5 ms·

The inflation-adjusted SP500 has never recovered from the 2000 peak

Bostonian 5y ago
The chart is misleading because it adjusts for inflation using M3, rather than the Consumer Price Index (CPI). People assess inflation by the prices they pay, not some monetary aggregate. Using CPI, the S&P 500 has recovered to its 2000 peak. Just as important, the owner of an S&P 500 index fund would have received dividends, so her total return would have exceeded inflation. The caption at the bottom suggests why this misleading analysis is shown. The author is pushing crypto. "Invest wisely and you can maintain or increase your standard of life. Invest poorly and the road to serfdom is real. Invest in crypto"
- xqcgrek2 5y ago
  CPI is misleading, M3 is more accurate. CPI is heavily influenced by technology trends and offshoring of labor for widgets. House and asset prices tell different story.
  - JumpCrisscross 5y ago
    > CPI is misleading, M3 is more accurate This assumes a constant velocity of money. That's empirically false. Money supply can remain stable while prices soar or collapse solely on the back of velocity changes.
  - mlyle 5y ago
    > CPI is heavily influenced by technology trends and offshoring of labor for widgets. As opposed to M3, which is influenced by economic growth exceeding inflation, population growth, just overall changes in velocity of money, etc...
  - h4x0r12345 5y ago
    Correct. Some would argue that CPI is specifically engineered to mislead.
    - carnitine 5y ago
      Why do banks and asset managers trade billions in CPI derivatives if it is a useless, engineered metric?
      - h4x0r12345 5y ago
        I never said it was useless. You're putting words in my mouth.
  - thunderbird120 5y ago
    CPI includes housing and M3 is effectively never a good measure of inflation. People have this misconception that the supply of money is directly inversely proportional to the value of one unit of that currency. That is not how that works at all. Inflation is demand driven. When demand falls off a cliff you can have periods of deflation during which money supply increased significantly.
  - Retric 5y ago
    CPI covers Food energy housing etc because people aren’t just buying any one thing. We could argue about the correct mix to use, but M3 alone ignores population and economic growth etc making it a vastly worse measure of inflation. This becomes really obvious if you look at M3 vs prices over long periods. If you have say 2x as many people and M3 is 2x the size then a 1$ candy bar that’s still 1$ somehow demonstrates inflation and increases in productivity. Except productivity per worker was unchanged only total economic output which is irrelevant to individuals.
  - gruez 5y ago
    >CPI is misleading, M3 is more accurate. I wonder what happens if we apply that to other metrics... https://i.imgur.com/2GkpBLZ.png https://i.imgur.com/2GkpBLZ.png Uh oh. If we take raw gdp (ie. not adjusted for inflation/cpi), and adjust it by M3 instead, we find that the economy has shrunk by nearly 50% since the mid 90s. That can't be right, can it? Chart was made in excel from these data sources: https://fred.stlouisfed.org/series/MABMM301USM189S https://fred.stlouisfed.org/series/MABMM301USM189S https://fred.stlouisfed.org/series/GDPC1 https://fred.stlouisfed.org/series/GDPC1 https://fred.stlouisfed.org/series/GDP https://fred.stlouisfed.org/series/GDP edit: fixed axis format.
- cwkoss 5y ago
  Isn't CPI politicized and doesn't accurately account for real cost of living changes? Why do you think CPI is a better measure?
  - mlyle 5y ago
