As everyone knows, over time equities will always outperform bonds. The downside is that shares are also a good sight more volatile, so that sometimes there are quite prolonged periods when they seriously underperform. Two important studies published this week – the latest Credit Suisse Global Investment Returns Year Book and the annual Barclays Capital Equity Gilt Study – provide ample graphic illustration of these trends. … A thousand dollars invested in US equities in 1900 would today be worth $727,000, according to the Credit Suisse study. These numbers are adjusted for inflation, so that's a fabulous real rate of return of 6.2 per cent. Bonds and bills don't come remotely close… The over-riding message from both studies seems to be buy equities and dump sovereign debt. If this seems to be a statement of the bleedin' obvious, it is at least nice to know it is supported by the historical data. It's not just gut instinct. – UK Telegraph
Dominant Social Theme: Hold onto your stocks to grow rich.
Free-Market Analysis: Are stocks the only place to be long-term? We don't think so. The Bell is on record as pointing out that the stock markets of the 20th century were highly influenced by central banking money production and were in a sense a "scam" because it was fiat money printed by Western governments that inflated them. Without the tremendous booms and busts generated by central bank money printing, the stock market would probably be of far less interest to many investors. Not only that, but in a non-fiat, non central banking economy (one likely with a diminished equity market), honest money (gold and silver) would tend to gain value over the course of a person's life because technology would make most purchases less expensive.
Central bank money printing inflates markets (especially American markets) to ludicrous levels before the inevitable collapse takes place. It has happened over and over again. In the late 1960s, the "nifty fifty" inflated and then collapsed, leading to the ruinous 1970s. In the later 1980s, the stock market roared again and then crashed in October 1987. In the late 1990s, technology stocks found favor and 20-something millionaires were minted before the market thudded to the ground.
Public interest is inevitably stimulated by the great amounts of money that can be made during an inflationary fiat-money boom, and this is one of the reasons that stock markets have flourished. But just because people invest in equity markets and reap gains during certain parts of the business cycle does not mean that stock markets are in any sense a mechanism that can predictably provide for one's retirement. In fact, we would argue that buy and hold strategies are merely massaged, numerical promotions intended to fool people into thinking markets are something they are not. Here's Jeremy Warner, the author of the above article, on the doubts he has about the studies he's mentioning (and generally lauding):
I have to admit to being faintly suspicious of these [Credit Suisse] numbers, in that by the authors' own admission, virtually all this return comes from reinvested dividends. The gain is derived from the compound interest effect, not capital growth. In practice, dividend income is rarely all reinvested in this manner and in any case tends to get eroded by tax and other deductions. I also question whether these long term assessments of the return on equities fully take into account corporate insolvencies, where all capital is wiped out. Certainly stock market indices tend not to. They are better at capturing the upside of equities than the downside. When a company goes bust, it will merely be discarded and replaced by another which does have value.
While equity numbers are often massaged by the broker-dealers that issue the studies celebrating the magic of the stock market, there are other reasons to be wary of the buy-and-hold argument. The main one is that stock markets (certainly the American stock market) can plunge down and remain down for years. Or just as bad, the market may plunge, reverse course and then plunge again. While a year or two may not be a lengthy period of time to wait out a reversal, five or ten years can constitute (literally) a lifetime for older people and retirees.
From our point of view, one of the best ways to play stock markets is to observe business cycles and to try to get into the market before a central banking surge of fiat money inflates them – or certain sectors anyway. The trouble with this strategy is that it is hard to tell when a fiat-money speculative surge is taking place. Those closer to the central banking spigot – Wall Street and London's City, etc. – have a better sense of what is actually taking place, which is why private bankers can make so much money early on when the general public is still ignorant of the turning cycle.
In the 21st century, we believe that business cycle investing – to the degree that it ever worked for the private investor – is going to be increasingly problematic. This is because the entire mercantilistic central banking economy is beginning to break down. The Internet itself is putting tremendous pressure on central banking as a dominant social theme and as a result, the predictable ebb and surge of equity markets may be disrupted. Certainly, if the Federal Reserve itself collapsed or if central banking worldwide becomes a public venue only then stock markets will behave differently in our opinion.
Leaving aside stock market investing in particular, it is the point of view of the Bell that the most efficient and valid 21st century investment paradigm is the one that follows the dominant social themes of the elite with an eye toward determining their success. Within this context, of course, business cycle investing still has its place. Physical precious metals, for instance, ran up in the first decade of the 2000s because of the turning of the business cycle – and precious metals securities may be the next big risers. But today's investors will still have to struggle with the success or failure of the elite's dominant social themes. As the Internet continually exposes the elite's promotional machinations, its memes begin to struggle and fail. This no doubt makes the elite increasingly desperate – leading to unpredictable actions that can have a positive or negative effect on investors' portfolios. The next ten years should indeed offer "interesting times."