海角大神

Market rally like the 1970s?

In the 1970s, a bear market was disguised by a series of market rallies. Some think a similar phenomenon might be occurring now.

02/17/10 London, England 鈥� Yesterday鈥檚 big move in the Dow throws us back to our customary position 鈥� uncertainty, bordering on da-daism. The Dow rose 169 points yesterday. Gold shot up $29 to $1119.

鈥淚 think, therefore I am,鈥� said Rene Descartes. How did he know he thought? And what if he thought he wasn鈥檛? Would he not be? He should have tried following the stock market! It would have improved his philosophy. 鈥淚 think I think,鈥� he would have emended his famous quotation. 鈥淏ut maybe I don鈥檛鈥︹��

Yesterday morning we were uncertain about the direction of the stock market. By evening, we weren鈥檛 so sure鈥� We thought the markets were headed down. But yesterday鈥檚 strong showing puts our hypothesis in doubt.

Why should stocks go down? Because they鈥檙e-priced for a strong recovery. But we鈥檙e not getting a strong recovery. We鈥檙e not getting any recovery at all. Investors were bound to notice, sooner or later.

A new index of the trucking industry 鈥� based on how often they fuel up their big rigs 鈥� fell 37% in January, from a big rise in December. Neither unemployment nor housing show any sign of real improvement.

Greece is on the edge of default. China sits on the Great Wall like Humpty Dumpty鈥�threatening to fall off at any moment.

And yet鈥�there is still no big sell-off in the stock market. Why?

Our old friends Mary Anne and Pam Aden recently suggested that this market was like the period in the 鈥�70s when a bear market had already begun 鈥� years before 鈥� but which was marked by a couple of major rallies. The rallies lasted about 17 months each. And each time, the Dow approached its previous high.

Hmmm鈥�maybe they鈥檙e right. This rally could go all the way to the summer.

Let鈥檚 put the all-time high of the US stock market at January 2000. The Dow had gone up about 11 times since its low in 1982. Then came the bear market. First, the Dow got whacked in 2001. And the government came in with the largest stimulus package the world had ever seen. That brought about a rally鈥�a large rally鈥�that took the Dow over 14,000 鈥� well over the previous high. Even so, if you adjust the Dow for inflation it made no real progress. And then, in 2007, the Dow got whacked again. This brought the Dow down below 7,000, reaching its low point last March. Since then, stocks have been rebounding.

A typical bounce 鈥� if anything is typical 鈥� takes a few months and recovers about half of what was lost. This bounce is typical in that it recovered about half of what was lost. But it has gone on for much longer 鈥� like the big bounces of the 鈥�70s.

How did the 鈥�70s period end? Inflation increased and the Dow sank. It didn鈥檛 hit its final low until August 1982. But at that point, stocks were undeniably cheap. You could buy the Dow for about 5 times earnings.

Will we relive the 鈥�70s?

Passing through the airport in Washington, we noticed a bar. It was named 鈥淗arry鈥檚 Bar鈥� or something like that. What caught our eye was the d茅cor. It had beige stone on the walls鈥�greens and browns鈥�and sleek wood paneling. Just like the 鈥�70s鈥�

And then, we noticed. Elizabeth had on a new outfit. There was something familiar about it. A flouncy sweater鈥�jeans flared out at the pant leg鈥�

鈥淵es, the 鈥�70s are back in style,鈥� she explained.

Some would say that Barack Obama is another throwback 鈥� to Jimmy Carter. He seems indecisive鈥�and aloof from the people. He seems destined to be a one-term president too.

The politicos in Washington regard Carter as a failure. Yet, to us, he is still a hero. He was the only presidential candidate your editor ever voted for. And he turned out to be one of America鈥檚 greatest presidents. He didn鈥檛 push the nation to war or to bankruptcy. He left Washington and the nation more or less as he found them. What more can you ask for?

But Mr. Obama is no Jimmy Carter. On Obama鈥檚 watch the nation will take on about $5 trillion in extra debt. While Carter left the nation in no worse condition than it was when he took over the helm in 1977, Obama will leave it much worse off.

Of course, his idea that energy conservation was the 鈥渕oral equivalent of war鈥� was silly. But at least it was mostly harmless.

Besides, Jimmy Carter displayed enormous personal courage. First, he did a remarkable thing 鈥� he actually cancelled a pay raise for the military. Then, in 1979, Carter was fishing in Plains, GA, when his presidential boat was attacked by a giant, mad 鈥榮wamp rabbit鈥� that tried to board without permission. Alone and unarmed, the president beat off the invader with an oar.

As far as we know, no other president has been similarly threatened鈥�and none has shown Carter鈥檚 sangfroid under attack.

But back to the 鈥�70s?

Probably not. The 鈥�70s period was marked by stagflation, following the Johnson Administration鈥檚 big spending and Nixon鈥檚 elimination of the gold backing for the dollar. The CPI reached as high as 14% at one point. And Paul Volcker 鈥� a Carter appointee 鈥� fought it seriously鈥�driving yields on the 10-year T-note up to 18% at one point. This was co-incident with a severe recession, and it got the job done. It turned around the bond market, the stock market, and the economy. The stage was set for an 18-year boom.

Today, inflation is not the immediate threat. Deflation is still the proximate problem. Here in England, inflation rates are going up. The papers whine that Britain鈥檚 middle-class is caught in a vise 鈥� between rising living costs and a punky economy. And sooner or later, inflation will be a major problem again 鈥� for Britain and America. Pundits argue about whether it will be sooner or later.

We don鈥檛 know. But our guess 鈥� and it is only a guess 鈥� is that the process of deflation, deleveraging, and depression has only just begun. The problems 鈥� too much debt, too many bad investments, too much money badly allocated 鈥� that existed before the crisis of 鈥�07-鈥�09 have not been corrected. There are still millions of people in houses that they can鈥檛 afford. There are still millions of mortgages for more than the houses are worth. There are still trillions of dollars at risk鈥�still waiting to be worked out, written off, or inflated away.

The major contribution of the Bush/Obama administrations has been to add to these credit mistakes with trillions more in federal debt. That, too, will have to be reckoned with. But now there is Ben Bernanke at the Fed, not Paul Volcker. Now we are dealing with deflation (we think), not inflation. And now we have total official US debt 10 times as great as it was when Carter left office鈥�and 3 times as much in terms of GDP.

What can we expect? Well, here鈥檚 one thing we feel fairly sure of: ahead lies a crisis much worse that the recession/bear market of the early 鈥�80s.

What is wrong with these New York Times columnists? David Brooks is a smarter version of Thomas Friedman鈥�which is to say, he is more thoughtful. But his thoughts seem to run into similar dead ends. He notes that more men in America are finding it difficult to be the breadwinners of their families. Women now get more college degrees than men. And women typically work in industries that are not suffering as much as construction and manufacturing, where men work. Result: men are out of work and out of money. And who wants to marry a man with no work and no money? So, men end up being lonely too.

Naturally, Brooks has a solution: 鈥渨e need to redefine masculinity, creating an image that encourages teenage boys to stay in school and older men to pursue service jobs.鈥�

That鈥檚 right. 鈥淲e鈥� need to do that.

And this too: 鈥渟omebody has to provide institutions for unaffiliated 24-year-olds.鈥�

Don鈥檛 worry. Someone will. Someone will give them black shirts. And set them to marching in the streets, beating up 鈥榗lass enemies.鈥� Someone will do something鈥�and make the situation worse.

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