“If ifs were a fifth, we’d all be drunk.”
– Unknown
It looks like investors are breaking out the party hats.
In China, Bloomberg reports that nearly half a million new trading accounts were opened in the past week. In the United States, the bulls are cheering the Dow’s retaking of the 9,000 line (presuming they can hold it).
The divergence of views as to what lies ahead for the global economy – i.e. the “spread” between bullish and bearish thinking – is now as wide as it has ever been. Both sides agree that things still look terrible in the here and now. The difference lies in future expectations.
The bulls seem convinced that a full-stop, no-holds-barred global economic recovery is at hand. China, playing the role of Santa Claus, is set to lead the merry way.
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Meanwhile, as far as the bears are concerned, the bulls are no longer smoking “green shoots” – they’ve upgraded to a crack pipe. For every shiny surface-level statistic the bulls cheer, the bears see rottenness and decay underneath.
Regardless of which side one comes down on, it seems indisputable that more than a few performance chasers have forgotten – hell, utterly abandoned – Warren Buffett’s old maxim: “Be greedy when others are fearful, and fearful when others are greedy.”
And so, to the legions of freshly minted punters willing to buy into the Shanghai A-shares market already 80% up on the year, your humble editor says “Good luck with that.”
And to those who see no problem with China’s blatant efforts to inflate a new series of real estate and credit bubbles, having pumped more than a trillion dollars worth of bank lending funds into the system thus far, one can only say “Good luck with that too.” (Apparently Beijing has some magic means of avoiding meltdown that Washington and Tokyo haven’t heard of.)
You Think It’s 1982? Really?
If the bulls want to go nuts, good for them. It takes opinions to make a market, and backing one’s opinions with money – in an intelligent or not-so-intelligent way – is what trading and investing are all about. On top of that, there are certainly some individual long-term investment names worthy of being bought in this big rush.
So that’s all well and good. Let the games continue, and we’ll see how things wash out.
Today Taipan Daily feels the need to address a particularly nutty bullish notion, though – a whispered idea that goes well beyond the scope of opinion and veers into madness. (Mad bull disease?)
This idea, or rumor, or whatever it is – which appears to have been started by an über-bullish Goldman Sachs call aimed at drawing more investors into the market at nosebleed heights – is that the current environment resembles 1982. (This would be a pretty damn big deal, if true, given that 1982 kicked off one of the greatest bull markets of all time.)
Bloomberg has also gotten in on the act, with a recent chart of the day headlined “As Stocks Surge, 1980s Comparisons Emerge.”
To fan the flames, Bloomberg created an overlay of the March/July 2009 S&P and the Aug/Dec 1982 S&P, tweaking the calendar dates to make things look just right. As you can see, there is a “kinda sorta maybe if you squint” similarity in terms of how the squiggly lines are drawn.
No doubt this airtight case is being made by financial planning types nationwide. “You see Aunt Mabel, the orange and yellow overlap shows why you should plunge the rest of your retirement nest egg back into the market right away...”
As it turns out, your humble editor was watching Saturday morning cartoons and eating Cap’n Crunch cereal in 1982. So firsthand memories aren’t a lot to go by here. But it doesn’t take a very deep grasp of economic history to recognize that 1982 comparisons are complete bullsh—er, rather unjustified.
That Was Then, This Is Now
As of August 1982, for one, the United States had just closed the door on the most punishing period of fiscal discipline in all of recorded financial history.
Under the leadership of Paul Volcker, the Fed resolved to break the back of inflation in 1979... and they nearly broke the back of the economy in doing so.
For 33 months – almost three years straight – the Federal Reserve kept interest rates incredibly high. More than once the monthly effective Fed funds rate challenged the mind-boggling level of 20%.
In their effort to break inflation, the Volcker Fed also brought about a massive liquidation in the broad economy. Countless small businesses and debt-strapped consumers went under as a result of punishingly high interest rates.
