Tuesday, October 07, 2008

The market hasn't tanked, yet.

As much as people are fainting in the floor over the current value of the Dow, wailing over the money they have "lost" in their retirement, college, and house down payment investments, the ugly truth is that the money they thought they had "earned" was never real in the first place, and they money they put into the market to start with was never, ever, guaranteed to be returned to them.

The market has been grossly overvalued, rising at an unhistorically steep and unsustainable rate, for the past couple of decades - ever since investment bankers started quietly slipping off the protections put in place after the Great Depression, in case you hadn't noticed.

Now, this base chart of "all data" for the Dow, which came from Marketwatch, is not very good as far as size and readability. But since it isn't logarythmic, it does give you a good view of the inordinate steepness, almost a parabolic curve, of trading prices in the relatively recent past. Notice a very, very rough trendline started from earliest days of the market shows that if historical (pre-computer era) rates of growth had been maintained, the value of the Dow today would only be about $5500 or so (the green trendline). If you pick a more modern starting point and a greater annual rate of increase reflecting modern progress in productivity and technology, you still only get about $8500 (the red trendline).

So in reality, the Dow was never worth $12000, and in order to be truly undervalued, the Dow will have to get below $8000.

Not to say that it can't get there, because it's possible that in spite of the "plunge protection" team's best efforts, the market will seek the level it should be without all the manipulations that the investment houses have used to inflate their stock values and initially over-correct. Over-correction is an expected by-product of popped bubbles. But most people simply do not realize that once you take away all the artificial market manipulation, the "real" value of the Dow is only about 2/3 of what they thought it was (i.e. $8500 instead of $12000).

In order to be a truly "crashing" market, the value of the Dow would need to be 20% below its "real" value - in other words, 20%x8500=$1700, and 8500-1700=$6800.

Most people who have been relying on stock market investments for some financial goal will no doubt have had an apoplexy long before the Dow reaches the neighborhood of $7000, however, because apparently somebody forgot to tell them that putting money in the stock market is gambling with it, not saving it. Stocks are not, and have never been, "savings," contrary to popular belief.

This used to be common knowledge - that you should never put money in the stock market that you can't afford to lose. It's a risk, a gamble, and no one is guaranteed to get even so much as their money back, much less a profit. That's the simple truth.

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