We are within a few days of the twelfth anniversary of the NASDAQ peak. Some readers will remember how the stock market suddenly dominated the national psyche. All of a sudden, millenial fervor mixed with recurring stock market surges that supported the idea that we were #1. U-S-A all the way and that sort of sentiment. (“The end of history”, for intellectuals.) It was a New Era, so it was claimed. Old economic ideas such as generating cash profits, and even generating sales, were so last century/last millenium. The 2000s would be different. It was time for new thinking. Enterprises of great pith and moment sprang from the minds of tech-savvy youngsters, so it was claimed. Proof of this was the widely-trumpeted ascent of tech-media-telecom stocks.
The rising stock prices were held up as evidence, if not proof, of America’s success. That aggregate corporate profits were no longer rising was not publicized. It was bubble-nomics, and it garnered many true believers who could not possibly have the knowledge to understand what was really going on: inflation being reflected in stock prices.
That the then-powers-that-be seized upon rising stocks to justify their policies is nothing new. This appears to be part of the woof and warp of the American system (it is not that way in many places in Old Europe).
Thus with that point made, I want to quote the famous verse from “The Graduate”:
Where have you gone, Joe DiMaggio
A nation turns its lonely eyes to you (Woo, woo, woo)
What’s that you say, Mrs. Robinson
Joltin’ Joe has left and gone away
(Hey, hey, hey…hey, hey, hey)
What does the “Yankee Clipper”, aka Joe Dimaggio, have to do with today’s stock market?
Here is what Paul Simon, the lyricist for the song quoted above (“Mrs. Robinson”), explained in 1999:
Simon … explained that the line was meant as a sincere tribute to DiMaggio’s unpretentious heroic stature, in a time when popular culture magnifies and distorts how we perceive our heroes. He further reflected: “In these days of Presidential transgressions and apologies and prime-time interviews about private sexual matters, we grieve for Joe DiMaggio and mourn the loss of his grace and dignity, his fierce sense of privacy, his fidelity to the memory of his wife and the power of his silence.” Simon subsequently performed “Mrs. Robinson” at Yankee Stadium in DiMaggio’s honor the month after his death.
Americans now have much more to be dispirited about than private Presidential matters, or the Viet Nam era concerns that were on Simon’s mind when the song came out in the late 1960s. Simon’s concerns as of 1999 seem trivial now. Since the millenium fervor discussed above, the country has endured a decade and more of economic stagnation, un-won wars, TSA groping, and — you name it.
Might the authorities want to point to rising stock prices to help improve psychology? What is the easiest time-tested way for the powers that be to help achieve that goal? Inflation. They control Federal taxing and spending. They control base money supply and heavily influence the other “downstream” monetary aggregates. They can’t do everything, but I think they are doing what they think they “should” to “get the country moving again”.
Now to today’s markets. Familiar patterns of the past decade, post-2000 crash, are again seen today. Stocks are down on the futures market. And once again, as in the past decade, this stock price weakness is accompanied not by a bear market in Treasurys and a bull market in commodities–that was so 1970s- but by a continuing trend toward lower interest rates and churning commodity prices. So long as this dynamic occurs at a time of rising corporate earnings and rising dividends- more or less meaning outside of a recession- the standard formulae have their stock market valuation parameters all moving in the right direction- as opposed to the usual pattern in which rising earnings have a valuation counterweight because they are associated with rising credit demands, an increasingly-less accommodative central bank, and thus rising interest rates. Thus, betting against stocks is not the same today as betting on more economic weakness.
In other words, monetary inflation has been reflected both in rising stock and rising bond prices, despite the large ongoing Federal deficits and despite the general economic troubles in the U.S.
This trend has surprised many. It is counter-intuitive. The technician Louise Yamada has pointed out that even before the Great Depression, prior periods of interest rate minima have taken a good long while to run their course. This cannot continue forever, one would think, but who can say where there is an end of it?
The trend is said to be your friend until it ends. Of the three major asset classes I follow, it is now stocks that have gone nowhere for over a decade. They may continue to go nowhere for another decade, just as gold worked off its 1979-80 exuberance by the early 1990s but that continued dropping for another decade before reversing. If a new recession (within the greater depression) begins now, I would expect another stock market crash, perhaps another 50% down for stocks. But on a multi-year and even multi-decade basis, high quality companies at the “correct” prices finally have enough fundamental underlying value and theoretical future earnings power in nominal currency units to be sound investments compared with the paltry yields on most high quality long-term bonds and thus now compete with gold, Treasurys and muni bonds in my mind as places to which capital may be allocated in the future.
Financial markets swing like pendulums do.