    > Isn't CPI politicized and doesn't accurately account for real cost of living changes? CPI ain't perfect. Anyone can argue about the compensation of the basket and make points that it might understate some portions of household spending. And then there's confounds in the opposite direction: it doesn't take into account hedonics at all really. But it's not terrible, either: it's the best measure we have. > Why do you think CPI is a better measure? See sibling comments. If CPI doesn't quite accurately report purchasing power... M3 is nowhere close as a metric.
    - itsdrewmiller 5y ago
      Hedonics are one of the best arguments against CPI - https://wolfstreet.com/2019/12/05/what-worries-me-about-hedonic-quality-adjustments-cpi/ https://wolfstreet.com/2019/12/05/what-worries-me-about-hedo... This M3 nonsense is ridiculous though, I agree.
      - mlyle 5y ago
        Hedonics (which I had mentioned) are an inescapable confound. We can't go back and live in 1990 with 1990s goods. The cost of an equivalent quality of life (by our best reckoning) is measured in the various CPI. But people expecting more in life (safer products, more computing, etc) isn't exactly "inflation". And if we treat increases in quality of life as an increase of cost of living, we're really measuring something else.
  - JumpCrisscross 5y ago
    > Isn't CPI politicized and doesn't accurately account for real cost of living changes? There isn't a single CPI. Headline CPI is widely reported because it's approximately right for most people. If you're doing inflation-sensitive planning, you should be using a more fine-grained metric. Predicting your personal cost of living changes using national core CPI is like aiming a gun with a compass. (That said, most people--when discussing inflation--aren't doing anything practical with it. For conversational purposes, headline is fine.)
AnimalMuppet 5y ago
If you use M3 (total money supply) as the definition of inflation, which is a pretty bogus thing to do. Why is it bogus? Because we have more people than we had in 2000. We have more houses, more cars, more computers, more phones. If M3 stayed the same, that would be deflationary, because the same amount of money would be spread over more stuff.
- xqcgrek2 5y ago
  You don't really explain why the S&P rising slower than M3.
  - JumpCrisscross 5y ago
    > You don't really explain why the S&P rising slower than M3 Why do you think a constant fraction of every dollar the Fed creates should go into the S&P 500? Private markets, debt markets and bank reserves have soared since 2008, for example. This chart is the financial equivalent of "a series of tubes."
  - throwaway09223 5y ago
    It seems an obvious answer would be that there has been a lot of growth outside of the 500 large companies picked to comprise the s&p 500. The s&p 500 is not an index of all corporate growth.
    - jimminy 5y ago
      This is the correct answer and is actually somewhat visible if you also look at the DJIA and NASDAQ figures. The S&P 500 and DJIA are limited to a fixed number of corporations. The NASDAQ is allowed to expand it's number of listed companies over time. If you look at the NASDAQ figures it's able to show considerable and relevant growth, as more companies have listed. (Still not at 2000's peak, but much closer than the S&P or DJIA.)
    - deleted 5y ago
      [deleted]
  - 5y ago
ydnaclementine 5y ago
I think about this a lot about one of Japan's indices: Nikkei 225. It peaked in 1989 (~33k) and has not yet recovered since their crash (currently ~27k)(ignoring inflation, just value)

