out of six or seven wars, he picks the ones that make his case. This guy (and anyone tempted to draw any conclusions from this chart) should read A Random Walk Down Wall Street.
Which other relatively long or expensive wars are missing from this?
Wouldn't the length of a war be difficult to estimate at the outset, and hence be priced in to stock market growth over time? In my economics class they taught us that war is bad for the (real) economy because the country is relatively more invested in the engines of destruction than production, and thus productivity growth in things that make life better is lower. The conclusions of this chart stand to intuitive reason based on that teaching, but I'm by no means an expert.
But to be fair, Korea was dwarfed by WWII and Vietnam in cost and public awareness. For example, did you know that we're currently technically still at war with North Korea? There's only a cease-fire, no treaty. We still even have troops over there...
I wonder how the graph will continue if we add one possible scenario.
That the war on terror will last for decades to come, escalating conflicts in other locations, say Pakistan or somewhere in the gulf (again)
World wide war without end..
The assertion that the war in Afghanistan is winding down, doesn't strike me as accurate.
In addition the period after the second world war, was marked by a US economic dominance, as Europe was in ruins and the soviet block stifled economic development in almost half the globe for several decades including the Vietnam period until glasnost started to get a footing (in that curious uptick around 1988 perhaps), right till the fall of the Berlin wall.
True, but look at the bright side, following the long period of inflation there will be fantastic growth! But really, are any of us keynesians surprised?
I'm more apathetic to this surprise. Everything looks like linear growth when plotted on a long enough time line, in log log with a fat marker.
In war time, the economy appears to stall, since the growth is concentrated in war-related products which do not influence indicators like the consumer price index. After the war ends, the industry goes back to normal and the CPI `catches up', making it look like the war boosted economic growth.
That's how we explained it when I studied economics, at least IIRC.
Edit: just noticed the website name. "The Christian Science Monitor". I feel slightly cheated.
I don't think the performance of the stock market varies depending on whether the person reading the numbers is a Christian Scientist. If it did, that would be even more remarkable and weird than if Christian Science were correct in, e.g., its claims about disease.
(For the avoidance of doubt: No, I am not a Christian Scientist.)
The graph is titled (roughly) "500% rises follow inflation". It could just as easily be titled "500% rises are followed by inflation" from the same data.
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So unless you're buying index funds that track the DJIA, the chart loses it use. Because when we look at this, we see that the stock market always goes up with time. But what we are looking at is the fact that the 30 largest/most successful companies in the USA keep pace with inflation. Which is hardly a shock.
Note that I'm not arguing some of the authors points, I'm just encouraging an open mind when viewing graphics like this - you've got to know what you're looking for.