You're sooo right... one could as easily say that it took the Dow 7 years to regain its losses and then find a new peak. The S&P has still not regaqined it's losses but is close. Again, 7 years. The Nasdaq has regained less than half of it's losses.

And, there's the old mathematical truth... lose 50% and you have to gain 100% just to get back where you were.

When regaining takes more than half a decade you have returns that are, on an annual basis, sub-par and that are not adequate compensation for the risk you've taken on.

And people largely forget that the compensation for investment is compensation for taking on risk. You have to view risk like you'd view any form of work. Would I mow your mid-sized lawn for $500? Probably. Would I do it for $5? Probably not worth it to me. Risk is the same kind of thing. But, we don't realize the risks we take on in the markets so we don't demand adequate compensation. That's why conservatives love markets so much... they can pay you an unfair wage and you're unlikely to ever realize it.

thosethingswesay.blogspot.com

I think the previous two posts are spot on. The indexes are below where they ought to be and recovery is much slower than we’d like. Sure the 1300 Dow gets the “We’re in the Money” music on NPR’s MarketPlace, but adjusted for historic growth, it’s anemic. Case in point, we’ve seen some very big private equity deals in the last two years. As Deepthroat advised, “follow the money.” The PE spike gives us an insight into what they big guys are thinking, and they are not thinking stocks.

As for Japan, I think the example is more analogous to the 1929 crash. Why? Fundamental weakness in the economy in 1929 frustrated recovery. Likewise, Japan had fundamental weakness is in its economy. The Japanese recovery is marked by a significant increase in regulation; regulation required to fix their broken banking structure. In fact, regulatory environment in Japanese markets in the last ten years borders on draconian: Companies have been shut down in order to fix what we would see as mild infractions in their accounting practices (especially in reporting risk and exposure).

The US banking system fixed many of it structural issues in the years after the 1929 crash. The result has been a more durable financial system. So I would suggest that comparing the Japanese recession and the recent US recession may not be apples to apples, and may lead to cosmically incorrect conclusions.

I think we need to put the Fed’s effect on markets into some perspective. We always see a flurry of activity coming out of their board meetings; mostly over-covered by the business media. But in reality it takes over three quarters to see the real effect of interest rate changes on the economy. US financial markets are a big ship with a small rudder. Adjustments take a while to change the ship’s course. The Fed is but one (albeit potent) input in how the markets behave. Do I think Greenspan could have derailed the bubble? No. If his admonition of “irrational exuberance” did not get through (which for the Fed is the equivalent of screaming “Fire!” in the movie theater), then I doubt monetary policy could have had any more effect on the dot com bubble.

Remember the construction worker speculating on Cisco? What chance had he on interpreting the subtly of the Fed Board when the Street was making big money on fees and IPO’s at record levels.

and, if you factor in inflation,... isn't 2000 still competitive?

I read the other day that companies are using "share buy back programs" to drive the earnings per share numbers up, so they don't look as bad as they did in 2000 but, then, some companies have taken on debt to do this.

I haven't studied such claims but as barnum once said, there's a sucker born every minute and, damn, it's hard to see through the BS.

To boldly go...

Likewise, Japan had fundamental weakness is in its economy.

The "fundamental weakness" was also in large part synchronized to the shift from around 90% domestic value added in the main export industry to around 60%. That entailed a lot of real business investment by Japanese firms going to China (and, secondarily, SEAsia) rather than Japan.

The weakness of bank balance sheets prevented the easy credit that would have allowed small business real business investment and/or household spending to boost the economy, the domestic content of export earnings was steadily declining, and the bulk of large business real business investment was directed overseas.

When you tally it up, the lack of serious growth drivers for Japan in the 90's is fairly easy to work out.

Hardly a 36Ker, but you raise some fair points. What I meant by "where we should be" is in relation to the pre-bubble trend. If I use market data from say 1995 and calculate a macrogrowth trend similar to the period of 1950 - 1995, the Dow should be higher than where it is today. It's a question of recovery from the bubble. Yes, we've come back, but no we haven't come back to the point that the macrotrend indicates we should have...yet.

As for growth trends, the numbers say that we have enjoyed an upward trend since recovering from the 1929 crash. The US economy has come nowhere near it's zenith, and is likely not to get there while we still continue adding population, providing security to the world shipping lanes, and providing a center of capital to the rest of the world, among many other economic factors. Neither a divine right, nor an unrealistic goal.

I guess the one area that disturbs me about the bubble, and then the recovery from the bubble, is the distribution of the wealth in the former and, worse still, the later. This is where my progressive bona fides come into play, despite already giving myself away as pro-business, or pro market growth at any rate. If we look at distribution and median income and (please stay with me in the macro here, as how median plays out on the working family is another topic--albeit a worthy one)pre-bubble and post bubble, there is an alarming decrease in wealth distribution. Yes, Virginia, the wealthiest two percent did indeed get wealthier.

