A Little Bit of History - Repeating?
The previous Big Picture column provided data to show that stocks are as
cheap on a relative basis as they have been for the entire thirty-plus years of
your author's career. There are reasons for this. Everyone "knows"
that stocks are a risky investment and that economic and global conditions will
limit stock gains in the years ahead. Just like in 1979.
The View from 1979
When I first became employed in the financial markets in 1979, the conventional
wisdom was overwhelming -- everyone "knew" that only fools owned stocks.
After all, stocks had been flat for about 15 years. The volatility was
clearly not worth the limited upside.
Even worse, economic and geopolitical conditions were downright scary.
Here is a brief review of how the world looked in 1979 from the financial market
First - the unquestioned economic "truths" as seen in 1979:
1) Inflation was intractable, due in large part to expectations of inflation.
2) Interest rates would never drop back to historical levels, but instead would,
with inflation, after occasional declines, start upward again from a higher
3) The U.S. economy could not compete with the Japanese economy. Ever.
4) The Philips curve proved that unemployment would never drop below 6%.
5) The age of limits was upon us.
6) Capitalism and free markets were discredited and in retreat.
It is hard for those who were not working at that time to understand the
depth of pessimism about the U.S. economy.
Inflation would never be cured. Indexing everything to rising prices was
the only possible solution. Interest rates would never return to
The U.S. was destined to sell potato chips and not computer chips. Japan
would control all technology industries. The unemployment rate had become
"sticky" and middle class wages were falling.
Government-run industrial policy was necessary to make the U.S. competitive.
Comparable worth, with the government setting wage rates, was considered a
necessary policy option.
Simply put -- capitalism no longer worked and the best days for the United States
were over. Period.
Those were just the national problems.
The international problems were worse:
1) Communism was on the march and gains, even in Europe, were inexorable.
2) The coming global population explosion would cause widespread famine.
3) Developed economies would run out of oil within decades, producing an energy
crisis of unfathomable proportions.
4) Commodity prices, particularly for food, would skyrocket, due to rising
5) Environmental catastrophe was imminent.
In 1979 the Communist Party garnered support from one-third of the voters in
a number of European countries. Southeast Asia had fallen. The USSR
had invaded Afghanistan.
Communism was unstoppable. Western-style democracy was corroding at the core.
That was the good news. Far worse was the unstoppable population explosion
and the associated famines, rising commodity prices, and environmental
catastrophe that were sure to follow.
The Club of Rome's 1972 "Limits to Growth" and Paul Erlich's "Population Bomb"
pervaded not just elite thinking but popular culture as well. It was an
absolute given that there were simply too many people, and not enough output.
Global mass starvation was imminent -- and undeniable.
Of course, this also meant environmental destruction on a massive scale as well
as total depletion of environmental resources.
Your author was particularly struck by the exhortations of Ted Turner that the
world was going to run out of every last drop of oil in 25 years. This was
inarguable. Simply take the known world reserves, plot demand, and bingo
-- no more oil, no more economy, no more prosperity.
What idiot would consider buying stocks given these circumstances?
In early 1981 I engaged a stock broker. My intention was to invest in
money market funds, which were then providing extremely high yields, as well as
some bond funds.
My broker advised buying stocks, saying it was "a turkey shoot." I said,
"Stocks have been flat for 16 years. In 1965 the Dow was 900. Today,
in 1981, it is still 900."
He said, "Exactly!"
I noted the litany of problems listed above. He said, "Everything
I wish I had taken his advice to buy stocks. Granted, any purchases made
in 1981 would have been down sharply in mid-1982 as the stock market dipped
about 10% during that year. My stock broker was wrong -- for awhile.
In hindsight, that seems ridiculously trivial.
Over the 17 years from 1982 through 2000, the S&P 500 posted a compounded rate
of increase of 16.7%. The Dow soared from 900 to 11,000.
Every one of the basic economic assumptions of 1979 proved wrong.
1) Fed Chairman Paul Volcker crushed inflation. That led to a 30-year
downtrend in interest rates.
2) The expansion of venture capital and innovation centered in Silicon Valley
made the U.S. the global technology leader.
3) Communism failed and collapsed.
4) Global food yields surged (thanks to Norman Borlaug and others).
5) Fertility rates in developed countries and even in developing countries have
plunged. (For example, Mexico, Brazil, and China now have below-replacement
fertility as do almost all western countries.)
6) Oil reserve estimates and drilling productivity were consistently raised and
energy efficiency increased.
Almost no one foresaw any of these developments. Yet, these unexpected changes
supported a bull market that ran for 17 years.
Of course, now there is a whole new set of concerns.
1) Japanese-style deflation will produce a lost decade for the U.S., similar
to what happened in Japan.
2) Or, perhaps the alternative will occur -- explosive inflation due to excessive
quantitative easing and poor policy intended to inflate away government debt.
3) Aging populations in western countries that will strain existing pension
4) The growing conflict between South and North, rather than East and West.
5) Global tensions between cultures rather than capitalism and communism.
6) Imminent environmental disaster.
7) Stagnant employment and wage growth that will devastate the middle class.
8) Poorly functioning credit markets.
9) A torpid housing market.
10) Rising commodity prices.
Given these concerns, everyone once again "knows" that only an idiot would buy
What It All Means
As I noted in the previous column, the current financial market and political
environment reminds me greatly of conditions in 1979.
The specific concerns are different, but the general tone is the same -- the
focus is on the risks and not the potential rewards for stocks.
Investors are looking in the rear view mirror instead of looking ahead.
Yet, as proved true in 1979, everything will change.
As a believer in the transformative impact of human ingenuity, and as an
optimist supported by the facts of human progress even in the face of seemingly
intractable problems, I present the following possibilities.
1) New energy sources will be developed that will spur growth in developing
2) Western countries will take the necessary (and logical) steps to curb
excessive re-distribution policies from the working to the non-working elderly.
3) The Fed will extricate itself from quantitative easing just fine, and
inflation and interest rates will stabilize near historical levels.
4) Employment growth will accelerate just as it has after previous recessions.
5) The credit markets will clear in a year or two.
6) Housing demand will rebound solidly within a few years, as housing is now
more affordable on a price-to-income basis than ever before.
7) Demand shift and efficiency gains will prevent rising commodity prices from
being a major economic constraint.
Perhaps the current turmoil in the Middle East will even lead to more open
societies and reduced strains between cultures.
All of this might, at some point, start a solid long-term bull run fueled by
the inherent value now in stocks.
The stock market didn't rally right away in 1979, or even 1981. It took a
while for investors to become comfortable with stocks again. The same
might apply today.
Nevertheless, particularly for young investors with a long-term horizon, the
inherent value in stocks is intriguing. I missed a huge bull run in the
1980s and 1990s. Current conditions remind me a lot of those early days
and make me think.
Heck, sometimes I step back, look at world-class brands selling at earnings
yields of 8% to 10%, and think, "It's a turkey shoot."