S&P Composite Index 1871-2010
I been looking at this chart by Catherine Mulbrandon for a week now (click to enlarge).The infographic shows the exponential growth of US stocks from 1871 based on Robert Shiller’s data. Obviously there is this incredible palpitation of the last two decades, with each swing matching the cumulative growth of the entire American century (we normally look only at a small time stretch, so we don’t notice the comparable abnormality of the mountainous formations of the last two decades). Note the 800 point drop from the top of the Dotcom bubble and the retracing of the same low during the current bubble, it’s exceeds the entire cumulative American stocks gains from 1871 to 1987 (and I though Nassim Taleb was kidding when he said that during the Savings and Loan crisis in the 90s and now during the mortgage bubble, the banks lost more than they ever made, incredible)! Similarly the drop of the Great Depression exceeded the cumulative previous gains. The destruction of wealth in the last decades is so massive that it leaves only the lottery winners or the “house” with the century worth of the American productive wealth. The era of the oligarchy turbocharged by the global slave labor and the federal monetary policy. Hence the sharp decline of the productive middle class (it aint the cost of the healthcare as they told you).
There is also the historical aspect that is clearly observable on this chart. Nassim Taleb hooked me up with the idea that the black swans fly in pairs. And I have been noticing it more and more when thinking about history. Take a look at the pairs along the time axis. There is the obvious WWI and WWII, but also the Korean War and the Vietnam War, the pair of Iraq wars (and naturally the last two black swan stock crashes). Outside of the scope of this chart, but within the same pattern, are the 1967 and Yom Kippur wars in Israel. Going way back is the destruction of the Temple and the Bar Kochba messianic revolt. Psychologically this is easy to understand. Besides the unfinished business on the battlefields and the urge for a revenge there is a still living generation of a conflict participants whose condition changed drastically depending on the outcome of the conflict. People have a hard time accepting and adjusting to a changed social role, they look to return to the former identity or status by all means possible.
1933 Nazi Propaganda Poster about the danger of the Treaty of Versailles
Germany in danger of an Air Attack from Czechoslovakia
Above this idea illustrated in it’s purest form, it shows the connection between the WWI and the WWII. This is 1933 Nazi propaganda poster (via JF Ptak). See how the Treaty of Versailles left Germany in a defenseless posture. Germans were called to mobilize for the war production, to correct the mortal danger of the of the Versailles Treaty. And it took Germany just six years to openly break from the limitation of the Treaty of Versailles and to build the strongest european war machine. So just like Stalin and Hitler were one prolonged historical event, so were the black swans of the WWI and WWII. All the black swans seem to fly in pairs.
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There is indeed a theme in the stock market these days which we could call “Anything but America.” Trading on this theme meany buying things like the Japanese Yen, Gold and the Brazilian market. But such an idea is not without difficulties of their own. Consider Japan. If there was ever a country that is aging and imploding it’s Japan.Debt/GNP ratios far worse than America. It already has had a heart attack. But here the currency is unbelievably strong, though the market has been nothing for a generation.
The same theme restated is buy the BRIC (Brazil, Russia,China, India),short the S&P. I’m sure you would agree Russia is problematic as a country and the market there has been so so. The only country whose future looks bright to me down the road is Brazil.
I am more worried about the value of the dollar and long term bonds. If they hyperinflate stocks can do ok, but bonds and cash can go down in value very quickly.
Looking at the graph, it seems that it took 30 years or more for the market to recover from the Great Depression levels. Thirty years – and that is just to get your money back. Factoring in inflation, investors STILL lost loads of money, even after three decades. More recently, the NASDAQ has done the same. I read an article in the late 1990′s comparing the Internet stock boom with the Television stock boom. Fascinating parallels. New technology, new business models, no one was really sure how to make money out of it, new ideas about free services supported by advertising, new suppliers of hardware, new content-providers, new consumer appliances, new mass markets. Back then, some companies collapsed quickly and burned up all of the investor’s money. Some disappeared entirely. Others took decades to raise share prices to pre-bust levels. Decades. A few became media giants. It’s happening all over again, except that now there are other trends, with unpredictable results (especially the rise of militant Islam and the decline of America). No quick fixes here. People will be lucky to get their money back – without interest or dividends – decades from now. If they’re lucky.