US Stock Market versus Inflation

DJIA-versus-CPI

(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

Cable Internet and MSOs Capping Internet Traffic

I am not a purist about open Internet or the idea that all plans must be unlimited data, but here are questions for the NSP/ISP industry (Network/Internet Service Providers).

Assumption 1: Internet service delivery is a little cheaper every year

Assumption 2: People are using more Internet data transfer every year

Conclusion 1: “Fair” service packages from NSP/ISPs will need to provide more data every year for roughly the same price.  Think of this as Internet inflation indexing, as in a pension adjustment.

Question 1: Who will decide what the “base level” of data transfer represents an “average user” so that the ISPs can charge a premium for heavy users?

Question 2: How transparent will this process be?  Will ISPs use a neutral third party to calibrate the “normal growth” of Internet usage?

Question 3: As users consume the Internet in new ways, who will decide what is normal and what is premium?

Question 4: Have the architects of the new plans any understanding of the long (very long) history surrounding the commodity-dollar concept and how the basket of goods used for the CPI is a problem area?
NSPs and ISPs need to introduce new packages having already thought through all of the above.  They are in danger of misreading the market and causing their own demise.  How?  By creating attrition of heavy users to other providers and therefore creating a declining market for themselves.  At first they will have a margin increase because heavy users will have left and service will be cheaper to provide.  But attrition grows rapidly and alternative ISPs who welcome heavy users will become the new vanguard of the market.
I have heard proposals from MSOs (Cable ISPs) that propose a cap at 20GB per month and then charging $1 per GB thereafter.

Let’s see … I can burn a 4.77 GB DVD for about $0.25 and mail it to a friend for about $0.75.  Therefore, the physical world costs $1 for slow delivery of about 5 GB.  Tell me again why it costs $5 to download a 5 GB movie?  The idea isn’t broken, but the numbers are.  For an HD movie (about 10 GB), they will want to charge $10, plus the cost of the movie of course.

Simplifying my world …

I have been using multiple tools for years to communicate across many Internet media. Today I am moving everything to WordPress. Sometime over the Summer I will try to create a meaningful archive of prior blogs and posts, but for now, my world is being reduced to WordPress blogs.

Grover Righter

My main profile in the business world can be found on LinkedIn at

http://www.linkedin.com/in/groverrighter