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1966 - 1982 all over again
Old 10-31-2008, 10:46 AM   #1
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1966 - 1982 all over again

My gut has been telling me we are in a 1966 thru 1982 cycle all over again. To me, 2000 - 2008 is similiar to 1966 - 1974. I wouldn't be shocked if we are headed to stagflation again, just like the mid to late 70's. I've been looking for an analysis that came to a similiar conclusion, and John Mauldin's investing letter is the closest so far. From his letter:




Back to 1974?
........ Note that in late 1974 valuations were still at about their long-term average. Buying then was not compelling from a valuation standpoint. But Richard Russell called the bottom in one of his more famous calls late in the year. And it was a "price" bottom.
There was a great deal of volatility in the next eight years, and another recession at the end of the period, before valuations finally got down to extremely undervalued single-digit levels. Thus, those years saw a rising stock market and ever-lower P/E ratios. That happened as earnings grew faster than the prices of the stocks! Why did prices not rise along with the earnings growth?
Now, gentle reader, we come full circle, back to the Dreman and Lufkin study. Investors, twice burned in the late '60s and early '70s, were reluctant to get back into the market in a large, overtly bullish way. They were cautious.
I think we may be in a reflection of that same period. While it is possible we have put in the lows for this cycle, I think that as the recession will be deeper and longer than most of us have experienced (think 1982), we will see more rounds of earnings disappointments. I think the market has more downside in its future. But sometime, whether it was last week, or a few quarters in the future, we are going to see a cycle low in terms of price.
But it will most likely be a repeat of 1974-1982. Lots of volatility. Very large run-ups followed by quick and vicious sell-offs on the way back up to new highs. This is NOT going to be a recovery back to new highs in two years. This is going to take a long time. Further, I don't think nominal GDP will be 6% for the next three years, for reasons stated last week.
Investors are going to get their hearts broken by their favorite companies time and time again. The economic news will not be good for another year at a minimum. This is not the stuff that wild bull markets are made of. That time will come, but it is not yet.
That being said, I am a believer in American business. They will figure out how to maneuver and prosper in this new environment. In 12 years, earnings will have doubled from the trend of last year, which suggests earnings could be $140 in 2020. Put a multiple of 20 on that and we have an S&P 500 at 2,800, up over 3 times from today. That is the long view.






I'm still accumulating wealth, so I plan to continue to follow my strategy of AA and putting dollars into my investments monthly because I have no idea when the bottom will be. I still have a 15 year investment horizon, so I think we will recover by then. We may be beginning a new bull market now. But if I had to bet, I think it will be a few years before that begins, and I would be surprised if we are down another 25% 3 to 5 years from now.
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Old 10-31-2008, 11:54 AM   #2
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Do you have a link to the full article?
He doesn't mention stagflation in the quote above.

++++++

M1, M2, Real GDP and CPI Growth: 1970s vs. Now | Economist Blog

Bottom Line: We’re not anywhere close to the monetary expansion and subsequent inflationary environment of the 1970s, and since it’s been 7 years since the very moderate monetary expansion of 2001, we won’t get there anytime soon.

++++
There are several reasons why there will not be stagflation.
1. monetary conditions - see above & the current bail out is to keep credit available - it should keep rates low
2. do to global economies; US companies do not have pricing power.
3 non governmental union membership is lower - no labor pricing power
4. Large pool of illegal immigrants - keep wages down
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Old 10-31-2008, 12:16 PM   #3
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Originally Posted by HokieHill View Post
Back to 1974?
........ Note that in late 1974 valuations were still at about their long-term average. Buying then was not compelling from a valuation standpoint.
GIGO. Find some data- Shiller is a good start. Values in 1974 were extremely compelling. True enough that 1982 was even better in some industries. But remember that period. Oil shock2, 15% longterm interest rates on treasuries, and 20% on bills...

Ha
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Old 10-31-2008, 12:17 PM   #4
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big differences are that back then boomers were graduating college, today they are retiring. that's a nice commodity deflation argument
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Old 10-31-2008, 12:18 PM   #5
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Stagflation was my addition, John doesn't mention it in his article. As I said, this was more gut level thinking than analysis. You linked some good money supply info that compares the two and shows we are nowhere near the 66 - 82 period.

The full article is an e-newsletter. To get it, you can go to the link below and subscribe:

Thoughts from the Frontline
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Old 10-31-2008, 01:20 PM   #6
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GIGO. Find some data- Shiller is a good start. Values in 1974 were extremely compelling. True enough that 1982 was even better in some industries. But remember that period. Oil shock2, 15% longterm interest rates on treasuries, and 20% on bills...
Exactly right. The S&P 500 returned nearly 15% per year compounded from the end of 1974 until the end of 1982. Even with the very high inflation that existed over that period, the real return was still 6.2%. Interestingly, the drop from the market peak in 1973 until the bottom of 1974 was very similar to what we have just experienced over the past year.

