Long financial cycles last several decades, and many investors tend to forget that they exist. Which is a very bad idea if you don’t want to be surprised during reversals…
The noose is tightening around the Fed. Bloomberg:
“Federal Reserve Chairman Jerome Powell and his colleagues have seen their benchmark inflation gauge rise to a level not seen in forty years, when Paul Volcker was chairman of the central bank. American.
The household consumer spending index, which the Fed uses to set its inflation target, jumped 6% year-on-year in January, according to the average estimate from a Bloomberg survey of Feds. economists. The index ‘core’which excludes food and fuel, is expected to rise 5.2%.
Less than a month before the next meeting of the Fed’s monetary policy committee, a stronger-than-expected rise in the price index could lead the US central bank to raise its key rate by half a point. The consumer price index rose more than expected in January, with strong increases in the prices of goods and services. »
It’s inflation or death. Either the Fed keeps recklessly spinning the billboard or it tightens monetary policy, in which case you can say goodbye to the bubble economy.
Why this trend?
Paul Volcker was the last competent Fed chairman. He was also the last to reduce the money supply to stem inflation. That doesn’t mean he was right on the whole line. But pushed to its limits, it was able to react and stop inflation.
It was forty years ago.
Last Friday, we were looking at long market cycles. In short, prices move up and down in trends that last for decades.
Why ? Because markets are part of human existence. Like almost everything in life (except science and technology, where real progress is possible), these are deep-seated trends, patterns and archetypes.
Why do we fall in love? Is there a law that requires us to do so? Why do we get married? Love and marriage seem to go together, like a horse and a carriage. Then we have children, who will have children and so on. Is this a good thing? Is this a bad thing? We don’t know, but it’s been that way for a long time. We follow a pattern that we know but will never fully understand.
seasonal lessons
When winter comes, the temperatures don’t drop indefinitely until the earth turns into a ball of ice. After winter comes spring, then summer. In the same way, we are alternately inhabited by hope, despair, joy, gloom, war and peace, love and hate, sin and redemption.
We learn the same lessons over and over again. Storms come and go.
The markets are simply content to reflect these seasons of relish and discomfort. And the fact that the “long waves” are so long is not surprising. A generation learns. The next one forgets.
It’s been about a generation and a half since Paul Volcker brought inflation under control. Since then, price increases have generally slowed. No one thinks of repairing their roof when the sun is shining. And no one fears a rise in interest rates when they have been falling since a lease.
Bond yields fell to their lowest level in history after World War II (more or less when we came into existence). Then they went up for over 30 years, and then went down for over 40 years. It seems that they are now starting to rise again.
In markets, long-term trends, or primary trends, are also long. Markets peaked in 1929. Investors then had to wait 27 years for a new high (adjusted for inflation). From a low reached in 1932, markets rose for 34 years, reaching a new high in 1966.
Then they went down again for 29 years, much to the chagrin of investors. In 1998, the Dow Jones rose again to a level (adjusted for inflation) not seen since 1966.
Lightning progression
Starting from a level of 5,300 points, the Dow Jones would see a meteoric rise that would propel it to 36,000 points in 2021. From the lowest point of this cycle, which began in August 1982 and continues to this day , stock markets have risen continuously for nearly 40 years.
What awaits us now? It would be tempting to expect another long and sharp decline. If history repeats itself, investors will have to wait until 2047, at a minimum, to see markets rise to such highs again.
Should you get your stake back now? As we showed last Friday, measured in gold, the stock markets have been on the spot for the past 93 years. In 1929, it was possible to buy all the stocks comprising the Dow Jones for 18 ounces of gold. It also takes 18 ounces of gold today to buy the Dow Jones.
What’s the point ?
The dividends ! Businesses manufacture goods and provide services. They are the source of real wealth, which they share with shareholders. The trick is knowing when to keep them in the portfolio and when to get rid of them.
Is it possible ? Not really. But it is possible to get out of the game.
To be continued…