It's Still A Very Young Bull Market

In the last Musings, we touched on the need to be aware of very long, i.e., generational, wavelength change. This Musings, continues in that vein, albeit in a different way. With the stuff of VIX forcing us to avert our gaze or risk motion sickness, it has been a good time to immerse one’s self in the question of “What Time Is It?” with respect to the Bull Market that began in March 2009. In this edition, we will examine how the early days of this nascent Generational Bull might be similar to its predecessors: the 33+ year Bull Market that lasted from 1974 to 2007 and the only slightly longer one that ran from July 1932 until (take your pick) 1968 or 1973. Owing to the paucity of data in the case of the latter, the comparison of where we might be today is mainly with the Bull Market which more or less defined the bulk of my career (i.e., since 1981). Just don’t miss that the 1932-68 Market strongly resembled the post 1974 Market insofar as it was a three decade affair born out of a devastating washout that completely demoralized all but the most resilient of investors, which is exactly where the financial media would have us believe we are today.

In comparing where we seem to be today and with where the Market was in the years just after 1974, it appears that the sense of futility we are now experiencing is not unlike what the pundits of thirty years ago so called “the death of equities”. In either case, it was a very long time in the making. Both of these “once-in-a-generation” Bear Markets (1973-74 and 2007-09) were preceded few years earlier by gully washers that were fearsome enough in their own right. The Market shed a third of its value in a little over a year circa 1969, and then would take about three years to recover to only about 10% above the 1968 peak. Which on an inflation adjusted basis was less than no gain at all (and why 1968 might be considered the actual generational peak). Akin to the “lost decade” for equities we have lived through, an investor who bought the S&P in 1968 was still underwater in 1982, and on an inflation adjusted, total return basis was not made whole until 1985. By comparison, the bursting of the Tech Bubble a dozen years ago was most notably felt by the NDQ, but in so doing it cut the S&P 500 nearly in half. It would take several years to recover to just a few percentage points above the 2000 peak before commencing the Bear that we will remember as worst ever. (The 1929-32 debacle did not have a similar precursor, as the DJIA rose nearly six-fold between 1921 and 1929 without a perceptible break. However, the decade long demoralization is apparent back then as well. An investor who bought the DJIA near the 1937 recovery peak would still be waiting to break even in 1948.)

Clearly, this is not the first time in the modern, records-get-kept era that equity ownership has been tried, found wanting, and given up on. The massive fund outflows of recent weeks make me think that we have reached a moment of capitulation not unlike 1938 and 1982 (i.e., a few years past the washout that gets remembered). Just as a scintillating rally of rapid decompression in 2009 mirrored 1933-37 and 1975, the recovery, or perhaps the necessary arrival of complete investor capitulation a la 1939 or 1982, is a much more protracted affair.

Even though I experienced them first hand, I hesitate to compare the years leading up to when the Market finally took off in August 1982 with today. After all, I was in those years that might be described as where the twilight of adolescence is painfully banished by the daunting challenges of matrimony, paternity and, fiscally speaking, still not yet having a pot to piss in, poles apart from today. As a “rookie stock broker” in 1981, I was ill equipped to take the measure of the Market and draw any actionable conclusions. I was, however, extremely in tune with the investing public’s outright disgust with equities. There was money looking to be put to work, but it was the exceptional prospective client who did not say, in so many words, “anything but stocks!”. Money market funds with double digit returns, real estate, oil & gas partnerships (which all came to naught) and maybe municipal bonds (which turned out to provide a prescient few with a fabulous, multi-decade ride), but no stocks. Then there were the gold bugs. Just like today, recent experience had made them look very “right”, as the metal had rocketed six or so fold in the latter part of the Seventies. (Since we can’t begin to value it, I can’t begin to have an opinion on gold, other than that it is likely to be a great speculative vehicle about once in a generation, and that there is no good reason that its latest stint in that mode will end any differently than the 20 year despond which followed its prior day in the sun.)

So as I shift my focus forward and ask what could possibly make the Market go up, given all the structural difficulties we are constantly reminded of, I again recall those late years of the prior, bleak era (1968-82). As it was then, the Bull Market will commence in earnest once the demoralization is complete. That could be right now, or a in a few more years, but just as it was in the Eighties, it won’t be obvious until well after the fact. The Market gave us two great decades because it started from a low and dispirited place, but also because it was on to something. No individual could really see it, but in 1982 the Market “knew”, or started to sense, that ever cheaper computing and telecom would find its way into the cost of practically everything else and make global enterprises with decently managed risks possible. The evidence was also in place for it to perceive that the stultifying menace of Soviet Socialism was dead on its feet, providing a potential for that respite from History which we now remember as the Clinton years. And it also knew, as very few of us would recognize until years later, that a great leader by the name of Reagan was just then taking his place on the big stage. (The hard work and experiences by which he prepared himself for his moment, in stunning contrast to our present leader, were knowable enough, even then.) These were factors that a Market “done going down” in 1982 was able to sense and then overcome that not inconsiderable wall of worry that was the 1980s.

