
The silent market crash (S&P 500 against the price of eggs) - nickb
http://www.princeton.edu/~rmcduff/Market/0807/0807.html
======
pg
In the graphs comparing stocks to gold, it's important to realize that the
gold supply has been increasing.

~~~
herdrick
Not really. At least, the supply of gold increases more slowly than about
anything else, especially stocks. Or am I missing your point?

------
byrneseyeview
The egg thing is actually rather dishonest -- eggs have gone way up, due to
(among other things) the continued popularity of the Atkins diet. So egg
stocks have, well:

[http://bigcharts.marketwatch.com/quickchart/quickchart.asp?s...](http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=calm&sid=0&o_symb=calm&freq=2&time=13)

------
dejb
Interesting article. Would have like to have seen a graph adjusting for a
combined CPI and currency changes.

------
hugh
Now I'm glad I invested in a basementfull of eggs.

------
fauigerzigerk
Am I completely misunderstanding this or is that guy seriously calculating
returns without accounting for dividends?

~~~
time_management
The S&P, which models a portfolio of 500 large-cap stocks weighted by market
cap, is adjusted for splits and dividends. Splits effect neither the index
value nor the weights, and dividends are implicitly assumed to go back into
the portfolio, altering the weights but not the cash value. So what the S&P
tracks is the performance of this portfolio, with cash dividends immediately
reinvested. In other words, the returns calculated include dividends.

The S&P index is a damn good measure of market performance, since, although
only 500 stocks are included, it comprises about 80% of US equities by market
cap. (Wiltshire 5k is theoretically better, but the practical difficulties in
index arbitrage on 5000 stocks, many illiquid, make S&P futures more popular.)
The Dow, on the other hand, is a terrible index. It's not weighted for market
caps, which means that if a Dow company splits its shares, its weight in the
index declines, for no good reason.

~~~
pg
I think you're mistaken in believing that the S&P 500 Index includes the value
of reinvested dividends. The number you're describing is a separate one called
the "total return."

[http://techfarm.blogspot.com/2008/04/historic-s-500-pe-
ratio...](http://techfarm.blogspot.com/2008/04/historic-s-500-pe-ratio-
dividend-yield.html)

------
time_management
S&P/gold reflects gold speculation, so I don't take too much out of that.
S&P/oil is more disturbing, because despite the complaints about oil
speculators, the fact is that the current oil run-up has a lot more to do with
geology and international politics than "speculators". However, if you want to
see the real, incontrovertable proof of a "silent crash", look at S&P/euro.
It's ugly.

The 1980s-90s bull market was fed by a couple of factors which are not likely
to repeat, and if anything, will unwind. The first is that a lot of middle-
class people came into the stock market, due to online trading and the
replacement of traditional pension funds with 401k plans. Until 1980, stocks
were considered a rich peoples' game, too risky for the mom-n'-pop investor.
In 2008, after US equities showed an abysmal performance, it's unlikely that
many new investors are going to come into them as they did in the '80s.

The second factor is that there has been an expansion of large corporations
into all aspects of American life, with Wal-Marts knocking out local shops and
mass media gaining ownership of average Americans' minds and desires. This
trend is going to reverse for two reasons. The first is that our fairly long-
standing energy crisis (call it "peak oil" if you wish) is going to make a lot
of corporate business models less competitive, leading to increasing
localization. The second is that upper-middle-class Americans, who drive the
culture and started this trend toward suburbanization and corporatization in
the 1920s-50s, just don't like corporate anymore. They buy produce at farmer's
markets, avoid chain restaurants, and prefer the internet over TV. These two
factors are going to cause a glacial retreat of the corporate state that will
continue even once the economy starts to recover.

~~~
esja
Good analysis, to which I would add: peak debt. There is only so much debt a
person can take on, and for now at least, that amount has been exceeded.

Much of the financial innovation of the last few decades has been about
pricing risk so efficiently that larger and larger amounts of leverage can be
employed without the borrower going under. This was the ultimate driver for
higher asset prices (in particular homes), which in turn via mortgage equity
withdrawal and other means have funded a lot of the second houses, extra cars,
big screen televisions, and other luxuries we see around us today.

The credit crunch will soon extend to credit cards and auto loans, and we'll
see disposable income fall further. Share prices will fall as earnings
disappoint and most investors, seeing no dividends and unlikely capital gains
through the recessionary period, will abandon ship.

I don't think this is all priced in yet.