In July of 1982, the Fed finally relented. Volcker’s high interest rates had hit the international economy hard too, and many “LDCs” (less developed countries) were threatening to implode under the weight of their debts.
Yet another major factor in 1982 was the Reagan tax cuts. In August of 1981 (a year earlier) President Ronald Reagan pushed through one of the largest tax cuts in history. This tax cut – the Economic Recovery Tax Act (ERTA) – was criticized for heavily favoring the wealthy.
Another major factor in the early 1980s was the super-strong U.S. dollar. By keeping interest rates so high for so long, the Volcker Fed had managed to draw in foreign investment capital from all over the world. The strong dollar played a role in keeping inflation down by weakening U.S. exports and lowering the cost of imports, thus putting pressure on labor and wages (particularly union wages).
Interest Rates, Taxes, Leverage and the Dollar
So now, with that very brief recap in mind, let’s reexamine the idea that 2009 looks like 1982 because of some squiggly lines on a chart.
In 1982, interest rates were just coming off the highest levels the world had ever seen. Interest rates were also just getting ready to go on a long march DOWN that would play out for decades.
In 1982, the same was true of inflation. Having slayed the dragon of inflation, the Volcker Fed set the table for a long-lasting period of “disinflation,” i.e. declining overall inflation that would again last for decades.
In 1982, tax rates had just been cut dramatically and the dollar was quite strong. This combination of lower taxes and a strong dollar favored a big boost in capital expenditure, as U.S. businesses took advantage of tax breaks to expand investment in plants and equipment.
Something else pretty major in 1982... the great multi-decade leverage boom was yet to begin. Consumers, businesses and investment banks had not yet discovered the joys of spending to the hilt on borrowed funds, or increasing their buying power dramatically through the use of prepackaged loans and exotic derivatives.
So how does all that compare to today (July 2009)? Well, let’s see:
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Interest rates hugging zero have pretty much only one place to go: UP.
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As a result of global recovery, out-of-control stimulus spending, or both, inflation has only one direction to head in: UP.
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Thanks to multitrillion-dollar bailout costs and the massive government plans tied to things like nationalized healthcare reform and climate change initiatives, tax rates on consumers and businesses are headed in one direction: UP.
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In 1982 the U.S. dollar was a juggernaut. The 1980s dollar was so strong, in fact, that in 1985 the major world players of the time – France, West Germany, Japan, Britain and the United States – had to get together and figure out how to make the dollar weaker. (This was known as the Plaza Accord.) And how is the greenback looking now, you ask? Don’t ask.
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In 1982, the great debt binge – on the part of consumers, businesses and
government – had barely just begun. Now we are on the other side, with Western consumers and Western government faced with the biggest, ugliest debt hangover the world has ever seen. Meanwhile, the massive credit creation machine – the system of levers and pulleys designed to create leverage, built over the past few decades – has blown up, leaving a vaporized smoking hole in its wake.
Kangaroo 2012
So, in other words... and pardon the raised voice if you will... the present environment looks ABSOLUTELY NOTHING LIKE 1982 WHATSOEVER.
Virtually every single factor that played a role in the launch of the epic 1982 bull market – every single one! – has not only been negated as of 2009, it has been reversed. I’m tempted to say one would have to be an economically illiterate crackhead to think otherwise, but I’ll refrain. (Oh, wait. Oops...)
To sum up, in 1982 America was fiscally fit and leverage light, having been whipped into shape over a brutal three-year period. In 2009, America is a morbidly obese, debt-addicted binge drinker curled up in the fetal position at the bottom of a stairwell.
In 1982 the incredibly epic 25-year binge was just beginning. As of 2009 it has violently ended, with the consequences still far from played out. And yet, many now want to pretend it never happened at all. (Binge, what binge? Consequences, what consequences?)
So, to all the bulls... Yep, right on guys, this environment looks just like 1982. And Captain Kangaroo is going to be the next president of the United States.
Warm Regards,
JL
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