Thursday, July 10, 2008

My cool-ass economy chart (with comments & wild speculation)

Yeah baby... the economy is big news right now. We've gone through some intense housing, oil, currency, stock, and credit/interest fluctuations in the past decade. What does it all mean & what will happen next? There's a lot of buzz & speculation about that right now...

I've said this before. I love charts & I created the graph below from data I scraped off the web.
I used nominal prices for oil and gold, plus the Dow Jones index - then adjusted everything for inflation based on the national CPI. I added the national bank prime rate and unemployment then scaled everything to a scale of 1 (from maximum/peak value) to compare the relationships.

History is a great way to learn because there are equilibriums and trends to be found. You can see that unemployment does not trend up or down over time... but still fluctuates a lot. Interest rates change depending on how the Fed feels about inflation & unemployment. You will notice that oil and gold fluctuate together, because they share a relationship with inflation. Gold hikes may coincide with inflation (or expectations of inflation). Oil hikes may cause inflation (or increase expectations of inflation). I say 'expectations' because Milton Friedman didn't believe in cost-push inflation & I'm undecided. You'll also see that the Dow Jones forms an inverse relationship (think sine & cosine waves) with oil & gold. Perhaps this is because weak currency corresponds with contracted business earnings.

What does it mean? Well, if you extrapolate a 40-year cycle in the market.... we might have another 5-10 years of contracting economy before things turn around. I have no idea why there would be a cycle - but the chart does imply one & economic cycles have been debated for a long time. What does it mean for how you should invest? No one can predict exactly... but I'd say a good strategy would be to go heavy on gold and commodities and then gradually shift to stocks over the next 5-10 years (somewhat like if it was 1970).

Maybe I will add real estate value, inflation rate, and/or other data to this chart at some point & wildly speculate further.

1 comment:

JT said...

That IS a cool ass chart. Was it made from open office or google spreadsheets?