Saturday, May 19, 2007

Is This 1972 Redux--or 2000? Or Some of Both?

First up: some logistics. The Readers Journal has finally been updated, and there's a wide variety of smart thinking on elites, taxes and dirt (seriously). Without healthy, living dirt, we'd all starve. And recovering soil that's been paved over is very difficult.

Click on the links to your right for commentary you won't get on namby-pamby mainstream media sites or ideologically "pure" sites that "preach to the choir." Here every thoughtful opinion is welcome--Libertarian, Republican, Democratic, Anarchist, Buddhist, Taoist, Animist, you name it. (I praised Nixon here a few days ago, and you can't get more un-PC than that.)

Reader Aaron O. quite rightly asked why I don't have an RSS feed for each full entry, and I need to mention that I've set up a "mirror site" on Blogspot which you can read in its entirety with Google Reader or equivalent. My apologies for not mentioning it sooner. I still hand-code an RSS and Atom summary, but if you prefer to see the whole enchilada, then switch to the Blogspot page, which I update daily. (Some charts are missing, as the formatting is funky. But you can easily click over here to see the charts.)

Astute reader Matt V. posed a deeply fascinating question which I'm going to swing at (and probably whiff):

While I'm writing you emails, I thought I'd bounce something off of you concerning your thoughts that we're careening toward a depression in the next decade ... Looking around I can't help but agree that these "good times" can't last forever. I'm dumbfounded how housing prices can double in a few years and everyone just accepts it as normal market forces. I keep waiting for tougher times to set in, yet somehow they have lasted without a serious recession since the 1970's. So, I'm in agreement with your writings that things aren't what they seem, and it won't last. I mean, the parallels to the 1920s is startling! However, this little voice in the back of my mind wonders if things won't turn out like anyone expects.

Here's my thought: You and I aren't the only ones thinking things will take a turn for the worst in 2011. Harry Dent thinks so (famous Bull from 1990s) based on his demographics research. So does Robert Kiyosaki (best selling author of Rich Dad/Poor Dad) with his Prophecy book based on the ERISA act. So, this gets me thinking ... if so many well-known folks are anticipating tough times ahead, then will it actually happen? Could something so obvious from a historical perspective actually occur?

Your thoughts would be appreciated.

I'm going to start my response with a chart:

As we now know, Greenspan's warning was valid. But it took three years for the market madness to reach its final zenith. Every year that the tech euphoria continued, the chorus of doubters/naysayers grew larger. Warren Buffet famously avoided the tech sector, and ended up apologizing to his shareholders in 1999 for not matching the returns reaped by momentum players in that mad year.

But the doubters were right--it just took time for a market disconnected from reality to revert to the mean, or cycle back to fundamentals. As for the current fundamentals--please scroll down to the entry of May 11, 2007 for a chilling snapshot of an economy of consumers (70% of the U.S. GDP is consuemr spending) which has been dependent on debt to fuel "prosperity." The consumer's ability to acquire and support ever more debt is clearly nearing the end of a debt-bubble cycle.

The only possible outcome is reduction in borrowing/lending, reduction in spending, reduction in GDP and reduction in corporate profits which necessarily means a contraction in price-to-earnings ratios--a fancy way of saying the stock market has to tank as earnings wither.

So it seems anticipating a financial return to reality (i.e. a downturn brought on by reduction of lending/borrowing) does not preclude that downturn from happening--though it is always wise to ask: what else might happen? I think the charts posted on May 11 provide little support for any other future but contraction/recession.

Erudite reader Brian H. weighed in with a somewhat related commentary comparing 2007 with 1972: (photo is yours truly in 1972, starving philosophy student)

You ever sit back and think which year 2007 is similar to?