The chart is misleading because it adjusts for inflation using M3, rather than the Consumer Price Index (CPI). People assess inflation by the prices they pay, not some monetary aggregate. Using CPI, the S&P 500 has recovered to its 2000 peak. Just as important, the owner of an S&P 500 index fund would have received dividends, so her total return would have exceeded inflation. The caption at the bottom suggests why this misleading analysis is shown. The author is pushing crypto. "Invest wisely and you can maintain or increase your standard of life. Invest poorly and the road to serfdom is real. Invest in crypto"

xqcgrek2 5y ago
CPI is misleading, M3 is more accurate. CPI is heavily influenced by technology trends and offshoring of labor for widgets. House and asset prices tell different story.
- JumpCrisscross 5y ago
  > CPI is misleading, M3 is more accurate This assumes a constant velocity of money. That's empirically false. Money supply can remain stable while prices soar or collapse solely on the back of velocity changes.
- mlyle 5y ago
  > CPI is heavily influenced by technology trends and offshoring of labor for widgets. As opposed to M3, which is influenced by economic growth exceeding inflation, population growth, just overall changes in velocity of money, etc...
- h4x0r12345 5y ago
  Correct. Some would argue that CPI is specifically engineered to mislead.
  - carnitine 5y ago
    Why do banks and asset managers trade billions in CPI derivatives if it is a useless, engineered metric?
    - h4x0r12345 5y ago
      I never said it was useless. You're putting words in my mouth.
- thunderbird120 5y ago
  CPI includes housing and M3 is effectively never a good measure of inflation. People have this misconception that the supply of money is directly inversely proportional to the value of one unit of that currency. That is not how that works at all. Inflation is demand driven. When demand falls off a cliff you can have periods of deflation during which money supply increased significantly.
- Retric 5y ago
  CPI covers Food energy housing etc because people aren’t just buying any one thing. We could argue about the correct mix to use, but M3 alone ignores population and economic growth etc making it a vastly worse measure of inflation. This becomes really obvious if you look at M3 vs prices over long periods. If you have say 2x as many people and M3 is 2x the size then a 1$ candy bar that’s still 1$ somehow demonstrates inflation and increases in productivity. Except productivity per worker was unchanged only total economic output which is irrelevant to individuals.
- gruez 5y ago
  >CPI is misleading, M3 is more accurate. I wonder what happens if we apply that to other metrics... https://i.imgur.com/2GkpBLZ.png https://i.imgur.com/2GkpBLZ.png Uh oh. If we take raw gdp (ie. not adjusted for inflation/cpi), and adjust it by M3 instead, we find that the economy has shrunk by nearly 50% since the mid 90s. That can't be right, can it? Chart was made in excel from these data sources: https://fred.stlouisfed.org/series/MABMM301USM189S https://fred.stlouisfed.org/series/MABMM301USM189S https://fred.stlouisfed.org/series/GDPC1 https://fred.stlouisfed.org/series/GDPC1 https://fred.stlouisfed.org/series/GDP https://fred.stlouisfed.org/series/GDP edit: fixed axis format.
cwkoss 5y ago
Isn't CPI politicized and doesn't accurately account for real cost of living changes? Why do you think CPI is a better measure?
- mlyle 5y ago
  > Isn't CPI politicized and doesn't accurately account for real cost of living changes? CPI ain't perfect. Anyone can argue about the compensation of the basket and make points that it might understate some portions of household spending. And then there's confounds in the opposite direction: it doesn't take into account hedonics at all really. But it's not terrible, either: it's the best measure we have. > Why do you think CPI is a better measure? See sibling comments. If CPI doesn't quite accurately report purchasing power... M3 is nowhere close as a metric.
  - itsdrewmiller 5y ago
    Hedonics are one of the best arguments against CPI - https://wolfstreet.com/2019/12/05/what-worries-me-about-hedonic-quality-adjustments-cpi/ https://wolfstreet.com/2019/12/05/what-worries-me-about-hedo... This M3 nonsense is ridiculous though, I agree.
    - mlyle 5y ago
      Hedonics (which I had mentioned) are an inescapable confound. We can't go back and live in 1990 with 1990s goods. The cost of an equivalent quality of life (by our best reckoning) is measured in the various CPI. But people expecting more in life (safer products, more computing, etc) isn't exactly "inflation". And if we treat increases in quality of life as an increase of cost of living, we're really measuring something else.
- JumpCrisscross 5y ago
  > Isn't CPI politicized and doesn't accurately account for real cost of living changes? There isn't a single CPI. Headline CPI is widely reported because it's approximately right for most people. If you're doing inflation-sensitive planning, you should be using a more fine-grained metric. Predicting your personal cost of living changes using national core CPI is like aiming a gun with a compass. (That said, most people--when discussing inflation--aren't doing anything practical with it. For conversational purposes, headline is fine.)

AnimalMuppet 5y ago

If you use M3 (total money supply) as the definition of inflation, which is a pretty bogus thing to do. Why is it bogus? Because we have more people than we had in 2000. We have more houses, more cars, more computers, more phones. If M3 stayed the same, that would be deflationary, because the same amount of money would be spread over more stuff.

xqcgrek2 5y ago
You don't really explain why the S&P rising slower than M3.
- JumpCrisscross 5y ago
  > You don't really explain why the S&P rising slower than M3 Why do you think a constant fraction of every dollar the Fed creates should go into the S&P 500? Private markets, debt markets and bank reserves have soared since 2008, for example. This chart is the financial equivalent of "a series of tubes."
- throwaway09223 5y ago
  It seems an obvious answer would be that there has been a lot of growth outside of the 500 large companies picked to comprise the s&p 500. The s&p 500 is not an index of all corporate growth.
  - jimminy 5y ago
    This is the correct answer and is actually somewhat visible if you also look at the DJIA and NASDAQ figures. The S&P 500 and DJIA are limited to a fixed number of corporations. The NASDAQ is allowed to expand it's number of listed companies over time. If you look at the NASDAQ figures it's able to show considerable and relevant growth, as more companies have listed. (Still not at 2000's peak, but much closer than the S&P or DJIA.)
  - deleted 5y ago
    [deleted]
- 5y ago

ydnaclementine 5y ago

I think about this a lot about one of Japan's indices: Nikkei 225. It peaked in 1989 (~33k) and has not yet recovered since their crash (currently ~27k)(ignoring inflation, just value)