Stocks Bite the Big One

Is a secular bull market inevitable? Mogambo wants to know. He looks at the last bear market in stocks and concludes: if you bought stocks in 1969, you’d still not have made your money back. Sounds unlikely? It’s not…

I see cycles in everything…

Invisible FBI guys riding around my house on their invisible bicycles – which is not exactly the same thing – and I can also see invisible government helicopters hovering over my house, and over YOUR house too, but don’t tell them I tipped you off.

But, Jeff Ferguson defines a short-term cycle as something that lasts two to four years, as opposed to a secular (30 to 40 year) cycle, in his essay, "Is a Secular Bear Market Inevitable?"

He writes, "Contrary to a common belief, equities didn’t simply move sideways through the 1970’s before moving to new highs with the great bull market starting in 1982. This illusion is caused by the inflation, which plagued the period. Deflating the S&P 500 with the CPI reveals that the market peaked in 1969, not 1973, before falling 64% over the subsequent 13 years, ultimately bottoming in 1982."

I will pause there to let the significance of that seep into our brains, as I am not sure that I comprehend the full significance, although there are several rude audience members who can’t restrain themselves, and who blurt out that I am such an idiot that I can’t comprehend the significance of a twist-off bottle cap, which is probably true, but beside the point.

Social Security Privatization: Adjusting For Inflation

But if they had privatized Social Security in 1969, how would you feel if your retirement had lost 64% in buying power, as you got poorer and poorer, until 1982? In effect, you can afford to buy slightly more than a THIRD of the basket of stuff you could have bought in 1969!

But it gets worse than that! He goes on to say, still adjusting things for inflation, "Stock prices failed to exceed the 1969 peak until 1993, 24 years later, and didn’t move convincingly through the 1969 level until 1995." That’s 26 freaking years in a row that you failed to break even in the stock market, i.e. before the 1969 level was reached. And how long will it be before the guys who bought at the exact bottom actually make a profit? Don’t ask.

I know what you are thinking: "Wow! The Mogambo was right! When adjusted for inflation, stocks bite the big one (BTBO) from time to time, like all the other investments BTBO from time to time!"

If you were really thinking, and not sitting there on the couch sucking down another beer, you might even say, "Hmmm! Let me see! The Mogambo was right that there are long periods of time when stock are NOT going to increase your actual, inflation-adjusted wealth! And right now the stock market is still waaayyyYYYYyyyy higher than it has been, and is very, very expensive, and so is this really the best place to be putting my money right now?"

But can it get worse than that? Yes. I close my big blue Mogambo eyes (BBME) and I concentrate, concentrate, concentrate, and I am tapping into your brain, probing your subconscious, and I can tell that you are asking yourself, "How can it get worse than that?"

Social Security Privatization: It Can Get Worse

Well, for instance, I could come over there and try to borrow your barbeque grill, and then keep getting in your face until you just give me the damn thing just to get rid of me. I am sure you agree that would be worse!

But the authors were probably not referring to that. And sure enough, they go on to say, "At this point the weary, and rather aged, investor still faced capital gains taxes on a phantom 300% gain wholly due to inflation. Covering this tax liability likely extended the true recovery period to within shouting distance of the bear market in stocks beginning in 2000, the most recent peak in equity markets."

So, net of inflation, and net of taxes, the investing dudes and dudettes in 1969 NEVER actually showed a profit from their investing in the stock market! And the two authors did not even mention the fees and commissions and costs that their hypothetical investor would have had to pay to the greedy, grubby financial services industry all these years, nickel-and-diming you to death, including "inactivity fees" which you have to pay because you don’t do enough trading to suit the guys who charge you fees for that trading.

And, depending where you live, they neglected to deduct state taxes on the gains, and/or the value of the holdings! What a racket! And they call this "investing" Hahahaha!

And now we are talking about putting Social Security money into privatization? The Mogambo tilts his head back and roars, which sounded a lot like "hahahahaha!" only with more spittle and an unmistakable undertone of contempt.

But of course the privatization of Social Security, or some tamer variant, will be passed, or they will simply increase taxes, or reduce benefits, or all three, as there is no other way. We are here with a gigantic, bankrupt system, strictly attributable to the stupidity of Congressional boneheads, which not only ratified FDR’s New Deal idiocies in the 30’s, but kept expanding them, year after year after year, letting more and more people gobble money from the Social Security fund, and increasing-increasing-increasing benefits for current beneficiaries.

And when that predictably caused shortfalls, they increased the Social Security tax, adding the Medicare surtax, and then spending spending spending the resultant Social Security Trust Fund surpluses. And now here we are again.

The Congress that we have now is more stupid, arrogant and corrupt than any other in the history of Congress, the Leftist morons on the Supreme Court have destroyed the Constitution by letting them do it, and a brain-damaged Federal Reserve has provided every dime of financing for the whole enchilada and destroyed the dollar for their efforts. Since nothing has changed, except to get worse, I am sure that taxes are going to be increased. Again. And again. And again. Ugh.

