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Past Is Prologue: Repeating The Secular Bear Of The 70's?
Submitted by Lance Roberts of STA Wealth Management,
As I was writing this past weekend's newsletter, "Some Things I Am Thinking About" (free email subscription) I touched briefly on the similarities between the current market and that of the secular bear market of the 1960's and 70's. I wanted to expand more on that thought today.
Just recently Carl Swenlin wrote:
"A secular market refers to a market trend that persists over decades. I pulled up a very long-term chart and noted that the last secular bull market began off the bear market low in 1974. The first clue we would have had that something big was brewing was when the S&P 500 Index broke out of the ragged trading range it had been in during the 1960s and 1970s.
Now note that the S&P 500 has recently broken out of a trading range that spans more than a decade."
The breakout of the trading range has been noted by many market bulls proclaiming a new secular bull market has started despite fundamental evidence to the contrary. However, is that really the case?
The chart below compares the last secular "bear" market that ran from 1963 to 1982 as compared the current cycle. Notice the chart for this previous period stops in 1973. I will show you the rest of this period in a moment.
What is important to notice, besides the very similar pattern between the two periods, is that the breakout in 1969 did not start a new bull market. It was a setup for the next major decline.
Of course, the breakout in 1972 was surely the beginning of the new bull market – right? Not so fast.
The second breakout in 1972, like the previous, was the setup for the final market dive that reset valuation levels back to historic secular bear market lows. That crash also created the necessary extreme negative in investor psychology. The 1974 bear market low is known as a "black bear market" because investors were so brutally ravaged by the crash they did not return in force until nearly two decades later when the next secular cycle was already in progress.
I also stated this past week is that are also numerous valuation and sentiment measures that do not support claims for a new secular bull market. I touched on some of these recently in "Correcting Some Misconceptions About A New Secular Bull Market" to wit:
'Secondly, the ability to have a '1982-2000 affair' is highly improbable. The 1982-2000 secular bull market cycle was driven primarily by a multiple expansion process with a beginning valuation level of 5-7x earnings and a dividend yield of 6%. Interest rates and inflation were at extremely high levels and were at the beginning of a 30-year decline which would increase profitability as production and interest rate costs fell."
I wanted to use this post to illustrate the statement above with a couple of charts. The first chart shows the secular bear market of the 60's and 70's with an overlay of valuations, dividends, interest rates and inflation.
You will notice that at the beginning of the bear market in the 60's valuations were high while everything else was low. By the end of the secular period, these factors were reversed.
The next chart shows the much beloved and hoped for, secular bull market of the 1980's and 90's.
There were several contributing factors that drove that particular secular bull market:
- Inflation and interest rates were high and falling which boosted corporate profitability.
- The extreme negative sentiment of the late 70's was finally undone by the early 90's. (At the turn of the century roughly 80% of all individual investors in the market began investing after 1990. 80% of that total started after 1995 due to the investing innovations created by the internet. The majority of these were "boomers.")
- Large foreign net inflows to chase the "tech boom" drove prices to extreme levels.
- The mirage of consumer wealth, driven by declining inflation and interest rates and easy access to credit, inflated consumption, corporate profits and economic growth.
- Corporate profits were boosted by deregulation of industries, wage suppression, outsourcing and productivity increases.
- Pension funding requirements and accounting standards were eased which increased corporate profits.
- Stock based executive compensation was grossly expanded which led to more "accounting gimmickry" to sustain stock price levels.
The dual panel chart below shows the economic fundamentals versus the S&P 500 and the change that occurred beginning in 1983. (Red dividing line)
I have also noted the expanding "megaphone" pattern in the current market as compared to that of the 60's and 70's.
Despite much hope that the current breakout of the markets is the beginning of a new secular "bull" market - the economic and fundamental variables suggest otherwise. Valuations and sentiment are at very elevated levels which is the opposite of what has been seen previously. Interest rates, inflation, wages and savings rates are all at historically low levels which are normally seen at the end of secular bull market periods.
Lastly, the consumer, the main driver of the economy, will not be able to again become a significantly larger chunk of the economy than they are today as the fundamental capacity to releverage to similar extremes is no longer available.
While stock prices can certainly be driven much higher through the Federal Reserve's ongoing interventions, the inability for the economic variables to "replay the tape" of the 80's and 90's increases the potential of a rather nasty mean reversion at some point in the future. It is precisely that reversion that will likely create the "set up" necessary to start the next great secular bull market. However, as was seen at the bottom of the market in 1974, there were few individual investors left to enjoy the beginning of that ride.
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YELL!!!!YELLEN!!! WHAT YA GONNA DO ABOUT THIS?!
Are markets rising or is currency crashing?
Is there any difference?
Why would anyone hold currency at a time when it is being openly debased?
Fundamentals for securities might be terrible, but at least they are not being diluted.
You have to allocate capital relative to other assets, not relevant to other times in history.
I can’t allocate my capital to 1974.
I have to choose the best allocation relative to other assets, whether the broader asset markets rise 30% or plunge 70%. It’s how I perform relative to other asset classes that matters, not how I perform relative to other vintages.
What was the best performing asset class for 2013? Was it liquid equities? Why? Where other asset classes being corrupted by supra-entities? Yes they were, currency and fixed income were both being eroded throughout 2013. Therefore it is prudent to allocate capital to alternative asset classes. The choices are finite.
