History: DOW mean 2010 is 7000?


I am recycling old material as (via Eve) it is now a story in Bloomberg. The picture above shows clear signal on a linear scale. It shows garbage on a log scale.

Here is the log view of 80-now.



It is as if the log scale doesn't convey the information as clearly.

When you see it in linear you see all growth, corrections included, sums up to linear growth. Why is this news?

Very simply because if it were real growth, real growth usually manifests itself with a straight line on log. It is the very definition of log actually since the mathematical definition is that the growth equals a fraction of the whole and that resolves in a exponential.

The point is that it isn't there.

It shows up linear however, and that's news. SOMETHING has been growing linearly lately for the past 30 years and it isn't all growth. Could it be the money supply? WIth a narrow focus on CPI, have we missed the obvious that asset prices were going up in a inflationary signal of monetary levels?

That is what the anemic linear scale tells us. And if you want to look really closely at the log you will start seeing, not a straight line, but in fact, an arc.

Comments

Barry Kelly said…
The DOW isn't a particularly good time series for this kind of analysis, IMO. It's price-weighted nature means that it arbitrarily values stocks with high face-value over those with low face-value, see e.g. Wikipedia.
October 16, 2008 at 4:32:00 PM PDT
adt43wt342 said…
even with distortions, or lack of representativeness it still remains that linear growth is a VERY interesting concept. And that is the best case scenario, that there actually was REAL growth, even if linear. The worse case scenario is that it was all monetary.

This for example invalidates most portfolio theories. Plain and simple.

It also makes sense in a galactic way. It is easy to show exponential growth when you are small. It is super hard when you are big. Therefore the growth could be linear in later stages.

All economic theory that talk of GDP growth as a percentage of GDP taints our perception to assume "exp".

Growth is a factor of efficiency and innovation, I can see a case for linearity there.
October 17, 2008 at 9:08:00 AM PDT
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