(The link above is the PDF version of this blog, with easier to see graphics)
Here is a comparison I made in January 2008, prior to the recent oil price increases.
Preamble: Thought Experiments ( credit to Walker Percy)
Walker Percy was a noted semiotics experts and author. Semiotics is a branch of mathematics that inter‐relates symbols, language and topology. It is, in effect, a 3D calculus for language. For an applied use case of semiotics, see www.kartoo.com and type in Grover Righter.
Percy’s Opus Magnum was “Lost in the Cosmos”, which will change your life. I own a signed limited edition of this book, and it goes with me if the house catches on fire. In the book, Percy introduces the powerful idea of a ‘thought experiment’, essentially a syllogism in reverse designed to challenge assumptions.
Now, onto the Dow and the CPI and some basic assumptions I was taught 20 years ago by financial experts.
(The following is easier to follow if you simply look at the attached PDF, but here is the HTML/blog version.)
The DJIA Stayed within a small range around roughly 800 for almost 20 years.
There is no guarantee of stock market growth
1965 CPI = 31.7 1985 CPI = 108.6
($1 in 1985 = 29 cents in 1965, but the market was flat, so the actual market value declined 70% in 20 years due to inflation.)
($1 in 1985 = 29 cents in 1965, but the market was flat, so the actual market value declined 70% in 20 years due to inflation.)
The Last Ten Years May be a Half Way Point
1997 CPI = 158.2 and DJIA ~= 10,000
2007 CPI = 197.2 and DJIA ~= 12,000
($1.25 in 2007 = $1 in 1997. The market “grew” by 20%, but inflation was 25%, therefore, the market underperformed inflation. )
2017 CPI ~= 265 and DJIA = ?????
Long bets on inflation are 3% at a minimum. In order to keep up with basic inflation (i.e., not lose money), the DJIA must grow 50% to 17,000 by 2017. In order to give a real 5% return on money aeer inflation, the DJIA must grow to 31,000 by 2017. Most 401K plan workbooks ask us to “Plan On” long term growth of
about 5% to 6% for mixed stock/bond funds.
Question (This is the Thought Experiment)
Do you believe both of these things?
1) Inflation (including food, oil and currency) will be less than or equal to 3% for the next ten years.
AND
2) The DJIA will grow to 31,000 over the next ten years.
Moral of the Story
• Plan “A” is not going to work
• We ALL NEED A PLAN B