Sometimes you just have to hold your nose and buy crap to avoid worse crap, e.g. currency.
The stock mkt is not at all correlated with the economy; probably as inverse as ever, actually. The key is that in addition to ZIRP for cheap buybacks to goose stock prices, corporations that are publicly traded generally are able to deal with compliance costs and red tape and 0bamacare whereas smaller would be competitors can't, so these big entities just consolidate more and swallow up more market share. This is not a product of free market capitalism, as this is not about economies of scale and efficiencies developed, but rather rent-seeking cronyism. Hence stocks going up, although with some of these retarded returns over the past few years that by almost any valuation metric have no basis is just as a poster was saying yesterday, float jam and short squeeze du jour and high ups just looking at finance as opposed to real growth. It's just one off rather than long term prudence, and then the execs are on their way. And again, this is not an outcome due to market problems, but rather the incentives via ZIRP and all the debt out there. Tremendous malinvestment.
Never underestimate the Fed's appetite for intervention. In the like image of her predecessor, Old Yellen will flood the markets with liquidity to buoy the S&P 500, at the first indication of the index's "numerical deflation."
Will that actually go into the index, or just into something like gold though?
Not to worry. The FED has taken over the S&P in a centralized globalist effort to kill everyone that opposes them.
I suppose if $17 Trillion in debt is considered payable; $34 Trillion will be as well.
Please, this is not the 70's, what was the outstanding debt in the 70's? Not even close motherfuckers.
Yup, and we still had a manufacturing base, T.V.'s and Toasters and all that.
Now we have $17 Trillion in debt (un-payable) and everything is made in China.
Oooops.
and everything is made in China.
And when you need to call and get information.......you get Ahmad.
IT'S THE 70'S SOUL TRAIN!! GET IN LINE!
http://youtu.be/0VN7LQpKI_o
http://www.youtube.com/watch?v=KGEZDf6LmU8
Already been there SD
USA debt about $ 300B in 1971, then more than doubled by 1980 once unhinged from the gold standard.
http://www.wisegeek.org/what-is-the-debt-of-the-united-states.htm
Yes, but trade imbalances are more important, especially now that everyone on earth is printing as fast as they can.
Fundamental variables? Enough with this bullshit! There is only 1 variable; the US Federal Reserve. They control the markets. Period. End of story. Now stop wasting so much fucking time combing through historical charts. There is no data in history that can be used for the present "markets". Learn a new language or hobby, volunteer at a shelter or food bank with all the extra time.
Zimbabwe and/or Weimar are in the history books as examples of this
type of CB intervention.Both stock markets carried on rising.
"Humans biggest failing is not learning from history".
The USD is toast, hedge accordingly.
But that was through inflation. The Fed learned in 2008 that because of 401k's and instant access to information, the stock market is a national indicator of the health of our economy for 99% of the people. The Fed is directly or indirectly forcing the markets higher to increase comsumer sentiment artificially. And it's working on most of the people and the media. It's actual manipulation versus the other examples of hyper inflation .
It's working? Less than half of the population has any sort of portfolio connected to the stock market. In addition, the real cost of this manipulation- food stamps, unemployment, disability etc. is going up much faster.
FAIL.
What I mean is that if the same people who have a job but don't own stock saw the Dow Jones drop by 10,000 points, would instantly cancel vacations, new car purchases and any thoughts of buying a new house. They may be uninformed and ignorant, but most people are living life like the good times are here forever. A massive stock market drop would change their attitudes instantly. I am not implying that the Fed master plan will be successful long term.
"but most people are living life like the good times are here forever" - Sorry, not many i know, beside many of them that are also have huge debt loads and live this way regardless of what the "markets" are doing. That which is not sustainable, will not continue, regardless. Rewarding irresponsible behavior for so long will have consequences, hedge accordingly.
If you are in the market to make money, you sometimes need to do so if you are tyring to get a timing right. On the other hand, if you are an armchair commentator, of course "it's all BS". Knowing the Fed conducts POMOs is not enough...
I thought those old secular bears were extinct.
I'll be blowed if we'll be!
Ahhh, the 70's, when women wore short shorts and went bra-less with a halter, tank or tube top yet they didn't have two spare tires around their gut, a bugling butt bursting the seams of their shorts and tattoos everywhere. Many of the Classic rock songs of today were written then too.
Today isn't so much like then in several ways.
Ahhh ..... [rips the knob off to a large collection of venerables, leading with Humble Pie - "Hot Coffee"]. The days of boundless opportunities and a respected nation being built not dismantled. Just like today .... only reversed.
The existing data sets cannot predict what is in store for this market. You would need 1,000 years of data to predict what this market is going to do. While very technical and well researched, we've left fundamentals too far behind for this to have any relevance.
The existing data sets cannot predict what is in store for this market.
The idea of drawing conclusions from charts pre 2007 is assinine. Find a chart that shows the effect of TARP, Bailout, QE1-4. Everything has changed, never before in the history of finance has trillions of fiat been dumped into a market at a time when production of value across the board is crashing.
Throw out the charts from the past.
We, all of us, are living in a fantasy, paid for with make believe fiat.
In other words, Fed's gonna have to raise rates (high) if you are going to have such a market.
You mean this period of rising interest rates will be just like the 1970's period of rising interest rates? NO SHIT. Next you'll say the sky that is blue today will also be blue tomorrow.
Good solid post...well thought out and actually contained some useful info
Thx