Economics

Some people doodle pictures

Some people doodle pictures, but I’m the type who mucks around random bits of historical price data just to see where it goes.  For example, I love charts of the Dow Jones Stock index in the 1920s – it me it tells a vivid story of hopes and dreams and pain mixed with desperation.  The wild fluctuations in the early 20’s, the solid gains of the mid 20’s then the euphoria and ensuing panic, well.. you know the rest.

A while a go, I came across a quote;

With an ounce of Gold, a man could buy a fine suit of clothes in the time of Shakespeare, in that of Beethoven and Jefferson…

What does a ‘fine suit’ cost today?  Well, an ounce of Gold is just short of £700.  If you went into Harrods, and asked for a fine suit, would that see you into an Armani or Zegna number?  I think so.

So, the maxim seems to ring as true today as it ever did.

So my mind got to thinking – if an ounce of gold seems to buy the same stuff over the centuries as it does today, then it would seem to be a great proxy for true purchasing power.

The problem with looking at historical charts of stock movements, especially if you are trying to learn the lessons of history, is that the picture is muddied by the fact that the unit of account – i.e. money, does not do a very good job.  It is rapidly decaying so when you compare over time, it just gives the wrong impression of what is going on.

For example, look at the stock market over the whole of the 70’s, and you think that equities didn’t do too badly.  But adjust for inflation, and you soon realize that stocks lost over three quarters of their value in the first half of the 70’s!

So, the idea dawned on me: the price of stocks and shares are only represented in terms of money.  What if you priced them in Gold instead of pounds and dollars?

Firstly: what data?  Well, I stuck to the UK, and I chose the FTSE all share index.  I took the index value for each day, going back a few decades.  I then converted them into ounces of gold.  The chart gave me a pretty shocking picture.

But then I realised I’d missed something pretty important.  Stocks pay dividends.  So, I added a 5% annual dividend return, and then reinvested it into my index.  Surely that’d make my chart look less ridiculous?  Erm, a bit… but not by very much.

What I was left with was a completely different view of history, and some pretty worrying revelations.

Firstly, my chart had nothing to say until the 70’s.  This is because until then, money was gold – therefore priced in money or gold – it didn’t make a difference.  In essence, the chart had no surprises.

But in the 1970’s, money was cut loose from gold, with some pretty shocking results.

FTSE All Share in terms of in oz of Gold (click to enlarge)

Some salient observations.

1. The mayhem of the early 70’s had some pretty catastrophic consequences for the world, and recovery only came in the 1980’s.  From over 12 ounces of gold, down to nearly 1 ounce of gold is a pretty insane move.

2. Real growth took off in the 80’s, but something happened in the mid 90’s – the internet.  This was a period of real economic growth, that morphed into a bubble, thanks to some pretty silly policy mistakes by Greenspan et al.

3. What happened in the 00’s?  Wasn’t that supposed to be the ‘NICE’ decade?  Wasn’t the stock market supposed to have risen back to its peaks?

My answer to this is that the noughties were a period of stagnation, economic misalignment, and we were all swamped by a money fraud.

The authorities were in such a blind funk in 2001, with the overriding perception that we were facing a 1929 style collapse, that they turned on the money gusher, and flooded the whole world with liquidity.  This found its way into the greatest worldwide property bubble the world has ever seen.

But… this was not true growth – at least for the Western economies.  Sure, great advances were made in some sectors of their economies, but huge misalignments of capital were occurring, and this decade of false signals  to producers, but especially to Western consumers, is why we had the economic crisis of 2008.

Look where we stand now.  In ruinous debt.  Shackled to low interest rates and nervously watching retail sales and property prices.  This is a direct consequence of our societies living the high life for ten years, without actually realising we were in decline.

We have been living like cannibals.  Hollowing out ourselves out, yet living the high life.  And this is all down to a pseudo neo-Keynesian/monetarist aggregate kabala fetish.

I feel a sense of panic looking at this chart, so what is the solution?

Free markets built on the bedrock of honest money.

4 comments to Some people doodle pictures

  • Jon

    Interesting post, but I think this paints a slightly misleading picture.
    Your initial premise that an ounce of gold will buy the same amount of something is not necessarily correct – it may apply at the top end of the market but at the lower end of the market living standards have been dramatically improved as a result of cheap imports and mass production.
    Why not plot the FTSE in terms of loaves of bread, you could use an average of the major manufacturors to eliminate some bias.
    The other point is that gold is traded on the stockmarket, my understanding is that it is sold during booms and bought during busts – surely this would create considerable bias in your graph.

  • Very nicely put!

    I noticed something very similar when the pound didn’t crash a few months ago – when I realised that the Dollar and the Euro are held up by the same silly system.

    We are going to have to pay for all this debt somehow – War and destruction is the traditional method – not that I would recommend it!

  • Mike

    Yes, I have mapped this to gold too.
    It clearly removes the “noise” of money and is a much truer picture.

    I recommend any trader or investor measuring their asset values in terms of gold.

  • Minor point – a “fine suit” is a very movable target – I would suspect even moderate suits will wear better, fade less, keep out the weather better & clean more easikly than in Shakespeare’s time. A “fine suit” really just means a better looking one than the current competition. The degree to which we are bettter off than in other ages cannot easily be appreciated.

    It looks like the computer boost had a major & real effect, it wasn’t all bubble. There are other similarly impressive technological developments close (nanothechnology, GM crops, algal oil, space development, space elevators, & Moore’s law means computer capacity is still doubling every 18 months). It also looks like government parasitism has increased & accounts for the downturn in the last decade. Currently 50% of the economy is government spending & another potential 100% of the economy is destroyed by regulation. All that could change almost instantly.