This post follows on in a somewhat tangential way from my earlier posting on the notion that retail is dead and there is a recession on the horizon – the chart action of retailers seems to show a different story. But financial journalists have bever been known to let facts get in the way of a stupid idea. Therefore it would not come as a surprise that the current end of the world meme that is going around is talking about the next great share market apocalypse and how the market today looks so much like the market from whatever period in history the author has chosen to justify their somewhat flimsy position. However, without context, these are meaningless comparisons and the moment you see one you should instantly assume that the author is a peanut.
Let me give you an example of context and the possibility of a false comparison leading to a false conclusion. Imagine you had never seen a picture of a tiger before and I showed you one, I then showed you a picture of a cat but this picture lacked any scale or context. You would assume that they were practically identical, they both have fur, four legs and a tail. There is nothing to tell you that the tiger could be up to 150 times the size of your average house cat, they look the same so therefore they should be the same. It is the context that tells the story not the picture in isolation. The same is true of markets without context simply overlaying one chart over the top of another is silly then saying they must be identical is stupid. Taking this a step further and saying the because B looks like A then C must follow is verging on idiotic.
To illustrate this consider the chart below. In this chart I have looked at a series of major crashes, I have mapped the data from a decade before the crash and for a year after to show the impact of the crash. I have then plotted the same data for today’s market by way of comparison.
Today doesn’t really look anything like previous periods in history other than the fact that the market has been going up for an extended period of time. However, this by itself does not anyway justify predictions of a coming financial armageddon. All we know from history is that booms end in busts but the timing of this bust is completely beyond or knowledge. The future is completely opaque to us. The only surprise I got from the chart above was the reinforcement of how good for investors the bull run of the 1990s which terminated with the dot com bust was for investors.