Dear Diary,
Yesterday, gold climbed back above $1,200 an ounce. US stocks went nowhere.
Meanwhile, a chill went down our spine. A sense of dread filled our frontal cortex.
We read a report that was designed to give investors courage and hope. Instead, it felt to us like a guilty verdict in a murder trial. Even with good behavior, our sentence would probably last longer than we would.
A chart told the story. It showed three bull markets over the last 20 years. In the 1990s, the S&P 500 total return was 227%. Then from 2002 to 2007, another bull market. The total return this time: 108%. And from 2009 to 2014, the S&P 500 returned another 195%.
The lesson is unmistakable. It tells you to get in stocks… and stay in. If the market has a fainting spell, don’t get dizzy. Stick with stocks!
Buy the Dips?
“Yes, we’ve seen some weak periods,” say the wealth managers, investment counselors and stockbrokers.
But they’ve always been followed by even greater strength. Each high has led to an even higher high.”
This is the message taken on board by a generation of investors. And if you go back further, you will find the same lesson learned by their fathers… even their grandfathers.
Since the end of World War II, there have been up markets, down markets and sideways markets. But if you had just gotten in and stayed in over any substantial length of time, you would have done well.
That is true for almost all financial assets – at least over the last 35 years – and true for stocks, especially, over the last 70 years. In 1960, the S&P 500 was 59. Yesterday, it was 1,964.
The lesson is now imbedded in our race memory… in our collective unconscious… and in our brains, our culture and our muscles. Even after a stroke or Alzheimer’s… after senile dementia and adult diapers… we will recite it on our deathbeds: “Buy the dips.”
We don’t have to think about it. We may fear the next recession… or the next sell-off on Wall Street… but we are confident the darkest night will always be followed by a bright dawn – always has!
And always will. At least, until it doesn’t.
Mr. Market’s Biggest Coup
But what if Mr. Market is about to pull his biggest coup?
What if the next dark night lasts 10… 20… 30 years? What if the experience of the last 70 years was sui generis? What if it was the result of particular conditions, which have now changed… and can’t be repeated? What if we are now looking at highs that we will never again see in our lifetimes?
Of course, what we don’t know about the future is encyclopedic. But wouldn’t it be a nice trick on Mr. Market’s part?
After World War II the US had the world’s largest economy – by far – and unlike its rivals in Europe, it was still intact. The GIs came home. They got married… they had the famous baby boom children… they started businesses and careers. Credit expanded – up 50 times since then.
And now, with interest rates lower than ever before, the credit expansion must be nearing its end.
World War II vets are dying at the rate of about 1,000 a day. And their children are retiring… at a rate of 10,000 every day. The boomers are no longer adding to wealth; they’re subtracting from it.
They’re no longer expanding credit by borrowing to buy new houses and new cars; now, they’re living off their investments and Social Security, counting on their own savings or the kindness of strangers to see them through the rest of their lives.
You heard about the great jobs report on Friday. Some 248,000 new jobs were created.
But wait… The real story is that of the 14 million people added to the adult population of the US since 2008, only 1 million have found real jobs.
That’s the important story: Growth is slowing. We have more people… but fewer of them paying the bills.
Reagan’s former budget adviser David Stockman comments:
Going back to September 2000, for example, there were only 76 million adults not in the labor force or unemployed, and that represented just 35.8% of the adult population of 213 million.
This means there has been a 26 million gain in the number of adults not working – even part-time – during that 14-year period. About 10 million of that gain is accounted for by retired workers on Social Security – a figure which has risen from 28.5 million to 38.5 million during the interim.
But where are the other 16 million? The answer is on disability (+4.5 million), food stamps (+25 million), survivors and dependents benefits, other forms of public aid, living in parents’ basements on student loans or not, or on the streets.
The employment ratio has plunged; full-time breadwinner jobs have actually shrunk; total labor hours employed have been stagnant; real GDP has grown at only 1.8% annually for 14 years – compared to 4% annually between 1956 and 1970; and real net capital investment is 20% below its turn-of-the-century level.
This isn’t at all like the postwar period. It is a whole different ballgame. We may never again in our lifetimes see stocks so high.
Stay tuned…
Your very ignorant correspondent,
Bill
Is Janet Yellen as Dovish as Folks Think?
Even if Bill’s right about the effect of America’s aging demographics on stocks, investors still have their comfort blanket: ultra-low interest rates.
Talk to most folks, and the message is clear: The Fed ain’t raising interest rates anytime soon.
This is largely based around the idea that the new Fed chairwoman, Janet Yellen, is an unrepentant policy dove.
In fact, when President Obama nominated her for the job, “bond king” Bill Gross told Bloomberg, “She’s a dove, actually, with a capital D.”
But investors betting on ultra-low interest rates as far as the eye can see may be in for a nasty shock.
As Yellen told reporters last month:
I’ve said repeatedly, and I want to say again, that if events surprise us, and we’re moving more quickly toward our objectives […] we have the flexibility to move.
And guess what… It gets harder and harder for the Yellen Fed to keep the foot on the gas with the headline unemployment rate down below 6%.
That’s lower than it was under President Reagan at the same point in his second term as we’re at now under President Obama. Back then the jobless rate was 7%. And it didn’t break below 6% for almost another year.
And September wasn’t the first month that we’ve seen good news on the jobs front either. Over the past six months, US employers have added about 245,000 jobs a month.
And since the start of 2014, the US economy has added nearly 2 million new jobs. Go back to February 2010… and the economy has added nearly 10 million jobs (9.8 million to be more precise).
Of course, these are just headline numbers. And as Bill points out, there are some worrying trends going on behind those headlines.
But don’t forget that the Fed’s threshold for unemployment under Ben Bernanke was originally 6.5%. And we’ve already broken through that…
It’s no wonder the markets are pricing 66% odds for a rate hike by July next year.
Nobody knows for sure what the effect of a rate hike on stocks will be. But investors have had the comfort of ultra-low interest rates for the past five years. And that could be about to change sooner that most folks expect.
And that, plus the declining demographics in America, could be a difficult hill to climb…