Saturday, September 12, 2009

Times are a Changing

Hello All

I wanted to go back in time today and look at the S&P since 1960:


My Take:

I just wanted to highlight the insanity of the markets since 1982. There are a few things to take notice of here.

First of all, investing in stocks since 1999 has been a disastrous investment strategy. The S&P sat at 1500 back then. It sits at 1042 today.

If you had simply placed your money in a CD you would have killed Wall St's bubble machine in terms of ROI.

I find the US's obsession with the stock market to be very fascinating. I mean for the last 10 years this country has gotten it's ass kicked by the thieves on Wall St and yet we keep coming back for more.

The bounce since March proves that we have not learned out lesson. I can't help but ask why we haven't? What has Wall St really done for you and your nest egg over the past 10 years other than send you to the poor house?

The 25 year bull run has hypnotized this nation into thinking the stock market will lead to riches when you retire. Historically, this simply hasn't been the case. Take a look above at the 20 years preceding 1982 bull run. Stocks went nowhere!

It's time for this nation to wake up and realize that bubble making machine on Wall St does not lead to riches. After such an enourmous rise, it's easy to see how this nation was mesmerized by the bull run since 1982.

However, history has shown us that secular bull markets are almost always followed by secular bear markets. These bear markets are needed in order to wipout the excesses of the previous bull. What the government is doing right now is preventing the bear from doing its work of "cleansing" the markets.

Once this cleansing is completed, the recovery can begin. The government's approach of "bailing out America" is doing nothing but preventing this process from occuring.

There will be no recovery as long as the Feds take this approach. The only only growth we will see as a result of this stupity will be in the form of taxpayer debt.

The reality here is this bull run was fueled by nothing other than cheap money. The easy money game is now over because we have borrowed as much easy many as humanly possible. It's now time to pay the piper and pay off the massive debts that we have run up over the past 30 years.

Take a serious look at the chart above. The S&P rose 15 fold until the collapse in 2008. The meteoric rise looks almost ridiculous.

I mean come on folks. Fundamentally did the economy really grow that much from 1982-2008? Consumption is what drives 70% of our economy. Did incomes rise 15 fold since 1982? Hell no! I can remember union steel workers in Pittsburgh making 70k a year back in the 1970's and the S&P was only at 100 back then! Remember folks, without rising wages in a consumption economy, its pretty tough to have continued growth.

Let me also note that a lot of the growth that was seen in the economy over the past couple decades was in the financial markets where debt was traded back and forth. This game is now gone too. The securitization markets have been essentially shut down except for government backed paper.

Now should we see some growth as the population of this country increases? Of course, but stocks have more than priced this in.

So how did we get here? It's pretty simple:

Our increased consumption via easy access to cheap money, greed, and an obsession with stocks are what pushed the stock market to such insane values. We have basically borrowed ourselves into oblivion and consumed as much as humanly possible. Stocks rose to unsustainable values as a result.

The Bottom Line

The days of easy money are gone folks. Banks are reducing the availability to credit. The word RISK actually means something on Wall St these days.

As a result, money will get much more expensive and I predict interest rates will rise as the world begins to walk away from our treasuries. Like Bill Gross from PIMCO explained: This is a new world and we need to adjust to this new reality.

Now am I saying you should avoid the stock market over the long term? Of course not. However, I think it should be a much smaller piece of your portfolio moving forward.

Diversification is a must as we all adjust to this new world.

7 comments:

getyourselfconnected said...

Jeff,
Great chart indeed. Using my meager charting skills I would project from 1982 to now, if a series of "regular" higher highs were made, the S&P should be at around 500-600. Pretty funny. I am sure being 100% in stocks is the right way to go, I just heard it this morning on the FOX Business block, so it must be true.

The last thread is still live with football talk, love it. I will have up a short opening weekend post in a bit.

Jeff said...

Get

I think it will be considered to be a success if it only drops to 500-600.

Lets hope it only gets that bad.

Thats funny about Fox. They will be screaming "buy buy buy" all the way to the bottom.

Anonymous said...

when will it stop ?
when it does it ain't going to be pretty

Tom said...

Hi Jeff
I can't resist asking a stupid question, so what can one invest in now, where their capital is protected but one can still get some interest?
Tom

jeff said...

Anon

I think it stops when the bond market says "no more spending" by taking yields higher.

This could happen in a variety of ways. The world stops buying our debt and yields would soar. The bond vigalantes could also appear and selloff treasuries which of course also takes yields higher.

Once borrowing costs rise, the government will immediately shut this sham down because the economy will be destroyed if mortgage rates rise to 10%.

jeff said...

Tom

It's tough right now.

Anything that has a yield also has fairly high risk.

Long term munies pay but inflation is a huge risk.

I think you need to focus on capital preservation versus return at this point.

Once this debt bubble bursts and things adjust back to historical norms there will be nice opportunites for good returns.

If we slash spending as a result of higher yields on treasuries that will be a nice place to go.

Many made fortunes in the '80's by just parking their money in treasurues that were paying huge yields.

Just be patient. Right now just focus on preservation.

Best

Tom said...

Thanks Jeff, nice and clear.
Tom