The Mogambo Sez: Too many forces are in play, and like any system with too many variables, unintended consequences will erupt. And it will be bad news all around.


The Mogambo Guru
for The Daily Reckoning
February 07, 2005

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter, an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.

(We apologize for his longish edition of the Daily Reckoning. We had a lot on our mind over the weekend. We might still have written less, but we didn’t have time.)

Every public spectacle begins in deceit, develops into farce, and ends in disaster.

‘I have devoted my entire life to making the world a better place,’ said Adolph Hitler, or words to that effect. ‘For the last thirty years, every breath…every waking moment…has been used to try to improve things.’

‘But, mein Fuhrer,’ explained one of his generals. ‘Berlin is nearly surrounded. We have no more ammunition. The people have no food. We must try to negotiate.’

‘You too? I am surrounded by incompetents and traitors,’ came the reply. ‘We can never surrender. I’d rather put a bullet to my head. Do you hear? We have done all we could, so far. We must go all the way…to the end if that is what is coming.’

‘But, mein Fuhrer, think of the suffering of the German people.’

‘You want me to have compassion? I have never permitted myself to be moved by compassion. My work was too important to let compassion or any personal motives interfere. So, don’t expect me to be compassionate now. And besides, the German people deserve to die too…they let me down. They aren’t worthy of the great new world we were offering them."

We saw the two approaches to world improvement almost standing side by side this past weekend. One wore the Nazi uniform on the silver screen. The other wore a simple priest’s frock in Normandy.

But first we turn to the financial news. There, too, we saw the world improvers at work. Alan Greenspan gave a speech this past weekend in honor of the first modern economist – Adam Smith. The Fed chairman journeyed to Fife College, in Kirkcaldy, Fife, Scotland, where Smith was born in 1723. There, he commented on Smith’s work:

"Most of Smith’s free market paradigm remains applicable to this day," said he. In particular, the world seems to have discovered that independent buyers and sellers are better at delivering the goods than government planners.

This would have come as a shock to George Orwell. Writing at the beginning of WWII, Orwell expressed the belief of millions:

"I began this book to the tune of German bombs…What this war has demonstrated is that private capitalism – that is, an economic system in which land, factories, mines and transports are owned privately and operated solely for profit – does not work. It cannot deliver the goods."

Orwell was wrong. Capitalism delivered the goods better than socialism, a fact that even near-sighted journalists and central bankers were eventually able to see.

After the fall of the Berlin Wall, continued America’s most celebrated central banker, there was ‘no eulogy for central planning."

Adam Smith had proposed a useful metaphor to help explain how a system of private, individual decision-making – which must have looked chaotic to the top-down observer – actually functioned to the betterment of all. A rise in the price of pigs, for example, sends a signal to the hog raisers to produce more. Thus is the market guided by an ‘invisible hand’ to produce exactly as much of a thing as people really want and can really afford.

Our quick-witted Daily Reckoning readers will already be gurgling with indignation and insight. First, because they will notice that the world improvers are no more than central planners – armed with lethal weapons and determined to turn the world into a place more to their liking. What’s the alternative to central planning? The contrary approach must be the moral equivalent of a free market – a system in which each person does his best to make his private world better…and thereby improves the whole world. "If everyone swept his own doorstep," said Goethe, "what a clean world it would be."

Readers must also be gagging on Mr. Greenspan’s remarks. Markets work best without the heavy hand of regulation, he acknowledges. But he seems to exempt, conveniently, the credit markets. The maestro’s speech seemed to hit a false note; rather like President Bush’s approach to evangelical democracy, it seemed to miss the point.

Instead of letting lenders of credit and demanders of it be guided by an ‘invisible hand,’ the Fed chief has for years drawn them together himself. Mr. Greenspan’s ‘Open Market Committee’, not the open market itself, has determined the rate at which lenders will lend, short term, and at which borrowers will borrow.

We noted a few days ago that two heads are better than one. Groups of people can be smarter than individuals. A market, theoretically, can do a better job of finding the right price for a thing. A market is supposed to aggregate the private opinions and independent judgments of thousands of individuals. But in practice, the market often slips into crowd-like behavior – whipped up to greed or fear by the financial media or the financial industry. And sometimes the whole market is deceived by its own central planners, namely Alan Greenspan and his sidekicks at the Federal Reserve.

Rather than allow lenders and borrowers to decide for themselves what rates they would accept, the feds decided for them. Arguably, they fixed short-term interest rates too low – and thus sent the wrong signal to everyone.

