Dakota Beacon

Inflation

The consumer price index in October, 1928 was 17.2 and in April, 2010 was 218, or put in simple terms, a dollar in October 1928 could purchase 12.6744 times more basic goods and services (food, shelter, clothing, transportation) than a dollar could in April 2010. A second order polynomial approximation is well above the 95% correlation factor (98.9%) necessary to be considered valid for future predictions of CPI. The average annually compounded growth in the CPI was 3.16%

Dow Jones Industrial Average (DJIA) 80 Year History

The DJIA closed at 252.16 on October 1, 1928 and at 11, 008.61 on April 30, 2010, a rate of growth of 4.74% compounded annually for the 81.58 years. The 4.74% rate of growth does not take into account the affects of inflation (devaluation of the dollar) and this very rough approximation only considers the two endpoint values of the DJIA, not the 977 remaining data points in between.

The above calculations, while offering a rough approximation of the real growth of the best known stock index, is slightly unscientific because it does not graph monthly values of the DJIA from 1928 through 2010 and use a mathematical approximation to compute a linear trend line. The graph on the next page represents such a mathematical model.

The Method behind the Truth

The monthly values of the DJIA were first adjusted to eliminate the affect of inflation by dividing the DJIA for each month in question by the consumer price index for that month and multiplying by the CPI of 17.2 for October 1928. For example, the calculation for April 30, 2010 (the latest point on the graph) was 11,008.61 / 218 * 17.2 or 868.57, the April 2010 value of the DJIA in 1928 dollars.

A linear approximation of the entire graph (all data points) was performed in Microsoft Excel, yielding the equation shown. The endpoints of the linear approximation represent the two data points to be used to compute the precise representation of the real annual growth in the DJIA. Those two endpoint values were 24.228 (October 1928) and 735.61 (April 2010). So the multiplier to be used was 735.61 / 24.228 or 30.362. The number of data points was 980, representing 979 periods of one month each. The time in years was found by dividing 979 by 12 months/year or 81.5833 years. The annual rate of growth in the DJIA was 4.27% compounded annually, not the 4.74% first determined above.

 My broker says we can expect 8%!

But doesn’t the 4.27% compounded annual rate of growth in the Dow (in 1928 dollars) from October 1928 through April 2010 pale in comparison to what stock brokers have been telling clients?

If one considers the growth of the Dow, including inflation, the average annually compounded growth is 7.57% (annually compounded inflation of the “Model” was 3.3%) which is the factual growth in the DJIA, but not the growth in “actual value” because it includes value-eroding inflation. Since the low of July 1982, most brokers prefer to go back to that point to predict the future. What they ignore is what “Great Society” socialism did to our economy from the DJIA high of January 1966 until July 1982, the low point before the “Reagan Revolution” of the 1980s and the “Contract with America” in the 1990s era caused the longest period of expansion on record. An expansion of socialism during the first decade of this century (prescription drug legislation passed by a Republican administration) has the markets wondering what kind of animal the markets will represent in the future, a “bear” or a “bull”?

Bear and Bull Markets

While each relatively lengthy period of decline (Bear Market) or increase (Bull Market) in value of the DJIA can be termed thusly, the above graph illustrates some major periods of growth and decline. From here on the DJIA in 1928 dollars (as portrayed on the graph above) will be referenced.

From a peak of 378 just prior to the “crash of 1929”, the market fell to its all time low of 58 in June 1932, subsequently climbing to an early depression era high of 228 in February of 1937.  The DJIA then dropped to 102 in 1942. A cyclical bull market then existed for a quarter of a century through the remainder of World War II and the post war boom, reaching a high of 532 in January 1966. A 16 year cyclical bear market then ensued, reaching a low of 143 in July 1982, marking the low point of a deep recession that followed a period of high inflation. A bull market subsequently arose, reaching a high of 400 in August 1987 just before a major crash in October 1987 in which the DJIA lost over a fourth of its value in one month. Thereafter, a long period of growth ensued culminating at a value of 1175 in December 1999, the highest close in the DJIA’s history.

The dot-com bubble and the 9-11-01 attacks caused the DJIA to fall to a low of 721 in September 2002, then rising again to its 2^nd all time high of 1147 in October of 2007. The subsequent economic crisis and housing implosion brought the DJIA to a low of 572 in February of 2009. The April 2010 endpoint of the graph representing an unadjusted value of 11,008 was another high as the market seeks its way in a period of worldwide economic uncertainty.

Is the World at an Economic Crossroads?

Iceland went broke a couple years ago, forcing a restructuring of its debt and severe changes in its “cradle to grave” socialistic society.

Greeks have been rioting in the streets, first those whose social benefits were cut, then those paying for the “slackers”. Germans are likewise rioting against the bailout that their leaders arranged for Greece.

Portugal, Spain and other countries in Europe are walking an economic tightrope.

Meanwhile, the current administration continues its steady march toward socialism and an eventual, if not sooner, fall to economic oblivion. This fall’s elections will have very serious economic ramifications. Nationally, a call for the removal of incumbents sounds like extremely good advice for voters! Such websites are popping up daily!

If voters expel “tax and spend” U.S. House & Senate incumbents en mass this November, we may realize the repeal of the “first step” toward nationalized health care. If voters continue to remain uninformed and disinterested, their 401Ks are in great jeopardy!

Vote to preserve your retirement savings this fall; perhaps your last chance!