Guest Post: OMG! Not Another Comparison Chart

Tyler Durden's picture

Submitted by Lance Roberts of STA Wealth Management,

Enough with the comparison charts already. The current stock market cycle has been compared to everything from the 1920's, 70's, 90's, you name it.  I will readily agree that, in all the comparisons, the price patterns are similar, however, correlation is not causation.  What is ALWAYS left out of the conversation are the fundamental underpinnings that either supported or impeded those previous market cycles as compared to today.

Today, Business Insider produced the following chart and commentary by Jeff Saut:

In his new weekly Investment Strategy comment, Saut notes that these things work in both directions. Here's Saut:


"Accordingly, the alleged pundits that called for a “crash” four weeks ago have, at least so far, also been proven wrong, which I discussed when dissecting their comparison chart to 1929 showing that when comparing apples-to-apples the correlation totally breaks down (see chart 1 and 2). In fact, as proof that you can make ratio charts do just about anything you want, take a look at chart 3 that suggests this secular bull market has another 300% to 400% left on the upside."


There are two major issues with that statement.  First, Business Insider extracted selected verbiage which makes it seem as though Jeff Saut is suggesting that the markets have 300-400% more upside to go.  That is not exactly the case.  Below is actually what Jeff Saut wrote:

"A few weeks ago it was the correlation to the 1929 stock market rally that led to the ’29 crash that made the rounds. I wrote about that, noting that the folks making said comparison were using ratio-adjusted charts, which can make the charts show just about anything you want them to. The same thing happened with Japan’s Nikkei Index in the early 1990s and that also proved to be wrong. Accordingly, the alleged pundits that called for a 'crash' four weeks ago have, at least so far, also been proven wrong, which I discussed when dissecting their comparison chart to 1929 showing that when comparing apples-to-apples the correlation totally breaks down. In fact, as proof that you can make ratio charts do just about anything you want, take a look at that suggests this secular bull market has another 300% to 400% left on the upside."

The point Jeff was trying to make is that you can take any multiple of data series, and with the right manipulation, you can torture the data into saying whatever you want.  As the old saying goes:

"There are three types of lies:  Lies, Damned Lies and Statistics."

Secondly, and much more important, is that while it is true that history does "rhyme", it does not repeat.  As I stated in the opening, there are specific fundamental underpinnings that supported the rampant secular bull markets that followed the major secular bear market lows of 1942 and 1974 which simply do not exist, as of yet, today.

One of the primary drivers that assisted in ending the "Great Depression" was the massive Government spending ramp, roughly 125% of GDP that was used to support WWII.  The surges in industrial production to support the war led to increased employment as women entered the work force while husbands, brothers and fathers were deployed overseas.  However, what drove the secular bull market of the 50's and 60's was "Johnny" returning home from war.  For years, everything had been rationed for the war effort, now the focus turned back to building families, homes and lives which lead to increased consumption as "pent up demand" was met.  However, more importantly, the United States became the industrial manufacturing powerhouse of the world.  With Europe, Japan and Russia in ruins following the war, the U.S. produced and shipped goods and products overseas for the rebuilding of war torn countries.  Government debt fell to historically low levels, household debt remained modest relative to incomes and personal savings rates were high which led to productive investment.  Even as interest rates rose, economic growth continued to rise giving a broad lift to prosperity.

This is something that I discussed at length in "Correcting Some Misconceptions Of A New Secular Bull Market:"

"The United States became the manufacturing center of the industrialized world as we assisted in the rebuilding of Germany, Britain, France and Japan.  That is no longer the case today as much of our industrial manufacturing has been outsourced to other countries for lower costs.  The chart below shows interest rates overlaid against the annual changes in economic growth."


The secular bull market of 80's and 90's is also something that we are unlikely to witness again in our lifetimes.  Unlike the secular boom of the 50's which was driven by "healthy" consumption, the boom of the 80's and 90's was an unhealthy "debt driven" demand cycle which was fostered by an era of falling interest rates, inflation and financial deregulation.   As I stated in "Past Is Prologue:"

"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:


1) Inflation and interest rates were high and falling which boosted corporate profitability.

2) 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.")

3) Large foreign net inflows to chase the "tech boom" drove prices to extreme levels.

4) The mirage of consumer wealth, driven by declining inflation and interest rates and easy access to credit, inflated consumption, corporate profits and economic growth.

5) Corporate profits were boosted by deregulation of industries, wage suppression, outsourcing and productivity increases. 