The low rates told consumers, producers, sellers, homeowners and investors that there were billions in savings rushing into the market, so much that they pushed down lending rates lower than they have been in the last 40 years. It looked like a new boom coming. It looked like good times. Even on the other side of the Pacific, suppliers took it for a huge increase in demand. Asset prices rose.  Lenders lent. Borrowers borrowed. Spenders spent.

But there were no savings. There was no real demand. It was just a mirage, caused by central planners who have given the wrong cue.

And so today’s public spectacle in the economy is not so different from public spectacles in politics. It began with a lie. It has become a farce. And it will end in disaster. How and when are the questions we pose everyday.

More news, from our friends on the currency desk at EverBank:


Chuck Butler, the currency counselor…

"The buying of the dollar was strong, and swift, before
dollar bears knew it the euro had fallen below the 1.29
level, and remained there the rest of the day. It’s still
trading with a 1.28 handle this morning…I’m not really
going to rail on it any longer…It just frustrates me to
no end!"


Bill Bonner, back in Paris, with more opinions…

*** The jobs report came out on Friday. "Job numbers soft again," says

Bonds rose on the news. Mortgage rates have been falling…for almost as long as the Fed has been increasing rates. What this tells us is that the economy is sinking…not dramatically, but slowly, softly…almost unnoticed. It suggests also that the Fed’s rate increases are a feint, a fake-out. They are supposed to be ‘normalizing’ rates…gently easing the economy back into balance after an ’emergency.’ But the rate increases are insignificant. Short rates are still below the inflation rate.

Meanwhile, in the most-recent 2-week period, the money supply, M3, increased at an astounding rate. More than $50 billion was added; if it were to continue growing at that rate more new money would come into the system in a single year than the value of all the gold above ground. It is dangerous to extrapolate from a couple weeks, but our guess is that the Fed is privately still desperately concerned about a slump…about deflation.

And so, the lower mortgage rates will help add more air to the housing bubble. As long as rates remain low, and housing prices keep rising, people will be convinced that they have more money than they really have. The phony boom continues…for now…

*** On Friday evening, we went to see the new German film, "The Fall." It is a masterpiece; it is everything that "Alexander the Great" is not. Both leading men are portrayed as world improvers. But Alexander was made to look ridiculous and absurd. Adolph Hitler looked very real…and pathetic.

"The Fall," takes place in Hitler’s bunker in the last days of the war. We see the ‘Thousand Year Reich’ coming to an end 990 years ahead of schedule. We see also how easily people are caught up in extravagant delusions…and how hard it is for them to free themselves. Hitler’s secretaries, cooks, deliverymen…even his generals…seem like fairly normal people. But they have been enlisted in a great campaign. They can see no other future but to see it through – even after it has become apparent to most of them that it leads to ruin. We see mature, battle-hardened generals, for example, who cannot bring themselves to disobey. They are soldiers, they tell each other, and have sworn to follow orders. They can see for themselves that Hitler is mad. They know his orders are foolish. There will be Hell to pay…but they soldier on anyway.

Many blow their brains out, rather than try to come up with Plan B.

*** On Sunday, we went to the little church in Normandy, near where we have bought our latest folly. The service was held not in the church itself, but in a tiny parish hall nearby.

We introduced ourselves. The priest apologized for the small turnout…and the humble circumstances.

"There are so few of us…and the church is not heated. You know, we Christians sometimes seem like a dying breed," he explained.

Looking around at the handful of the gray-haired faithful, it appeared that death was not only inevitable but imminent. There was hardly a person under the age of 70.

"But we are so happy to welcome you to our little community," he continued.

Later, in his sermon, he commented on Christ’s beatitudes.

"We Christians are urged to be a ‘light unto the world.’ But what does that mean? Does it mean we have to change the government? Or that we have to change the way people worship…or the way they act?

"No…it means we have to change ourselves."

We interrupt the sermon to offer clarification. There are two ways to build a better world. The world improvers such as Hitler and Alexander propose to do it by force. They apply a top-down method, effectuating ‘regime change’ in various foreign countries…and making a public spectacle of themselves to boot. The problem is that their ideas of a better world are no more than vanity – they have no better idea what a better world might look like than anyone else. And as soon as they take out their weapons to force the issue, the campaign sinks into barbarism; for what is barbarism except the use of force over persuasion?  The whole thing is a fraud, beginning with a lie…developing into a farce…and ending in disaster.

The other type of world improver hardly even dares to think about improving THE world.  He is much more modest. The best he can do is to make small private gestures in his own world. And not by packing heat.

"We are called to be a ‘light unto the world,’" continued the priest, "by lighting up our own little world…by rendering service to those in need. By offering a kind word. By visiting the sick. By welcoming strangers and newcomers to the community. By caring for the poor. By comforting those who suffer from sickness of the body…or the spirit. We light up the world simply by being the decent people that Christ showed us how to be. By showing compassion, in other words…and by loving our neighbors as ourselves."

The Daily Reckoning