A whole different ballgame this time around

Oct 7, 2014

Baltimore, Maryland

Dear Diary,

Yesterday, gold climbed back above $1,200 and 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 3 bull markets over the last 20 years. In the '90s, the S&P total return was 227%. Then, from 2002 to 2007 was another bull market: this time the total return was 108%. Finally, again in '09 to '14 investors got 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 yourself... stick with stocks!

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'Yes, we've seen some weak periods,' say the wealth managers, investment counselors and stock brokers. '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 whole generation of investors. And if you go back further, you will find the same lesson learned by their fathers...and even their grandfathers. Since the end of WWII, 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 alzheimers...after senile dementia and adult diapers...we will recite it on our death beds: "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 that the darkest night will always be followed by a bright dawn - always has!

And always will. At least, until it doesn't.

What if Mr. Market is about to pull his biggest coup? What if the 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 that have now changed...and can't be repeated? What is we are now looking at highs that we will never again see in our lifetimes?

Of course, what we don't know what the future is encyclopedic. But wouldn't it be a nice trick on Mr. Market's part?

After WWII the US had the world's largest economy - by far - and unlike its rivals in Europe, it was still intact. The soldiers 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. WWII vets are dying at the rate of about 1,000 a day. And their children are retiring...at 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. 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 post-war period. It is a whole different ballgame. We may never again in our lifetimes see stocks so high.

Stay tuned...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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