taking stock

This is kind of a summary of my thoughts regarding the economy, my personal history intertwined with the economic history of the nation.

I'm trying to make sense of what the market has done over the past 40 years, and where it will likely head in coming decades, at what seems like a pretty weird time in history.

Growing up in the 80's and 90's, I think a lot of people, including me, just got a sense that the economy would undergo smooth exponential growth, with a few minor booms and busts now and then, for decade after decade indefinitely.

Looking at it now, in 2010, it's pretty hard to maintain that view, and a lot of things seems to have changed fundamentally.

Early in the year 2000 was the first year I had a "real job" (at an Internet startup company, not surprisingly), so it was the first year I was making enough money to open a stock portfolio and start investing. I dumped a lot of money into the market, mostly into technology stocks, traded on NASDAQ. It seemed like a sure bet, considering the constant predicable exponential growth of NASDAQ stocks up until that point, far outperforming regular less-technology-oriented stocks:

NASDAQ composite index, over the past 40-years:


Of course, getting in at the absolute worst time in history (when NASDAQ was around 5000), I lost a ton of money--I think I put in around 15 grand, and a year or two later, I had roughly half of it left (although in my defense, I think I still "outperformed" the overall NASDAQ market). Worse, I graduated college in mid-2002, right when the unemployment numbers started shooting up after the tech bubble burst. That meant I had to survive solely on savings for the next year and a half while looking for a job. I was unemployed for nearly that whole year-and-a-half, although did find some part time contracting work here and there. Despite how much I had lost in the market, I still had enough to live off of for that period of time, the catch was--I had to sell all of my stocks (aside from my IRA) to survive. Which meant that I bought everything at the peak and sold everything in the middle of the recession--the opposite of "buy low and sell high" like you're supposed to do if you don't want to lose your shirt. I'm guessing I wasn't the only one who was forced into this situation.

At the end of that year-and-a-half, I started grad school--the market recovered a lot while I was in grad school, and the unemployment numbers came back down to normal levels. Now there were plenty of jobs, but I was locked into grad school and wanted to finish up rather than take the bait. I resigned myself to missing out on all the market growth while I was doing something I enjoyed but getting paid very little for it. So I finished up, but as my bad luck continued, just before I graduated the economy crashed again, this time even harder! I had no money at that point, and had already started to get slightly into debt--so in order to look for work after graduating, I had to get much further into debt. Took me 6 months to find a job, and now I'm starting to pay off that debt. The sucky thing though, is that while every bone in my body told me I should BUY BUY BUY stocks in 2009 to finally be able to "buy while it's low", I had no money at all to put in. Once 2010 got underway and I had an income again, I figured I'd better put some in fast before things recover too much more. So I did add a bit more to my IRA, even though I had to essentially borrow (or at least--decide not to pay off debt, depending on how you look at it) money to do it. My rationale for borrowing money to contribute to my IRA is that the interest rate on my loans range from 4% to 6.5%, while my Roth IRA could potentially earn more than that and those earnings are completely tax free, unlikely a regular stock portfolio where your'd have to take 30% or so off the top.

Dow Jones Industrial Average over the past 40 years:


So far, I have been doing reasonably well this time around. Possibly from having picked better stocks. But I can't help but wonder if all the rules have changed and we're at a turning point in history. Before this decade, exponential growth seemed normal. But from 2000 till 2010, the Dow has just stagnated right around the 10,000 level... and crashes every time it tries to go any higher. It also makes me wonder whether the apparent exponential growth of the 80's and 90's was due more to inflation or actual value creation. Maybe stagnation is actually the norm, and that was just a misleading period??

It seems my biggest bit of misfortune has been being in school earning close to nothing during both of the major bubbles (the tech bubble which you can see most clearly on the first NASDAQ plot, and the housing bubble which you can see most clearly on the DOW plot), and both times graduating right when the crash happens.

The difference between this decade and the 3 decades before it seems most striking if you look at the NASDAQ plot. Between 1970 and 1980, the index went from about 100 to about 200, roughly doubling. Between 1980 and 1990, it went from about 200 to about 450, more than doubling. Between 1990 and 2000, it went from 450 up to a whopping 5000 (right when I got in), multiplying by more than 10 times. The Internet explosion happened around 1995, so most of that multiplying by 10 times was between 1995 and 2000. Then, within a single year it fell all the way back to around 2000 and stayed around there for another whole decade. Of course, in retrospect, you have to consider the 5000 level in early 2000 as simply a "bubble" not really indicative of any real progress... so in that sense it's probably more true to say that it has stagnated for the past decade rather than gone backwards. The Dow plot shows the stagnation without the huge spike, with the recent dip and recovery circa 2008 being just a minor artifact.

