Saturday, February 7, 2009

Jaded Photoshop: 70s Re-Run

More than anywhere else on the web right now, I've found the best way to view The Great Correction graphically and in proper historical context is by regular visits to Dennis Short's marvelous site, Today I got a harebrained idea to put together a "photoshop extrapolation" of one of his more compelling charts that shows postwar S&P 500 and unemployment numbers:

What's amazing to me is how viable this model looks as a predictor. If the SPX bottom continues to hold, we would exit the offical recession about halfway through the year when unemployment peaks at 10% but from here we eventually rally to 1100 on the SPX and end the year up slightly with a pullback to 1000. During 2010, we would reach a short term peak at around 1200 that will stick for the latter half of next year but begin a slow slide back to 1000 by 2011, kicking off a tumultuous trading range during the next 5 years that sees the market swing down toward 850 up to 1050 in several waves until finally bottoming at 800 in the latter half of 2014 when we enter another brief recession as the Fed is forced to raise rates amid early signs of inflation. We get a false start in 2015 with what at first appears to be a rapid recovery as we briefly break 1000 again only to kick up the massive inflation we had expected all along.

Stagflation takes hold as we're forced to use high interest rates to keep inflation in check, sacrificing growth in the process and putting us into a final 24-month recession in which we finally breach 800 and continue further downward, ultimately bottoming in the 700s and reaching 12.4% unemployment before exiting even more dramatically than we did in 2009 as the 2017 bull market takes hold. After an uncertain 2018, the bull market resumes with force in 2019 when we retake 1400 for the first time since 2008 and during 2020 we finally celebrate new highs and reach SPX 1600 amidst enormous economic expansion.

If we successfully make the turn Monday, successfully stave off the temptation to nationalize banks and increase trade barriers, then I think this is this is about as close a predictor of what comes next as we could hope to assemble right now. If we fail on Monday and revisit 800, then I'll put the 30s re-run together (shudder). Let's hope it doesn't come to that.

1 comment:

  1. You directly commented my Solar and Coal posting at I think your grafting the charts above is interesting and possible. I asked dShort about his idea of future inflation in the context of S&P "Mean Reversion" on an inflation adjusted basis. He expects inflation. You might consider what a 5-10% multi-year inflation scenario might do to your charts; I think it would erase much of the decline.