Market rally like the 1970s?
In the 1970s, a bear market was disguised by a series of market rallies. Some think a similar phenomenon might be occurring now.
02/17/10 London, England – Yesterday’s big move in the Dow throws us back to our customary position – uncertainty, bordering on da-daism. The Dow rose 169 points yesterday. Gold shot up $29 to $1119.
“I think, therefore I am,” said Rene Descartes. How did he know he thought? And what if he thought he wasn’t? Would he not be? He should have tried following the stock market! It would have improved his philosophy. “I think I think,” he would have emended his famous quotation. “But maybe I don’t…”
Yesterday morning we were uncertain about the direction of the stock market. By evening, we weren’t so sure… We thought the markets were headed down. But yesterday’s strong showing puts our hypothesis in doubt.
Why should stocks go down? Because they’re-priced for a strong recovery. But we’re not getting a strong recovery. We’re not getting any recovery at all. Investors were bound to notice, sooner or later.
A new index of the trucking industry – based on how often they fuel up their big rigs – fell 37% in January, from a big rise in December. Neither unemployment nor housing show any sign of real improvement.
And yet…there is still no big sell-off in the stock market. Why?
Our old friends Mary Anne and Pam Aden recently suggested that this market was like the period in the ’70s when a bear market had already begun – years before – but which was marked by a couple of major rallies. The rallies lasted about 17 months each. And each time, the Dow approached its previous high.
Hmmm…maybe they’re right. This rally could go all the way to the summer.
Let’s put the all-time high of the US stock market at January 2000. The Dow had gone up about 11 times since its low in 1982. Then came the bear market. First, the Dow got whacked in 2001. And the government came in with the largest stimulus package the world had ever seen. That brought about a rally…a large rally…that took the Dow over 14,000 – well over the previous high. Even so, if you adjust the Dow for inflation it made no real progress. And then, in 2007, the Dow got whacked again. This brought the Dow down below 7,000, reaching its low point last March. Since then, stocks have been rebounding.
A typical bounce – if anything is typical – takes a few months and recovers about half of what was lost. This bounce is typical in that it recovered about half of what was lost. But it has gone on for much longer – like the big bounces of the ’70s.
How did the ’70s period end? Inflation increased and the Dow sank. It didn’t hit its final low until August 1982. But at that point, stocks were undeniably cheap. You could buy the Dow for about 5 times earnings.
Will we relive the ’70s?
Passing through the airport in Washington, we noticed a bar. It was named “Harry’s Bar” or something like that. What caught our eye was the décor. It had beige stone on the walls…greens and browns…and sleek wood paneling. Just like the ’70s…
And then, we noticed. Elizabeth had on a new outfit. There was something familiar about it. A flouncy sweater…jeans flared out at the pant leg…
“Yes, the ’70s are back in style,” she explained.
The politicos in Washington regard Carter as a failure. Yet, to us, he is still a hero. He was the only presidential candidate your editor ever voted for. And he turned out to be one of America’s greatest presidents. He didn’t push the nation to war or to bankruptcy. He left Washington and the nation more or less as he found them. What more can you ask for?
But Mr. Obama is no Jimmy Carter. On Obama’s watch the nation will take on about $5 trillion in extra debt. While Carter left the nation in no worse condition than it was when he took over the helm in 1977, Obama will leave it much worse off.
Of course, his idea that energy conservation was the “moral equivalent of war” was silly. But at least it was mostly harmless.
Besides, Jimmy Carter displayed enormous personal courage. First, he did a remarkable thing – he actually cancelled a pay raise for the military. Then, in 1979, Carter was fishing in Plains, GA, when his presidential boat was attacked by a giant, mad ‘swamp rabbit’ that tried to board without permission. Alone and unarmed, the president beat off the invader with an oar.
As far as we know, no other president has been similarly threatened…and none has shown Carter’s sangfroid under attack.
But back to the ’70s?
Probably not. The ’70s period was marked by stagflation, following the Johnson Administration’s big spending and Nixon’s elimination of the gold backing for the dollar. The CPI reached as high as 14% at one point. And Paul Volcker – a Carter appointee – fought it seriously…driving yields on the 10-year T-note up to 18% at one point. This was co-incident with a severe recession, and it got the job done. It turned around the bond market, the stock market, and the economy. The stage was set for an 18-year boom.
Today, inflation is not the immediate threat. Deflation is still the proximate problem. Here in England, inflation rates are going up. The papers whine that Britain’s middle-class is caught in a vise – between rising living costs and a punky economy. And sooner or later, inflation will be a major problem again – for Britain and America. Pundits argue about whether it will be sooner or later.
We don’t know. But our guess – and it is only a guess – is that the process of deflation, deleveraging, and depression has only just begun. The problems – too much debt, too many bad investments, too much money badly allocated – that existed before the crisis of ’07-’09 have not been corrected. There are still millions of people in houses that they can’t afford. There are still millions of mortgages for more than the houses are worth. There are still trillions of dollars at risk…still waiting to be worked out, written off, or inflated away.
The major contribution of the Bush/Obama administrations has been to add to these credit mistakes with trillions more in federal debt. That, too, will have to be reckoned with. But now there is Ben Bernanke at the Fed, not Paul Volcker. Now we are dealing with deflation (we think), not inflation. And now we have total official US debt 10 times as great as it was when Carter left office…and 3 times as much in terms of GDP.
What can we expect? Well, here’s one thing we feel fairly sure of: ahead lies a crisis much worse that the recession/bear market of the early ’80s.
What is wrong with these New York Times columnists? David Brooks is a smarter version of Thomas Friedman…which is to say, he is more thoughtful. But his thoughts seem to run into similar dead ends. He notes that more men in America are finding it difficult to be the breadwinners of their families. Women now get more college degrees than men. And women typically work in industries that are not suffering as much as construction and manufacturing, where men work. Result: men are out of work and out of money. And who wants to marry a man with no work and no money? So, men end up being lonely too.
Naturally, Brooks has a solution: “we need to redefine masculinity, creating an image that encourages teenage boys to stay in school and older men to pursue service jobs.”
That’s right. “We” need to do that.
And this too: “somebody has to provide institutions for unaffiliated 24-year-olds.”
Don’t worry. Someone will. Someone will give them black shirts. And set them to marching in the streets, beating up ‘class enemies.’ Someone will do something…and make the situation worse.
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