6) Pension funding requirements and accounting standards were eased which increased corporate profits. 

7) 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 while interest rates, inflation, wages and savings rates are all at historically low levels.  This set of fundamental variables are normally seen at the end of secular bull market periods. 

Lastly, the consumer, which comprises roughly 70% of economic growth is unable significantly increase their consumption, as a percent of the economy, as the capacity to releverage to their balance sheet is no longer available.  This "deleveraging" of balance sheets by the aging baby boomers, as they move through retirement, will further exacerbate the consumption side of the economic equation.

As I have said many times in the past I am currently maintaining fully allocated portfolio models.  As a money manager, I must participate with rising markets or suffer career risk.  However, while being a "stark raving bull" going into 2014 is certainly fashionable currently; as investors, we should place our faith, and hard earned savings, into the reality of the underlying fundamentals.  As I said at the beginning of the missive, it is disingenuous to manipulate the data to support a bullish thesis. 

In my opinion, this is the wrong way to view the markets.  Participating with rising markets is the easy part. As investors, we should focus our analysis on what can go wrong.  The "glass is always half full" commentary leads investors into taking on substantially more investment risk than they realize as markets are rising.  It is the unwinding of that "risk" that leads the majority of investors to unrecoverable losses.  Most importantly, one absolutely unrecoverable commodity that is lost during mean reverting events is our most precious form of investment capital - "time."  The reality is that we will not live forever.  By allowing "greed" to drive investment decisions the eventual "mean reversion" destroys our singularly most precious form of investment capital.

On that note, it is entirely conceivable that stock prices can be driven higher through the Federal Reserve's ongoing interventions, current momentum, and excessive optimism.  However, the current economic variables, demographic trends and underlying fundamentals make it currently impossible to "replay the tape" of the 80's and 90's.  These dynamics increase the potential of a rather nasty mean reversion at some point in the future.  The good news is that it is precisely that reversion that will likely create the "set up" necessary to launch 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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dcohen's picture

Ok, so we have to wait until another 500 % until we get a meaningful correction, ok, got it.

ParkAveFlasher's picture

No no, wait for two new world wars, a dust bowl, hyperinflation in central Europe, Zombie Nixon to re-open and then re-close the gold window, Vietnam, Sputnik, men on the moon, Michael Jackson's Thriller Part II, etc.

Sudden Debt's picture

if they return a 10 div. I don't care... to bad... they don't...

on a average our stocks in Europe paid a 176% div. to profits and they all loaned money to pay for it.

unsustainable? depends of the virtual reality you subscribed yourself into I guess.

And in my world... there's anger about this delayed crash and the clock is ticking.

pods's picture

Analysis pretending this is an actual "market?"


Printer beats fundamentals, well, until it doesn't.  But by then we will be worried about food, not charts.


Carl Popper's picture

I just need five more years of ponzi to be ready.

Please keep filling the punchbowl, Mr. Yellen.

dtwn's picture

Same here, need about 4-5 years to get into the career that will give me enough fiat to convert to real assets to secure my future.  Plus another 1-2 years to finally convince family/friends that shit's about to get real.  

weburke's picture

plan to sell summer of 2015. sept/oct you can short. better prep for that....meaning, buy stuff you use 6 months ahead that summer. you will save money that way, plus have it. No loss there right? you are going to use it anyway. 

skwid vacuous's picture

gay bob pisonmee says the fundermentals have turned, like a cock weasel in his bung-hole

NOTaREALmerican's picture

I'm predicting an increase in graphs.

Sudden Debt's picture

we ain't getting any younger on this one...

and the best graph to prove this is the synergie between gravity and tits...
x as time and y... for... WHY?!?!?!?!?

now that's a scarry chart...

Carl Popper's picture

Are you the guy who bought all those treasury bonds?

And what is this fascination in your country for striped shirts?

q99x2's picture

Its a new circular bull market that not even a nuclear armed 777 can knock down. You get out theie and BTFD and stop your belly-aching.

Carl Popper's picture

Circular bull. Lol.

Does it spin around and do pirouettes?

Truther's picture

I am fucking dazed..... Can't take this shit anymore. Will head out to the cabin to count my logs and milk my big bertha.

ebworthen's picture

Bonus chart (Labor force participation rate 1999-Present):

Bonus bonus chart (Percentage of population living on a farm or in rural areas):

Triple bonus chart (Corn yields per acre, notice huge spike post WWII with mechanization and petroleum based herbicides & fertilizers):


One word summary:  UNSUSTAINABLE.