As an indicator of economic health we ought not dismiss wealth distribution in favor of market indexes. That would make us 36Kers. What we should look at is market indexes as an indicator of how healthy wealth distribution should be. If distribution is unhealthy, we may need to give up some short term gains in the capital markets in favor of long term gains in retail economy via tax reform. Remember we owe the retail marketplace for keeping the economy afloat the last time the capital markets cratered. It's an economic insurance policy to have a large population with cash to spend Bill Gates can never live to see his billions spent. The other 299M consumers will usually spend their paycheck long before the next pay cycle. They did it form 2001 til 2006 and literally spent us out of recession.

Besides, it's the right thing to do in America.

For the trend analysis of 1950 - 1995 I used the aggregate market and not the Dow. Granted I did this four years ago and haven't been able to find the file, but I do recall we argued over the best measuring stick and decided to use the whole damn thing.

What might be interesting is a census trend and median income laid over the growth trend. If I have time on the weekend...finance geek!

Speaking of distribution, to what extent is the stock market itself the means to the increasingly discordant distribution? I really don't know, but it must be a significant player. Despite "more people holding stock than jobs" most stockholders hold very little - I'd even guess at this point most stockholders hold more debt than stock, at rates of interest far beyond the rates of return. So the gains of the market very much funnel wealth towards the top.

As we socially separate out into cream and milk, America effectively has two currencies - cash and stock - with the first buying increasingly less of what matters - health, education, housing - and the latter doing decently well, thank you. It's as if the dollar were becoming a third-world currency, while the stock certificate remained first-world - or better.

After all what would you rather trust - something backed by the leaders of our corporations, or the leaders of our "democracy"? However much both elites may be ethically challenged, the former has far more rational capability, at least outside of the auto industry....

btw, have you even been to Japan?

For one example, I stayed in a Nagano at the Olympic center for after Japan's bubble, and the proprietor of the inn complained of his economic woes, having previously been in construction in Tokyo. His "fallback" job at the inn with his wife still included more economic security and quality of life than many American middle class workers. That's typical of Japanese bubble experience.

Japan's hardship after the bubble is what America calls "every day."

Japan's normal mode is high job security, excellent heath care, single earner families regularly able to buy homes and support families, and basically the American quality of life from the early 1950's.

Tokyo and it's vast surrounding burbs (where I have family and friends) are still cleaner, newer and more modern, and safer than any US city.

Japanese consumers have the best consumer devices and even for the lowest rung families, everyone had a cell phone for ten years, including the kids, and most now have broadband internet access over their phone. Japanese drive great cars by domestic makes like Toyota/Lexus, and import a large number of European luxury cars and they have great/clean/fast public transit. Japanese computers and electronics are some of the best in the world. Consumer devices like electronic controlled washing machines which are high-end here, are the norm in Japan.

Japanese have great health care, child care, job security, and a lot of other quality of life issues like high levels of education in the hard sciences, high degree of cultural literacy, and almost universal literacy in Japanese written characters, Chinese characters, and of course the modern Latin alphabet. Most Japanese have taken English and are multilingual (though no t practiced) as well.

In every way I see, US cities are dirtier and more dilapidated and have higher crime, even our richest cities like NYC, LA, Chicago, and the notoriously beautiful San Francisco. Our consumer devices are inferior. Our infrastructure from power plants, to roads, to mass transit rail and airlines are inferior. (ever flown ANA or JAL? Compare it with United.) Our domestic cars are inferior and tend to be older and poorly maintained on average. Our social services are inferior. Our people on average are less educated. We have higher crime and more poverty and far higher incarceration rates.

And our innovation companies like Intel are increasingly multinational, and not really American companies anymore.

Where exactly is the US advantage for non multi-millionaires?

Yes median is important.

Also, no economist I'm aware of is willing to tackle the issue of overall economic efficiency. But for one example, having the highest and growing crime rates and incarceration rates in the world, and and the associated costs, is a tremendous drain. Then there is the growing health care costs and that increasing inefficiency. That's two examples out of many.

Is this cosmic thinking? None of the markets are anywhere near their previous highs. They have been printing money so fast (the real meaning of inflation) since 2000, I'm afraid any real money person must consider that the value of the dollar has fallen over 40% in this time period. Anyone thinking they are making gains in the stock market are a little confused. The governments figures on inflation, which remove the costs of anything that actually increases in price have pretty much fooled everyone. Remember, inflation is NOT rising prices. It is the expanding money supply, hence the governments policy of robbing you of the value of your money. The Dow won't hit a real new high till after 17,000 plus or minus. That Greenspan, and Bernanke has opened the floodgates even wider. How long will their illusion persist?

Bubbles are second order events -- canaries rather than methane gas.

The Japanese bubble occured due to its people's unwillingness -- not uncommon anywhere in the world -- to invest its grossly excessive savings outside the country. Huge export earnings went into the Nikkei and the home real estate market and resulted in asset bubbles. Japan is still doing it, and now, China has jumped in with both feet.

The difference from twenty years ago is the growth of financial devices which can distribute savings outside the export countries' economies; and thus, we have a worldwide real estate bubble. After all, only so much "savings" can be invested in productive capital assets.

Right now, we're doing our best to rid the world of this excessive savings by blowing it up in Iraq, but we're not spending it fast enough. What the world needs is many more Iraqs.