Tied in with this question of "where is the market going from here--will we ever get back on track towards exponential growth, or are we doomed to stagnation from here on out?" is the question of whether we will ever get back to the unemployment levels Americans have long considered "natural" of around 4-5%. Unfortunately, taking everything into account I would have to lean towards believing that many, if not most, of the jobs that have disappeared will never come back. Most of them are in the unskilled labor market, and much of that has already been exported overseas or replaced with technology. Many of the jobs were a side effect of the bubble that has burst, a false sense of optimism that things will continue expanding exponentially forever (I think it's quite possible my job in 2000 fell into this category). Today, it seems like there just isn't as much of a demand for humans to do unskilled labor in the US as there once was. These roles have already been replaced with a combination of robots, illegal immigrants, and wage laborers in third world countries. Even many tech support and programming jobs, which are technically "skilled" have already gone overseas. When I hear people arguing about whether Obama should have done more deficit spending or more deficit tax cuts to stimulate growth... I tend to be skeptical that either can work. Maybe one of them or both of them could, but then we'll be left with so much debt that it gets us into a precarious position. Is the only solution to just accept a higher level of unemployment like many European countries do, and put in place social programs that make unemployment less brutal? I'd like to think there's a way of getting back to full employment, but my gut is saying no. I hope I'm wrong!

Krugman has been saying all along that if only Obama had done a bigger stimulus package, with less of it dedicated to tax cuts and more of it dedicated to government spending--we would be well on our way back to full employment. Tea Partiers, as well as many mainstream Republicans, tend to assert the opposite, that we'd magically be back to full employment if we just cut taxes and forgot about any of the deficit spending. I don't think I believe either. It will be interesting to see what happens if the Republicans do take over in 2010 and/or 2012, and if so whether the economy will get better or worse. I suppose if they do take over, and the jobs *still* don't come back, perhaps it will finally be time to have a dialogue on what seems like the fundamental problem--what do you do when there's a lot of unskilled people living here and no need for unskilled labor to be done here? More education? Or stronger welfare programs?

On a side note, Paul Krugman (and Thomas Friedman, in the same discussion panel) pissed me off recently by criticizing Obama for "not having a strong enough narrative" to feed the public. And citing Ronald Reagan as an example of a President who did a much better job on that front. Jesus, do they really think spinning more narratives is the answer here? How about just confronting the issues individually--why do we always need some kind of grand narrative to get everyone to drink the kool-aid? Sounds like neo-con talk to me!

Also, interesting to note, although I hate to tie the two together, is that the late 90's was when the idea of the "technological singularity" really took off, although it had been gradually gaining momentum for a while.

taking stock : addendum

After posting this, I wondered if some of my interpretation might change if I look at things in a more long term context, considering more than just the past 40 years.

Well, NASDAQ doesn't go back any further--it began in 1971. So for NASDAQ, this "lost decade" that we've just had is completely unique. There had always been exponential growth in NASDAQ from the beginning up until 2000, and then no growth from 2000 to 2010.

However, the story *is* a little different if you look back further at the Dow. First of all, while the NASDAQ index did increase during the 1970's (although as I look at it again I realize it didn't quite double, as I said in my earlier post), the Dow did not--it was pretty much flat. But what's interesting is that the 70's was the last 10 years of a 15-year period of stagnation for the Dow. From 1965 all the way to 1980, there was no growth in the DJIA.

I'm too lazy to upload these longer term charts, but here's my summary, which indicates that the current period is not all that unique in the larger context of things... although it also seems to indicate that growth is not all that guaranteed:

The Dow reached a peak at around 340 in the summer of 1929. It crashed hard and fast from that, and then kept getting worse for several years. Reached an abysmal low at 42 in the spring of 1932. Incredibly, that means that a typical investor who had money in the stock market in the summer of 1929 had nearly 90% of his wealth wiped out over those 3 years!! Ouch. (Thank your local congressman for the financial bailouts that we did not have a repeat of the Great Depression this decade.)

By 1936, it had climbed back up to the 150 level, but then stagnated for a full decade. From 1945 to 1950 it climbed a little bit up to 200, and then entered a period of rapid growth for the next 15 years, from 1950 through 1965 (reaching 860 by 1965). Stagnation again from 1965 through 1980, then rapid growth from 1980 through 2000, moving all the way from 860 up to 10,000! Then stagnation through 2010 as it's remained around 10,000 the whole decade.

Interestingly, the peak value of 340 from 1929 was not reached again until 1954, 25 years later. Presumably though, this peak at the end of the "roaring 20's" was just as much of a bubble as the recent tech and housing bubbles. So for those who are waiting for us to get all the way back to bubble levels till they consider it a "successful recovery", you may have to wait another quarter century. Clearly, we have recovered (admittedly, a jobless recovery). But we still have to acknowledge that this decade has been complete stagnation. It's not the first decade where this has happened though. I am noticing a pattern, where things change from growth to stagnation and back roughly every 15-20 years. So perhaps we just have to sit it out and wait--we're through the first 10 years, so maybe another 5 or 10 until the next big boom?

If nothing else, what the past decade indicates is that we haven't yet figured out how to guarantee continuous growth out of the market. Some economists thought in the 80's or 90's that we'd essentially solved the problem, that we'd learned from our mistakes in the past, and that it was all clear sailing from then on. But it seems like it's an instance of history just repeating itself, and if there *is* a way to guarantee growth in every decade, we just haven't found it yet.

In short, while there was a fundamental change this decade within the context of *my* lifetime, it seems fairly normal in the longer term context of the past 80 years. I guess I'll end on that note, which is slightly more optimistic than my previous post =)