Wednesday, April 15, 2009

The Slope of The Sand Pile

In my college geology class we learned about the angle of repose of a sand pile. I often run this experiment while sitting on the beach. Build a pile of dry sand into a cone shape and at this magical point, the sand can no longer build up and it cascades down the side of the pile or cone. The physics behind it relates to the angle and slope of the cone with relation to the ground. A limit exists regarding the slope of the pile.

As with sand piles, the charts of stocks, market indices, and even species population curves reveal that an angle of repose appears to exist elsewhere in nature. Maybe this is some sort of natural law or a limit to growth.

The famous market crash of 1929 charted below illustrates an unsustainable slope.

The great Japanese crash or the "Lost Decade" as it's been titled. Twenty eight years and they're still in recovery. Remember when we wanted to be "everything Japanese"? Remember the Total Quality Management craze?

We all were able to experience the Tech Boom and the great ending orchestrated by the Dotcom mania. What a finale' it was. How about the slope on that curve?

The most recent is the Dow Jones Industrial Average charted below. The upward slope is not that steep because the real slope occurred up to mid-1999. The 2000-2008 slope was artificially stimulated by the money printing of the Federal Reserve.

The oil industry is still realing from the dramatic price crash of 2008. A steep advance and steep decline create beautiful symmetry.

And we can't forget everyone's favorite, Enron. While a few bad characters were the manipulators, many others were part of the process.
I presented the chart below a few weeks ago. It aligns investor psychology with the process that has played out many times over the past thousands of years. Don't forget the great Tulip Mania in Holland. It took place in 1637. The human limbic system has a long history of mania behavior.

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