Carl Popper's picture

Some contrarian thoughts. Or maybe they are mainstream. I dont even know any more.

Record tax receipts to treasury was reported in the news.

This led the last recovery from the dotcom bubble.

My haircut index shows that supercuts and sports cuts have been busier than ever before in my area. They are trying to hire new staff.

When people feel secure they get their haircut more often.

Maybe we are on the cusp of a boom?

ebworthen's picture

Peak delusion more likely.

I've had to cash out I.R.A.'s over the past couple of years, and they take 20% for the I.R.S. before I get a penny.

I still need to get a haircut now and then so I can try and get a job; unless a production of "Hair" rolls into town.

Carl Popper's picture

Well. According to neokeynrsians and expectations theory delusions create reality.

I have no more IRA's either. Long woeful tale. Except for women and haircuts and new underwear and whatever kids need I aint spending shit this year.

X_mloclaM's picture

Popper, you always were so ignorant, on real economics.

Expectations have long been accounted for, at first implicitly, but necessarily, then later formalized

Cambridge has added nothing



Now though I have analyzed Keynes's General Theory in the following pages theorem by theorem, chapter by chapter, and sometimes even sentence by sentence, to what to some readers may appear a tedious length, I have been unable to find in it a single important doctrine that is both true and original. What is original in the book is not true; and what is true is not original. In fact, as we shall find, even much that is fallacious in the book is not original, but can be found in a score of previous writers.

Blazed's picture

Fine, but then what about the USD. 

Its Only Rock N Roll's picture

Lance says he has to keep dancing while the music is playing....or HE faces career risk.  What about your clients interests Lance?  Self interest rules the day.  Clearly not acting in a fiduciary capacity...tisk tisk.

NotApplicable's picture

As any of the OPM managers around here will tell you, clients won't exit markets, but rather, look for someone else who will lie to them in a sweeter voice.

Jack4952's picture

Precisely WHAT does the U.S. produce that has any REAL value? I mean in the way of TANGIBLE goods:, food, manufactured goods, etc.?

Sure, the "service sector" is fine - I was part of it myself as a physician. But the most I can boast about my work is that I may have helped others prolong their lives so that THEY could produce some additional tangible goods. If EVERYONE - as in everyone in the entire world - worked in the "service sector", would we not all STARVE?

Midnight Rider's picture

"The good news is that it is precisely that reversion that will likely create the "set up" necessary to launch the next great secular bull market."


I'm beginning to think rather we'll end up in a never ending massive trading range until one of the future bubbles get's big enough to implode the entire financial system.

phijammaslamma's picture


It's pointless to compare US stock indices to 1970s, 1950s, 1930s, etc.   Corporations are becoming less connected to any one country with globalized workforce, global sales, tax avoidance, etc.   The biggest factor right now is the 0% interest rates.  Companies are borrowing cheap $$ to buyback stock, speculators are using cheap $ to play stocks, lots of construction/production is getting built with cheap $.   Equities are the only game left in town as most other assets like real estate, bonds, treasuries, collectibles, are even more mispriced.  So, I don't blame anyone going max long equities, esp. using OPM.  Global corporations are actually very good long-term investments, esp. those that have figure out how to avoid paying any taxes;  Your investment will effectively continue to grow taxfree until you sell.

In 2000, short-term rates were 5%+, corporate rates were higher, and yet we still had a stock bubble which didn't end until it exhausted itself in a huge blowoff from Nasdaq 3000 to 5000 in three months.

Short-term rates should be 2% or 3% at least, but the FOMC has artfully deflected attention from interest rates to tapering the QE in $10 BLN increments.   I'm looking for the Nasdaq 5000 new all-time highs sometime soon since the Federal Reserve is going to keep the money spigot on full blast until something gets out of control, e.g. inflation or US treasury prices collapse.  

Shyysiryxius's picture

Just bought another 1kg Ag from Adelaide Exchange :)


Bring it...

X_mloclaM's picture

One of the primary drivers that assisted in ending the "Great Depression" was the massive Government spending ramp, roughly 125% of GDP that was used to support WWII.

this prolonged the depression, and drained the US, who would have healed long prior, with far greater outcomes UNSEEN

X_mloclaM's picture

Lance, u still pro Dodd-Frank centralization and taxpayer-backed clearing of derivatives risk---THE money trust legislation of the new century?