Bulls love bull markets. History’s most famous bull, Yale economist Irving Fisher, loved the Roaring Twenties of the Great Gatsby.
Remember, weeks before the Crash of 1929 this brilliant Yale professor told investors: “Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon, if ever, a 50 or 60 point break from present levels, such as bears have predicted. I expect to see the stock market a good deal higher within a few months.”
Yes, bulls are perennial optimists. It’s in their nature, born in their DNA, a gyroscope guiding their brains. Their mantra: Napoleon Hill’s “Success Through a Positive Mental Attitude.” Their theme song, Monty Python’s “Always Look at the Bright Side of Life.”
They have an innocence, as if a sacred Invisible Hand gave them permission to set aside contrary evidence, dismiss facts and reality, rewrite history, challenge another “wall of worry,” and ignore market cycles, like the fact that 2013 is the fifth year of aging bull market, all mere dust to sweep under their bright-side-of-life rug.
Historical facts: Aging bulls in denial, roaring gets hoarse, bearish
Still, pause for a moment: Remember Bill O’Neil, Investors Business Daily’s publisher, a realist, part bull, part bear, who wrote in his classic, “How to Make Money in Stocks”: “During the last 50 years, we have had 12 bull markets and 11 bear markets … the typical bull market lasted 3.75 years and the classic bear market lingered only nine months.”
Well, investors, today’s bull is over four years old. Yes, an aging bull around hungry bears coming out of hibernation. Still, today’s bulls only sing the bright side, love roaring, and love taking risks against the odds.
They already lost roughly $10 trillion twice this century. They’re addicted to roaring, luring investors like a Pied Piper, making their money gambling with your money, even in losing markets.
Historical facts: Economic growth slowing to near zero
Jeremy Grantham, strategist for $100 billion GMO money managers, surveyed America’s economy for several generations, from the late 1900s: “The trend for U.S. GDP growth up until about 1980 was remarkable: 3.4% a year for a full hundred years. But after 1980 the trend began to slip.” And it’s “not going back to the glory days of the U.S. GDP growth.”
Get it? America’s growth rate is on a long slippery slope.
After a century of high-growth prosperity, GDP dropped “by over 1.5% from its peak in the 1960s and nearly 1% from the average of the last 30 years.” Worse, “going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year.”
And even worse, warns Grantham, through the next generation to 2050, America’s adjusted growth will average “about 0.9%.” Near zero, no growth, a killer for the stock markets through 2050.
Historical facts: Grand Disconnect, dramatic shocker by late 2013
Economist Gary Shilling, author of “The Age of Deleveraging” and long-time Forbes columnist, also confirms the long trend, warning of a “dramatic shock,” a wake-up call, a new black swan hitting the markets in 2013. Shilling is a realist among bulls: “Investors are paying little attention to weak and declining economies around the world, and concentrating on the flood of money being created by central banks.”
Shilling warns that this Grand Disconnect is driving “stocks around the world while the zeal for yield, amidst low interest rates, benefited junk bonds and other low-quality debt. The recent rush into equities by individual investors, after consistently liquidating them since 2008, suggests an expanding bubble.”
Yes folks, Wall Street bulls are blowing a new bigger, nastier bubble, repeating the roaring run-up to the 2008 meltdown, the 2000 dot-com crash, the 1929 Crash.
Remember, bulls are blind, they harmonize on the “Bright Side,” like Don Quixote, they believe in the promised land, a “permanently high plateau,” that they have finally discovered a cure to the 800-year old “this time is never different” malady. They dismiss Shilling’s warning that a Grand Shocker could shake up the financial markets before year-end.
Historical facts: 9 macrotrends slowing global economic growth
Gary Shilling just released his new Insight newsletter noting that “most of our economic forecasts have proved correct.” The most telling: “our projection of 2.0% annual real GDP growth was dead on.” Dead on, and he sees “another eight years of slow growth of about 2% in real GDP per year.”
That’s far less than the 3.4% long-term average from recent history and in line with the projected decline to near-zero growth in the next generation. Shilling sees a “forecast of continuing deleveraging” with “Nine Causes of Slow Global Growth in Future Years,” fairly rapidly through the next generation to 2050. The nine megatrends he predicts are putting the brakes on growth worldwide and across America are:
- New consumer-savings era: “U.S. consumers are shifting from a 25-year borrowing-and-spending binge to a saving spree. This is spreading abroad as American consumers curtail the imports of the goods and services many foreign nations depend on for economic growth.” We went from 12% savings in the 1980s to 1% in the last decade.
- Financial deleveraging: America’s financial leveraging binge began accelerating in the 1970s, with “debt-to-equity ratios of Wall Street firms jumping to 20-to-30 or more before Bear Stearns and Lehman Brothers.” Today financial deleveraging is reversing “the trend that financed much global growth in recent years.”
- New government regulations: In “The Age of Deleveraging” Shilling warns: “increased government regulation and involvement in major economies will stifle innovation and reduce efficiency, slowing growth.”
- Low commodity prices: “Earlier high prices spurred overinvestment and overcapacity, as usual, is coming on stream just in time for the recent drop in demand.” Going forward, “lower commodity prices will limit spending by commodity-producing lands” inhibiting future global growth: “The likelihood of continuing sluggish growth in coming years is a distinct depressing effect.”
- More fiscal restraint: “Developed countries are moving toward fiscal restraint.” And while such policies may not be “needed now they have resulted from the ongoing political gridlock between the Democrats and Republicans” that is definitely slowing economic growth.
- New global protectionism: “Rising protectionism will slow, even eliminate, global growth. Recessions spawn economic nationalism and protectionism, and the deeper the slump, the stronger are those tendencies.” It’s easier “to blame foreigners for domestic woes and take actions to protect the home turf.”
- Domestic housing slowdown: In the future “the U.S. housing market will be restrained by excess inventories and loss of homeowner investment appeal.”
- Consumer-spending cutbacks: As deflation continues, buyers will “curtail spending” anticipating lower prices as sellers get more competitive.
- State/local governments cuts: States and municipalities “will continue to contract” meaning less to spend, lower revenues, fewer services, less money from the federal government and more costs shifted to the people.
Yes, Shilling sees things getting worse, with real GDP growth at 2.0% annually for at least for the rest of this decade. Then as Grantham and many others warn we’re on the “Road to Zero Growth,” America’s GDP growth collapsing under 1% by 2050.
Of course, none of these facts will stop a bull from being a perpetual optimist with a positive mental attitude. Indeed, it’s a motivation to stick to your convictions. Why? It’s in their nature, in their DNA, with an Invisible Hand gyroscope pointing their minds at the “Bright Side of Life.”
No matter that America’s bulls have already lost roughly $10 trillion twice this decade — after the 2000 dot-com crash and the 2008 bank meltdown — they still believe “this time will be different,” in spite of 800 years evidence to the contrary. And you can’t just turn off an optimistic bull’s brain. Never can.
So secretly you must admire their innocent faith. Yes, eventually these nine economic macrotrends will wake all of America up to reality. But until then, enjoy Robert Mankoff’s brilliant New Yorker cartoon: “While the end-of-the-world scenario will be rife with unimaginable horrors,” predicts the CEO of a leading Wall Street bank, “we believe that the pre-end period will be filled with unprecedented opportunities for profit.”
Paul B. Farrell is a MarketWatch columnist based in San Luis Obispo, Calif. Follow him on Twitter @MKTWFarrell.
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