In one way (real world) it really seems to be 1972, a losing war, a surge (i.e. Rolling Thunder bombing campaigns), a president under seige, a government no one trusts, inflation running rampant but no one believes it, lots and lots of industries about to go bottom up. (1972, steel, autos, 2007, IT, computers, autos (well ok, that one is the same :-) ). People living the easy life (1960’s vs. 1990’s) and no real threats to their real living about to get ALL SHOOK UP. Most of the 70s were a tough time for a lot of people and they learned to do without and learned some new skills, could it happen again, or are those skills (surviving without total government nannyism) gone forever now?

But then, there’s the stock market. Maybe it’s 1972 and the Nifty Fifty again, but I wasn’t paying attention to the stock market then but I was in the late 90’s and I was very conservative (still am, especially for a young ‘un) and yet everyone and their mothers were buying stock in 1999, 2000 and going wow, this is great, first time I’ve ever bought stock and it just goes up. The stock market goes up and up and never a down day. (It kills me that I’m in cash, but the day is coming). And the other day a friend of my wife who’s never bought stock or followed the stock market or anything (mid 40’s) tells my wife that she’s now in the stock market and having fun. If that’s not an indication of the year 2000, I don’t know what is.

I have another unrelated thought you might get a kick out of, although I guess it does relate a lot to my 1972 analogy again. In the 1970’s, a lot of the "big" companies of today were born and/or forged by people dealing with the hard times/ no jobs or had lost their jobs from their “lifetime” employers. (i.e. Apple Computer, most of the IT stuff--actually pretty much all, as the old companies reinvented themselves, or are gone). Perhaps the same is coming due again.

The only "good" jobs are those government jobs with no work and high pay and zero risk (but I’m not bitter :-) ) Most of the big companies are TOTALLY stagnant, stuck in a morass of rules and HR crap and diversity campaigns. Nothing new is rarely invented by big companies although many times it’s improved and sold. Maybe we need a big shake up (1970s?) to get people working again at things that matter and using their skills and getting rid of all the crap. Maybe, maybe it’s impossible because of all the rules (of which there are tons every year, you just have to decide as a small business which ones to ignore to be successful).
Interesting parallels. My only suggestion would be to say the stock market is like 1973, at a peak within the secular Bear market which started in 1966 (or in our era, 2000). As noted here in previous entries, this 7-year peak also occured in 1929-1936, as well as 1966-1973. Therefore history suggests the current "new market high" will be the last one for some time to come.

I would also note that the 1972 "Christmas bombing" of Hanoi and the mining of Haiphong Harbor finally led the North Vietnamese to the bargaining table. Why? The U.S. had long been wary of triggering Chinese or Soviet involvement in the Vietnam War (even though Russians were piloting supposedly North Vietnamese MIG fighters) and as a result avoided hitting Hanoi or Haiphong Harbor, where a decoy Soviet freighter was always tied up to discourage any such attack.

After four years of losses and political intransigence, Nixon and Kissinger finally tired of this "limited war" gamesmanship, and they made the calculation that neither China nor the U.S.S.R. would open a wider war if they went for the North Vietnamese jugular.

The North Vietnamese had Soviet SAM-3 anti-air missiles, which knocked down many U.S. B-52s. But the war of attrition was won by the U.S., for with the harbor mined and the re-supply of SAMs cut off, the North Vietnamese soon expended their missiles. At that point they were in danger of losing their capital, their dikes, and whatever infrastructure was being enjoyed by the political elite. Within a matter of days, they basically sued for peace.

As a further footnote, the surrender of South Vietnam two years later in 1975 might not have been as preordained as is widely perceived. For the U.S. Congress had cut off funding to the South Vietnamese, a move President Ford could not stop. Without the financial means to fund a military response to the armor (tanks) of the well-supplied North Vietnamese army, then the cut-off of funding was equivalent to surrendering South Vietnam.

Was it good policy to cut off funding? Was it "worth it" to fight the war, or end it by ending financial support of South Vietnam? History can't be replayed; maybe the corrupt South Vietnamese regime was doomed, regardless of U.S. airpower or re-supply of weaponry. That is open to debate--a debate made sharper by the current political battle over ending funding of the war in Iraq.

Thank you, Matt and Brian, for thought-provoking commentaries.

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