An investor looking ahead for the next decade or two needs to be thinking about similar “stealth potential positives” that, as in the prior era, are probably hiding in plain sight. It has been my experience that as surely as we are unaware of most of what is really going on in the world (the myriad personal dramas that never make the news), we are more aware of the crises and various “bad things” than we are of what might be going right. The “surprising” outcome of so many elections in the past two years is but one indication that our ever vigilant news media doesn’t do a particularly good job of capturing the pulse of public mores and sentiment. So I think this is a particularly good moment to be asking the question, “What could go really right over the next decade or so?” There might not be any answers. It is not beyond the realm of possibilities that terminal decline is upon us, but as those of us who came of age in 1970s (or in the 1930s) can attest, it is not the first time it was easy to suppose as much.

I see political sea change that could make a real difference, but it will be a difference that will play out over a decade and more, and if it is real, the Market will anticipate it. The one area that comes to mind for me as a candidate for circa 2025 pundits wondering about who knew it would change so much would be that vast enterprise we call Education. That would be the process whereby otherwise feral and ignorant little savages get transformed into reasonably productive citizens. Or so it would seem. The reason I single Education out is not just because it is, in the sense I just described, as important as it is if our economy is going to be competitive enough to eventually tame our fiscal morass. Education stands out because as a national enterprise it has experienced colossally bad stewardship over the past generation or so. Alone among critical enterprises, it has had a deteriorating value proposition for the past sixty years at least. Contra what has happened with communications, transport, food and nearly everything else (more and better product at steadily declining real prices), Education is an enterprise that costs more and more but produces less and less (as in recent record low in SAT scores, though it is possible that the reason for that is simply that we invite too many people for whom academic excellence is but a figment of wishful thinking, who should be on a vocational track and/or in rehab, to take the test). The nearest I can get to a similarly failed (i.e., rising instead of falling real cost) would be Medicine, but here at least the quality (previously unimagined improvements in outcomes) makes up for some if not all of the price inflation.

Technology being what it is and having done what it has for almost every other enterprise, and considering what we have learned about the sciences which bear on the process of learning, Education should be a shining star of improving value. Instead, it is the exact opposite. However, I sense that this is well understood, if not quite yet an actionable consensus on any but the most micro of scales. A lot like the way a few prescient folks were seeing what a graphical user interface might do for personal computing, and what personal computing might do for commerce, back in 1982. Too much is at stake for this status quo to persist. Over the next thirty years, that mammoth, value destroying edifice that is Education will be creatively destroyed and supplanted by something that produces a much better outcome (i.e., a competitive workforce) at a much lower cost to families, tax payers, etc. There are probably a couple of other, big slow moving changes in play that will surprise us in the same way. So as tough as it’s been to persevere these past few months, I continue to believe that the decade 2011-20 will end up being less like the one that preceded it than we are presently tempted to believe. And if the leadership manages to get a few things right, the decade after that could be a whole lot more like the last two decades of the Twentieth Century than we now presently dare to believe.

Generational Change Hits Home

Something about visiting the locale of one’s youth gets you thinking about things that change over the course of a lifetime. So it was during the week+ we just spent in and around Seattle. It’s always a bit of an effort to square current impressions with memories that probably age more like butter than cheese. When I stop to consider that the time between when I got my driver’s license and today is the same as that between then and 1929, how surprised can I be that so much has changed as much as it has? Back then, a ride on the bus had only recently risen from $0.20 (now $2.50, unless you are among the entitled legions who qualify for a subsidized pass, yet another bit of stealth redistribution which belie the “poverty level” statistics), gasoline as low as $0.26 a gallon. Boeing is no longer the dominant employer it was then, even if it presence and that of the myriad companies that support it is vastly larger. Microsoft, Amazon, Starbucks, Expeditors International and the entire biomedical industry were, at most, just germs of ideas in the minds of a few individuals yet to be heard from. The Pacific Rim was more a geological phenomenon than the vast web of economic interdependence and cultural melding that it has become (a New, better-thought-out-than-the-first-attempt, Greater East Asia Co-Prosperity Sphere?).

It is quite possible that Seattle’s place as a key node in that Pacific Rim economy accounts for what seemed like an economy doing a lot better than I expected. Along with the constant reminders we get that the Western world is teetering on the brink of recession, my expectations were tempered by the prolonged speculative excess in real estate in that region that should have set the stage for a longer than average recovery. The downturn that commenced in 2007 certainly registered in terms of business failures, foreclosures and unemployment, but all that seems to have slipped into the past. The places I visited were not overrun with “House For Sale” signs, in fact one on one rather long walk through neighborhoods overlooking Puget Sound I only saw five such signs, and four of them were “Sold”. Perhaps most of the would be sellers gave up, or the Chinese are buying them, but it sure didn’t look like the aftermath of the bust that was 2008.

