Wednesday, April 16, 2008

Why Am I Feeling Like It’s 1977?

I’m getting some not-so-pleasant nostalgic feelings these days. I’m starting to feel like its 1977 again. I actually liked 1977 personally; I had graduated from U of D with my accounting degree, and was starting law school in the fall. I really disliked 1977 from the standpoint of the political and economic environment. To be sure, the Apple II came out, and the Concorde did New York to Paris in 2 hours (whatever happened to that?). Fantasy Island was 1977’s version of Desperate Housewives (actually, I’ve never seen Desperate Housewives, but they sound similar). Love Boat was a big show, compared to the big show in my household, Mythbusters. A great movie tradition started with Star Wars, thereby starting George Lucas on the road to riches. Saturday Night Fever contributed to a polyester shortage and helped John Travolta buy a 727 to fly while wearing his Brietling watch. Despite the disco craze, Jimmy Buffet recorded Margaritaville, and the Eagles had Hotel California. 1977 was a decent year for cultural shifts. I had fun, had long curly hair and owned some disco clothes.

What is much more troubling about the nostalgia is the prospective economic similarity of 1977 to 2009. Our economy has small cycles and large cycles. The small cycles are the relatively routine 4 year periods of expansion/recession. Since 1900, we’ve had, in general, 3 years of economic expansion, and one of contraction. Not always, sometimes we skip a recession, and sometimes we have a bigger one. But in general, that’s the cycle. There’s a bigger cycle as well (and some may argue, an even bigger one on top of that, named after a guy called Kondrieff). The bigger cycles are the cycles of secular bull or bear markets. An example of a secular bull market is the run from 1981 to 2000, where the S&P 500 gained 1736.82 % in total or 15.66% per annum. You don’t see a bull like that very often. The big bulls usually have some economic stimulus (like a tax cut), some global stimulus (like the end of a war), and something technological (like the development of a computer or the Internet).

Secular bears follow the bulls (and I suppose they lead them as well). A secular bear market is when the market fights between two extremes without ever getting out of them. For example, the Dow gained exactly 58.88 pts between 1968 and 1980. To be sure, it went up (and down) but started and ended at virtually the same spot. Bears usually have attributes like budget deficits (the 1977 deficit was $66B, compared to our current deficit of about $170B. Click HERE to see the budget), rising commodity prices, compelling social issues with expensive fixes (in 1977, Carter basically quadrupled the social security tax), and a general lack of consumer confidence. Our consumer confidence level is at a 5-year low, and the expectations index is at a 35-year low, the worst since 1973.

So my point? Well, here’s my laundry list of observations:
  • We have a national health care crisis, without any non-painful means to pay for it;
  • We have a vast loss of higher-paying manufacturing jobs (there were about 17.7M manufacturing jobs in 1990, about 13.8M now);
  • Global commodity demand is causing dramatic increases in commodity prices.
  • We’re in a war that probably won’t end any time soon (I’m talking about the war on terrorism, not Iraq, which probably also won’t end soon).
  • We have budget deficits and a national debt of about $9.4 trillion (to see the number on the National Debt clock, click here). The interest on the national debt for 2007 was a mere $429,977,998,108.20 for 2007.
  • We have an eminent tax increase by 2010, regardless of the next president.
My diagnosis? We’re in a secular bear market, maybe the middle of it. The Secular bear of 1977 (1977 was about the epicenter) lasted until about 1981, when the Reagan tax cuts, the fall of the Soviet Union, and the development of the microcomputer (and subsequently, the Internet), gave us a big bull. I think whoever gets elected will have such an unbelievable mess on their hands that their career will mirror that of my favorite ex-president Jimmy Carter. (I mean it: I think Jimmy Carter is a remarkable human, but was an ineffective president, somewhat due to his circumstances, and somewhat due to his own actions). I see the proverbial bear stuff hitting the fan, and by 2012 we’ll be sick and tired of being sick and tired. Watch the groundswells toward a National sales tax (the Fair Tax is a good start). Watch the movement to a private national health care system. Watch for new technology (my guesses might be lignose ethanol, stem cell, cloud computing, or something I can’t imagine, which is probably the one that will happen). Watch for a change in the terror conflict, but not an end.

Up, down. My prognosis is bears in the woods. We’ll have opportunities to make money (there are always opportunities to make money), but it won’t be pretty, and won’t be pleasant. Especially to whoever gets to be president. Maybe Mitt did OK after all.

Leon LaBrecque