From today's WSJ, comes this (amusing) article about the past decade: It's the worst equity performance in nearly 2 centuries. Why do I say amusing? Because despite what many fools … were claiming in the 1990s, stocks can only gain so much relative to earnings. Sure, other factors like population growth, economic expansion, productivity gains, all matter on the margins, but the bottom line is Earnings. But over the long haul, there is only so far you can run ahead of historical median rates of return. The current horrific decade lost half a percent each year on average versus average annual returns of about 10-12% over the past century. Why? This under-performance is payback for the massive gains in the salad days of the late 1990s. – The Insider
Dominant Social Theme: Stocks will rebound.
Free-Market Analysis: An article in the Wall Street Journal has attracted a lot of attention by claiming that the past decade for stocks were the worst decade ever. The above article cites the WSJ story and finds that it is amusing because "stocks can only gain so much relative to earnings."
We would revise these comments to the make the point that "stocks can gain only so much relative to central banking stimulation." These articles in fact – and those in and around Wall Street love statistics – are somewhat questionable in our opinion because they revert to – or reference – statistical analysis for something that is anti-statistical by its very nature, the monetary inflation of central banking.
Central bank money printing is so injurious and so pervasive that we don't see how any analysis of major stock markets can ever be seen as anything other than anomalous. What those who keep statistics are doing, in our opinion, is tracking the capricious nature with which central banks inject fiat money into the economy. What exactly is valuable about that? It's a little like tracking winning tickets in a lottery. You can end up with a lot of data, but much of it is gobbledygook (in our humble opinion anyway).
Examine the WSJ article a bit more closely. It claims its analysis has gone back 200 years, which is when "reliable" statistics began being kept. But even absent central banking (in the US anyway) these reliable statistics were based on an American auction-style bidding process for equities that was modeled on the French equity auctions. Stocks were bid up only at certain times during the day. In fact, it wasn't until after the War Between the States (or Civil War) in America that a transition to intra-day trading of securities began in earnest.
It was the NYSE that led the way by consolidating about 15 stock exchanges in the New York City area and then, finally, the "uptown boys" that were driving the NYSE out of business with real-time trading. In order to consummate the deal, the NYSE basically bribed the uptown boys with certain security franchises – and thus the NYSE specialist was born.
This history is especially amusing in light of the evolution of trading presented by such papers as the British Economist newspaper, which once repeated the hoary tale that the specialist post was generated by a broker who busted his leg and could only stand in one place. No, the NYSE, according to various responsible histories, used the single-stock franchise as a bribe to generate a merger that allowed it to stay in business. All the decades-long talk and studies – and statistics – throughout the 20th century about how specialists played a unique role in "stabilizing" the market were just so much embellishment on an initial business deal. (Another example of how statistical, academic arguments may have no resemblance to reality.)
And so it goes. Stocks have always been subject to marketing campaigns. This is not to say that people do not make huge money in the stock market. In fact, from our point of view stock markets are perfectly rational and serve a good purpose, generally. But the purpose has been perverted and the rational nature corrupted by endless central banking money stimulation.
Thus it is, the only way to understand the stock market – and to invest in it – is either to use arcane technical tools (that demand a professional's patience) or to internalize Austrian economics and the subsequent conclusion that business-cycle investing could be practical and even profitable.
What is business-cycle investing? It is an approach that recognizes that stocks go up and down depending on the stimulation of a relevant central bank, and that the stimulation tends to be cyclical and affect both interest rates and the money supply in a predictable pattern. It is predicated on real-life situations and can be borne out by them in our opinion as well. Just as it was clear that gold was going to have a massive move at the beginning of this decade, for example, so it was probably clear that American stocks were going to have a massive move coming out of the 1970s – another central-bank depressionary decade.
We recall, by the way, that Business Week published its famous cover story about the death of the American stock market at the beginning of the 1980s before the stock market started moving up fast – and didn't stop until 1987. Of course today Business Week's asking price is apparently a single US dollar (depreciating) and that's just the point. You won't ever get either honesty or common sense from the American (or generally Western) mainstream media when it comes to investing.
You can look in vain for articles about business-cycle investing in the mainstream Western media. Yes, there are books about it but journalism on the whole is lacking. An article in a mainstream publication beginning with "central banks cause tremendous booms and busts and investors ought to place funds in various instruments according to central-bank influenced money cycles" simply doesn't exist – at least not one with the requisite frankness in our opinion.
In order to truly understand the hype surrounding equity investing it is probably helpful to scrutinize "inflation adjusted" equity graphs. Such graphs (depending on the accuracy of the "adjustment") do reveal some interesting anomalies. A "cycle pro analysis" by Steven J Williams, for instance, seems to show us that from around 1922 to 1982, the US stock market (Dow Jones) gained perhaps 500 points – from 500 to about 1,000 (that's in a 60 year period).
Of course we are picking a low-to-low data point, but still that is a remarkable number – and not necessarily in a good sense. And where are we now? Well, currently we are at an inflation-adjusted 5,000 – so from 1922 to 2010, the stock market has moved from 500 to 5,000, the chart would seem to show. (Where we're headed from here is anyone's guess.)
Not long ago, the stock market was apparently at an inflation-adjusted 12,000, according to the chart, and thus the lesson is relearned that "timing is all." But, in fact, most people have no idea how to time the stock market – as it is indeed a most difficult process. The only way that one has a chance in our opinion – and admittedly it is a thin one – is to try to figure out how over-stimulated equity markets are and move money in and out accordingly. Of course one can always buy-and-hold. (Good luck with that.)
So what are the potential solutions? There's technical investing (perhaps combined with other kinds of observations) but that takes a lot of time and dedication. A simpler solution occurs to us: Business cycle investing. Yes, if one is willing to attempt it with the correct data inputs and on a regular basis, business cycle investing may be one way to cut some of the risks that one ordinarily takes in a fiat-money economy employing a "buy-and-hold" strategy.
It's not easy to figure out when stocks are overbought and gold is oversold and vice-versa, but one can probably come up with a historical ratio of gold-versus-stocks based on the past 40 years anyway (since gold was de-linked from money) that would give one at least an idea of where the dollar stood in relation to the yellow metal. Perhaps this could serve as a variant of the age-old gold/silver ratio. Of course, the best thing would in our estimation be a return to a private gold/silver standard. At the rate fiat money is going, that may indeed happen.
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