Friday, November 12, 2010

Three Years Later

Last month marked an auspicious anniversary, because it was in October of 2007 that the US stock market reached it's all time peak. The Dow Jones Industrial Average closed at it's all time high of 14,093 on October 12, 2007. Of course, we all know what has happened since: the sub-prime mortgage meltdown, government bailouts, financial Armageddon, and so forth.

We actually first created this blog in response to "The Financial Crisis" during March of 2009, which turned out to be when global stock markets hit their bottom. One of our first posts was called "Where Do We Go from Here" , in which we compared the current financial crisis to the market crashes of 1929 and 1973. We have since revisited this comparison several times, including in May 2009, October 2009 and a few months ago in June 2010. Well, let's look at the graphs again (click on the graphs to see a larger image).

A few comments/observations:

  • Fortunately, I was correct in March of '09 when I suggested that the current crisis seemed more like that of the 1970's than of the Great Depression. If you look at the second graph, which has been extended to 36 months, you can see that the current value and the value from the 1970's are exactly the same. Good job Frank! Seriously though, I had no idea that these two lines would collide at the 36 month point, but my general idea was correct.
  • To me, one of the most interesting points is that after hitting bottom, all three lines reversed direction dramatically. It is probably no coincidence that, in all three cases, the reversal coincides with actions taken by the Federal Reserve to dramatically increase the money supply (which is really economics speak for "printing money"). Good job Ben!
  • The third graph shows that in both the Great Depression and the 1970's, after hitting bottom and reversing direction, both lines continued on an upward trend for several years. THIS DOES NOT MEAN THE SAME THING WILL HAPPEN THIS TIME! Neither I, nor anyone else for that matter, truly knows what will happen next. However, it is encouraging to know that the economy has twice recovered from serious "Crisis".