Scripophilist
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This is an article that I had published earlier this year.
Groovy babe, it’s like the 1960’s
Free love, loads of mind expanding hallucinogenic drugs, the Beatles, Austin powers, Nuclear Armageddon?
Well OK maybe it’s not like the sixties in that sense but maybe in others, We worry as much as we used to. We need no longer worry about Russia dumping a few megatons on us we can worry about terrorists doing it instead.
But less gloom more boom, this is very similar to the 60’s. During the sixties there was a massive technology bubble caused by a new paradigm arriving in the sector. Stocks rose to massive multiples of their real value and people rushed in to buy in case they missed out.
The catalyst for this explosion? Exciting things such as instant photography, colour television and the transistor. All taken for granted now (apart from those that have been replaced) and now a fraction of their original cost. A few years after the initial excitement at the new paradigm a lot of go-go stocks had collapsed to a fraction of their value at the peak. Sound familiar. You see it wasn’t different this time, was it?
Hot Tech Stocks of 1968 (Source www.Itulip.com)
http://www.itulip.com/compare.htm
During the recent boom in Internet stocks a poster on an Internet bulletin board recommended a book “The Money Game” (ISBN 0394721039) to me. Written in the 1960’s, it was basically a market commentary about this period and the tech boom. The parallel with the boom of the late 90’s was uncanny and despite much highlighting of the fact during the Internet bubble I was often ridiculed for dismissing the folly of it all. I took my reading of this book as a sign (as it were) that the boom in Internet stocks was about to come to an end. About three months later it did. The $10 I spent on the book was obviously a much better investment than most people make in the market at that time.
The interesting thing that occurred when I read the book is how little the market has changed. The characters in the book are still around today, the experiences and hindsight very familiar. Back then there was still the debate about fundamentals and charting, worrying about the future and panic set in whenever the market didn’t go up in a straight line.
Two chapters at the end of the book are headed by the grand section title of “Visions of the apocalypse, Can it all come tumbling down?”. The two chapters themselves are “My friend the Gnome of Zurich says a major money crisis is on its way” and “If all the half dollars have disappeared is something sinister going on?”
Despite these concerns which the author quips at, things do appear to have appreciably got better in the intervening years. Not many people can argue that at least in fiscal terms the world is happier place.
So that was history what about the future?
DOW JONES INDUSTRIAL AVERAGE Dec. 31, 1964 : 874.12
DOW JONES INDUSTRIAL AVERAGE Dec. 31, 1981 : 875.00
By all accounts that is not a big move for ten years of hard work is it? The economy must have been in a right mess between those two dates for the stock market not to have advanced in real terms.
Well strange then that during the period between these years the GDP of the U.S. rose almost fourfold, 370%. Sales of the FORTUNE 500 (a changing mix of companies, of course) rose more than six fold. And yet the Dow went exactly nowhere.
Of course, point one is that an index does not include the value of dividends. If you had a half decent yield and reinvested that your performance would have been appreciably better. But that fact aside, if the economy had grown significantly then why not the stock market?
To understand why that happened, we need to look at interest rates. These act on financial valuations the way gravity acts on a apple about to drop on Sir Issac Newton’s head, The higher the rate, the greater the downward pull. That's because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn. That is an immutable fact and one that would appear to escape buy to let landlords at the moment. So if rates rise, the prices of all other investments must adjust downward at some point, to a level that brings their expected rates of return into line.
Conversely, if interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is, “What should an investor pay today for a dollar to be received tomorrow?” This can only be determined by first looking at the risk-free interest rate.
In the 1964-81 period, there was a tremendous increase in the rates on long-term US government bonds, which moved from just over 4% at year-end 1964 to more than 15% by late 1981. That rise in rates had a huge depressing effect on the value of all investments. So there, in the tripling of interest rates, lies the major explanation of why tremendous growth in the economy was accompanied by a stock market going absolutely nowhere.
Currently the opposite has happened and across the western world Interest rates have fallen while GDP has marched ahead. It is easy to see now why the stock market valuation of companies has risen so dramatically since 1981. Any up tick in inflation or interest rates or a slowing in the growth of GDP and therefore company earnings will no doubt force investors to reassess company valuations and that of other asset classes.
Of course this is a very broad approach, if you invested in a tracker fund over the period of 1964 to 1981 you would be pretty gutted. However, many people were able to significantly outperform this by investing in good companies growing at a reasonable rate which they bought at a good price.
Therefore I suggest that the next decade will all be about stock picking, anybody who has a broad or fashionable approach is likely to be disappointed. Also if you are playing a zero sum gain or riding the market in one direction or another then that’s going to get harder too.
Of course this hypothesis relies on the fact that the currently very lax monetary policy and abnormally low interest rates wont remain the norm or improve. I don’t see that as being at all realistic. After all if interest rates were to ease further that would no doubt be a sign or more systemic problems. As far as I can see things are about as good as they could get from a stimulus viewpoint and that is fully reflected in asset prices. From here that stimulus and its effect on asset prices can probably only head in one direction.
But of course, it’s different this time isn’t it?
