The Future: Gloomy or Prosperous?
The debate concerning the prosperity of future generations is never ending,
especially in the context of investing. In the real world, prosperous periods
have often taken an unexpected turn for the worse. For example, heading into
1914, the consensus in Europe was pointing to a bright future. From The
Wall Street Journal:
The world swept away had been a rising and increasingly constructive
one, where total war was unimaginable: "Europe in the summer of 1914
enjoyed a peaceful productivity so dependent on international exchange
and cooperation that a belief in the impossibility of general war
seemed the most conventional of wisdoms."
War Alters Everything
In the summer of 1914, the peaceful productivity in Europe was threatened
after the assassination of Archduke Franz Ferdinand of Austria set off a
chain of events that eventually led to World War I. From History.com:
The world's first global conflict, the "Great War" pitted the Central
Powers of Germany, Austria-Hungary and the Ottoman Empire against
the Allied forces of Great Britain, the United States, France, Russia,
Italy and Japan. The introduction of modern technology to warfare
resulted in unprecedented carnage and destruction, with more than
9 million soldiers killed by the end of the war in November 1918.
Little Basis For Optimism In Early 1980s
Just as negative turns can occur more rapidly than most anticipate, periods
of economic weakness and pessimism can be followed by unexpected periods
of economic expansion and prosperity. For example, the U.S. economy was so
unsettled in the late 1970s, the term "misery index" was used regularly during
the 1976 presidential campaign. The misery index is the sum of the unemployment
rate and inflation rate. After President Nixon's resignation, Gerald Ford
took office in September 1974 with a misery index of 17.85%. The index peaked
at 19.9% a few months later. From The
Bancroft Library at the University of California, Berkeley:
In January 1980 the U.S. economy entered a recession that, at the time,
was the most significant since the Great Depression. One of the causes
of the early 1980s recession was the Iranian Revolution of 1979,
which sparked a second large round of oil price increases. More important,
however, were Federal Reserve Chairman Paul Volcker's efforts to
tame inflation through restrictive monetary policy, which had the
expected effect of dampening economic growth. The American economy
experienced a modest recovery beginning in the summer of 1980 but
declined again from July 1981 to November 1982.
Technology Can Drive Unexpected Prosperity
While there are numerous reasons for the economic turnaround that occurred
in the early 1980s, advances in technology played a key role. From IBM:
On August 12, 1981, at a press conference at the Waldorf Astoria ballroom
in New York City,IBM Lab Director Don Estridge announced the IBM
Personal Computer with a price tag of $1,565. Two decades earlier,
an IBM computer often cost as much as $9 million and required an
air-conditioned quarter-acre of space and a staff of 60 people to
keep it fully loaded with instructions. The new IBM PC could not
only process information faster than those earlier machines but it
could hook up to the home TV set, play games, process text and harbor
more words than a fat cookbook.
2014-2024: Prosperity or Hard Times?
Having worked on Wall Street for over 20 years, I can confidently state that
economic and geopolitical gloom-and-doomers are always easy to find. What
they often fail to consider is the possibility of unexpected technological
advancements. From The
Wall Street Journal:
In the speculation on what the new technologies will look like and
do, robots and artificial intelligence remain front and center, at
once wished for (who likes making beds?) and feared as job-killers.
We haven't seen a fraction of what is possible in information and
communication technology. But the most unexpected advances may come
from less glamorous corners, such as material science. One example
is graphene, a sheet of very thin carbon whose molecules can be arranged
to make it either the strongest or the most flexible material on
earth. It conducts electricity and heat better than any material
ever discovered. In the future graphene is likely to replace silicon
in transistors, solar cells and other applications we cannot yet
imagine.
2014: No Shortage Of Geopolitical Concerns
In recent months, investors have been worried about developments in Gaza and
Ukraine. On Saturday, August 9, President Obama dampened expectations for
a limited and short-term U.S. role in Iraq, which could add to uncertainty
when the financial markets open Monday. From The
Guardian:
Barack Obama has committed the US to long-term involvement in Iraq,
warning that the rapidly evolving crisis in the north would not be
solved quickly. US aircraft have targeted armoured vehicles and militant
positions in a second day of strikes against Islamic State forces.
A mix of US fighters and drones attacked and destroyed armored personnel
carriers after Yazidi civilians near Sinjar came under attack from
the vehicles, US central command said.
History Tells Us To Remain Open To All Outcomes
How does all this help us from an investment perspective? The point is the
future is highly uncertain. Geopolitical events can cascade at unexpected
speeds. Technological advancements can be a powerful force for rapid economic
advancement. A highly uncertain and almost impossible to predict future calls
for a high degree of investment flexibility. If an investor entered the 1980s
with a bearish bias, they may have missed one of the greatest bull markets
of all time (see chart below). Conversely, many were blindsided by the rapid
changes that took place in Europe during World War I.
Were there fundamental problems in 1982? Yes, a brief refresher list is provided
below:
- Unemployment in the U.K. increased by 129,918 to 3,070,621, a post-war
record number.
- Hama massacre took place in Syria.
- The DeLorean Motor Company Car Factory in Belfast was put into receivership.
- The U.S. placed an embargo on Libyan oil imports, alleging Libyan support
for terrorist groups.
- The Falklands War began: Argentina invaded and occupied the Falkland
Islands.
- The 1982 Lebanon War began.
- The United Nations Security Council passed a resolution demanding that
Israel withdraw its troops from Lebanon.
- The Provisional IRA detonated 2 bombs in central London, killing 8 soldiers
and wounding 47 people.
- Italian Prime Minister Giovanni Spadolini resigned.
Staying In The Present Is The Key
If predicting the future is difficult, then what can we do? Focus on the hard
data we have in hand. If paying attention and making portfolio adjustments
as needed is new to you, these articles expand on the concepts:
- Managing
Risk In A Mature Bull Market
- The
Most Important Thing For 2014
- 2007/2013:
You Will Never Look At The Markets The Same Way Again
- Tired
Of Missing Rallies? 4 Ways To Improve Your Game
- Scared
Of Stocks? There Are Ways To Monitor Risk
- Guideposts
Can Assist With Risk Management
- Want
To Reduce Missteps? Become A 2-Faced Investor
- Investors
Must Know How We Got Here And Where We Are Going
Investment Implications - The Weight Of The Evidence
As outlined in this week's stock market video, the S&P 500 held near logical
support last week, but the intermediate-term investment picture remains cloudy.
While U.S. equities rallied strongly Friday based primarily on positive developments
in Russia and Iraq, we need to see more than a one day bounce. Therefore,
we continue to run a fence-sitting strategy with stock exposure (SPY) being
offset with a large cash position and modest exposure to bonds (TLT). If
the S&P 500 can "prove it" by closing above 1965-to1970ish, we will be
much more willing to take an incremental step back toward growth-oriented
assets, such as technology stocks (QQQ). From a bearish perspective, if support
levels outlined in detail on August
7 are breached on any sustained basis (more than a day), our market model
will call for further additions to cash and reductions on the stock (VTI)
side of our portfolios. We will enter the new week with a flexible, unbiased,
and open mind. The markets will guide us if we are willing to listen.
Hope image from DieselDemon.
War image from Ron
Cogswell. Locomotive image from David
Merrett. PC image from Luke
Jones.