Even more striking was a Friday evening visit to downtown of a district known as Ballard, a trendy nightlife destination that a couple of decades ago was as genuinely down and dirty, blue collar industrial as they get. At about the fifth restaurant where we were told that the wait time would be at least an hour and a half for a table for two, I was starting to get those “This is some recession we are having!” thoughts. Once we finally found a place that could seat us right away (at a bench overlooking a patio), I was struck by just how lavishly a mostly younger crowd seemed to be able to amuse themselves. A dozen or so years ago on a similar trip, I was bemused by a hallmark of spendthrift culture I chronicled as “$4 micro-brews”. That (now perfectly normal seeming) marker has evolved into $9 cocktails, which were being consumed along with a plethora of a la carte items all but certain to push the tab into three digits in no time at all. I was also assured by my guest that it is crowded like that most other evenings as well. I went to sleep thinking, sure, there may be something exceptional to account for what seemed like surprising prosperity in this little corner of the world, but even with that said, how shaky can the economy be with so many people out spending like that?

That further reflection that sometimes accompanies a night’s sleep brought me to a somewhat less sanguine conclusion. I couldn’t help wondering if what seemed like indications of prosperity were actually indications of cluelessness. Perhaps despite that terrifying moment of reckoning we went through a couple of years back, there are still large numbers among the up and coming generation that haven’t figured out that they are going to have to save a lot more of their incomes than their parents did. If so, then what was going to be a long, slow economic recovery in any case is going to be very long and slow indeed. Recessions are supposed to be reality checks, catalysts for prudence, temperance and sundry other virtues that tend to undergird prosperity as opposed to decline. We no doubt got a good whiff of that, but I can’t help wondering if, much like that uplift in comity and civic mindedness that followed 9/11/01, it has faded away. Probably not absolutely and across the board, but also probably more so than is conducive to a true and lasting national recovery.

The taproot of this somewhat counter intuitive stance is probably rooted in something that occurred to me at least 25 years ago. That was the observation that other countries, notably Japan and Germany, seemed to be catching up with us, and that many investors were terribly alarmed by this. It was true enough, but it had festered into confusion between relative and absolute position. Fixing on 1945 as a reference point, it seemed pretty obvious that other countries growing faster and so seemingly “catching up with us” was the most natural thing in the world. If one economy starts out bombed halfway to the Stone Age but is even remotely well-led, and the other has the only intact industrial base in the world and, over time, the hubris that goes with that, of course the former is going to grow faster.

Unfortunately, those advantages, the ease with which Americans could obtain the spending power to, in effect, bid against the rest of the world for goods and services (e.g., a union job at an enterprise with few if any competitors, something that in recent years has only existed in the public sector.) came to be thought of as perfectly natural and normal. The absolute level of prosperity has risen amazingly for nearly all of us (outside those benighted regions where autocrats and thugs do their best to discourage the impulses that drive prosperity). With the passage of a half century or so, though, the relative position, those advantages enjoyed by Americans and Europeans that were so conspicuous until well into the Seventies and still very large a decade ago, seem to be withering away at a faster clip. And not just withering. They took a huge haircut during the asset deflation that commenced in earnest in 2007. As with any other enterprise, the dysfunction, the dry rot, the ill-considered ideas that accrue in an economy during eras of scarcely interrupted prosperity don’t seem to matter at all until one day there is a tipping point and they are all that matters. Let’s put the collapse of Lehman Brothers at the epicenter of that tipping point and say that what should have been a wake-up call has had three years to wear off.

It appears more than remotely possible that however obvious that wake up call was for some of us, a plurality of the electorate might have further to go in realizing the true gravity of the situation. (Send a message of discontent like we just saw in NY special election? “Absolutely!” Accept the tough decisions that leaders will have to make without whining, complaining and threatening to vote the bum out of office? “Not if it puts my “rights” at risk!”) Having lived through the Seventies, I don’t see the US economy as beyond cure. They fixed that mess, and this mess is probably still fixable as well, but not without the realization that we can no longer afford to be as profligate (i.e, need to spend less and so a lot smarter) as the great prosperity of the past sixty years made so easy. Hopefully I have taken a tiny, atypical sample and misjudged the mood of a nation. Hopefully the vibrancy I keep seeing that belies doomsayers’ lament that the economy is stalling out is not being fueled by little more than rounds of $9 mojitos being piled onto credit cards. But as long as that’s a not bad metaphor for how the US economy functions (i.e., generously seeing to it that your friends have a good time with no thought as to when it will be paid for), the seriousness we need to undergo a necessary cure just might not be there. As we suffer through the discomfort of having watch wobbles in the the price of PIGS nation bank debt (which is easy enough for a pack of hedge funds to set to wobbling, by the way) swing the market cap of our economy by a major fraction of a $Trillion in a seeming blink of an eye, we should bear in mind that meaningful change also plays out on a wavelength that is generational and beyond.