Groovy babe, it’s like the 1960’s
Free love, loads of mind expanding hallucinogenic drugs, the Beatles, Austin powers, Nuclear Armageddon?
Well OK maybe it’s not like the sixties in that sense but maybe in others, We worry as much as we used to. We need no longer worry about Russia dumping a few megatons on us we can worry about terrorists doing it instead.
But less gloom more boom, this is very similar to the 60’s. During the sixties there was a massive technology bubble caused by a new paradigm arriving in the sector. Stocks rose to massive multiples of their real value and people rushed in to buy in case they missed out.
The catalyst for this explosion? Exciting things such as instant photography, colour television and the transistor. All taken for granted now (apart from those that have been replaced) and now a fraction of their original cost. A few years after the initial excitement at the new paradigm a lot of go-go stocks had collapsed to a fraction of their value at the peak. Sound familiar. You see it wasn’t different this time, was it?
Hot Tech Stocks of 1968 (Source www.Itulip.com)
http://www.itulip.com/compare.htm
During the recent boom in Internet stocks a poster on an Internet bulletin board recommended a book “The Money Game” (ISBN 0394721039) to me. Written in the 1960’s, it was basically a market commentary about this period and the tech boom. The parallel with the boom of the late 90’s was uncanny and despite much highlighting of the fact during the Internet bubble I was often ridiculed for dismissing the folly of it all. I took my reading of this book as a sign (as it were) that the boom in Internet stocks was about to come to an end. About three months later it did. The $10 I spent on the book was obviously a much better investment than most people make in the market at that time.
The interesting thing that occurred when I read the book is how little the market has changed. The characters in the book are still around today, the experiences and hindsight very familiar. Back then there was still the debate about fundamentals and charting, worrying about the future and panic set in whenever the market didn’t go up in a straight line.
Two chapters at the end of the book are headed by the grand section title of “Visions of the apocalypse, Can it all come tumbling down?”. The two chapters themselves are “My friend the Gnome of Zurich says a major money crisis is on its way” and “If all the half dollars have disappeared is something sinister going on?”
Despite these concerns which the author quips at, things do appear to have appreciably got better in the intervening years. Not many people can argue that at least in fiscal terms the world is happier place.
So that was history what about the future?
DOW JONES INDUSTRIAL AVERAGE Dec. 31, 1964 : 874.12
DOW JONES INDUSTRIAL AVERAGE Dec. 31, 1981 : 875.00
By all accounts that is not a big move for ten years of hard work is it? The economy must have been in a right mess between those two dates for the stock market not to have advanced in real terms.
Well strange then that during the period between these years the GDP of the U.S. rose almost fourfold, 370%. Sales of the FORTUNE 500 (a changing mix of companies, of course) rose more than six fold. And yet the Dow went exactly nowhere.
Of course, point one is that an index does not include the value of dividends. If you had a half decent yield and reinvested that your performance would have been appreciably better. But that fact aside, if the economy had grown significantly then why not the stock market?
To understand why that happened, we need to look at interest rates. These act on financial valuations the way gravity acts on a apple about to drop on Sir Issac Newton’s head, The higher the rate, the greater the downward pull. That's because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn. That is an immutable fact and one that would appear to escape buy to let landlords at the moment. So if rates rise, the prices of all other investments must adjust downward at some point, to a level that brings their expected rates of return into line.
Conversely, if interest rates fall, the move pushes the prices of all other investments upward. The basic proposition is, “What should an investor pay today for a dollar to be received tomorrow?” This can only be determined by first looking at the risk-free interest rate.
In the 1964-81 period, there was a tremendous increase in the rates on long-term US government bonds, which moved from just over 4% at year-end 1964 to more than 15% by late 1981. That rise in rates had a huge depressing effect on the value of all investments. So there, in the tripling of interest rates, lies the major explanation of why tremendous growth in the economy was accompanied by a stock market going absolutely nowhere.
Currently the opposite has happened and across the western world Interest rates have fallen while GDP has marched ahead. It is easy to see now why the stock market valuation of companies has risen so dramatically since 1981. Any up tick in inflation or interest rates or a slowing in the growth of GDP and therefore company earnings will no doubt force investors to reassess company valuations and that of other asset classes.
Of course this is a very broad approach, if you invested in a tracker fund over the period of 1964 to 1981 you would be pretty gutted. However, many people were able to significantly outperform this by investing in good companies growing at a reasonable rate which they bought at a good price.
Therefore I suggest that the next decade will all be about stock picking, anybody who has a broad or fashionable approach is likely to be disappointed. Also if you are playing a zero sum gain or riding the market in one direction or another then that’s going to get harder too.
Of course this hypothesis relies on the fact that the currently very lax monetary policy and abnormally low interest rates wont remain the norm or improve. I don’t see that as being at all realistic. After all if interest rates were to ease further that would no doubt be a sign or more systemic problems. As far as I can see things are about as good as they could get from a stimulus viewpoint and that is fully reflected in asset prices. From here that stimulus and its effect on asset prices can probably only head in one direction.
But of course, it’s different this time isn’t it?