And the period from 1982-2000 was one of the best (if not the best) period for financial assets that we have had in this country.
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Old 10-31-2008, 01:38 PM   #7
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War, oil, borrowing, and not enough revenue to pay the bills - same old same old same old.

' history may not repeat, but sometimes it rhymes.' (?? Mark Twain?? or ?)

I worked and partied thru 1966 - 1982. But it still was chewy investment wise.

heh heh heh - 500Index was availible in our 401k 1977 on.
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Old 10-31-2008, 02:41 PM   #8
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Exactly right. The S&P 500 returned nearly 15% per year compounded from the end of 1974 until the end of 1982. Even with the very high inflation that existed over that period, the real return was still 6.2%. Interestingly, the drop from the market peak in 1973 until the bottom of 1974 was very similar to what we have just experienced over the past year.

And the period from 1982-2000 was one of the best (if not the best) period for financial assets that we have had in this country.
No disagreement. I've tried to figure out how I would invest if we got another period like 73 to 82, and I wouldn't change. Just need to be diligent and keep investing and rebalancing. I could live with it if 2008 turned out to be similiar to 73. Have to hang on, though, because it will be a bumpy ride. For the S&P 500 from 73 to 81, 4 out of the 9 years had a negative return.

S&P 500 yearly returns from 1973 thru 1981 (w/ div reinvested)

1973 -14.7%
1974 -26.5%
1975 37.2%
1976 23.8%
1977 -7.2%
1978 6.6%
1979 18.4%
1980 32.4%
1981 -4.9%
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Old 10-31-2008, 03:34 PM   #9
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No disagreement. I've tried to figure out how I would invest if we got another period like 73 to 82, and I wouldn't change. Just need to be diligent and keep investing and rebalancing. I could live with it if 2008 turned out to be similiar to 73. Have to hang on, though, because it will be a bumpy ride. For the S&P 500 from 73 to 81, 4 out of the 9 years had a negative return.

S&P 500 yearly returns from 1973 thru 1981 (w/ div reinvested)

1973 -14.7%
1974 -26.5%
1975 37.2%
1976 23.8%
1977 -7.2%
1978 6.6%
1979 18.4%
1980 32.4%
1981 -4.9%
Very interesting - in the middle of it - it did not seem that I was doing that well at the time.

heh heh heh -
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Old 11-01-2008, 10:04 AM   #10
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Do you have a link to the full article?
He doesn't mention stagflation in the quote above.

++++++

M1, M2, Real GDP and CPI Growth: 1970s vs. Now | Economist Blog

Bottom Line: Were not anywhere close to the monetary expansion and subsequent inflationary environment of the 1970s, and since its been 7 years since the very moderate monetary expansion of 2001, we wont get there anytime soon.

++++
There are several reasons why there will not be stagflation.
1. monetary conditions - see above & the current bail out is to keep credit available - it should keep rates low
2. do to global economies; US companies do not have pricing power.
3 non governmental union membership is lower - no labor pricing power
4. Large pool of illegal immigrants - keep wages down

A different take on the current monetary conditions:

What the FED Did to Us in September
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Old 11-01-2008, 10:14 AM   #11
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I think we managed to get '73+'74 both in the same year!

I'm looking forward to '75 and '76 market gains!

Audrey
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Old 11-01-2008, 11:20 AM   #12
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I think we managed to get '73+'74 both in the same year!

I'm looking forward to '75 and '76 market gains!
Those gains (cited a few posts above) sound like a dream come true after this October, don't they!

It's hard to believe that the market would turn around that fast, this time. If it did, I promise I'll be dancing in the streets.

With things as they have been lately, Frank is talking more and more about job shopping during ER instead of semi-retiring with a low paying part-time job in the neighborhood. I would miss him so much if he had to be away a whole lot.
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Old 11-01-2008, 02:12 PM   #13
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I think we managed to get '73+'74 both in the same year!
Have we reached the parts with a 45% drop, double-digit unemployment, single-digit P/Es, and out-of-control inflation?

What usually wreaks havoc in this situation is a natural disaster or terrorism piled onto the vulnerability of an economic recession. Like an earthquake, hurricane, or tsunami. Or anthrax letters & assassinations. Not saying that it's gonna happen, but this is an even more critical time to have a Plan B.
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Old 11-01-2008, 02:16 PM   #14
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Well, I think we did the >40% drop at one point! Maybe you had to start counting from Oct 9 2007

Audrey
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Old 11-01-2008, 03:03 PM   #15
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A few months ago I made a post that sound just like this.

1970s all over again?
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