By: Chris Rowe — November 16, 2010
Markets Won't Recover for Decades -- Here's How to Profit
Do you want to ensure you'll be working and panicking through your retirement years? Then keep investing.
Today I'll prove to you that unless you are a TRADER (not investor) odds strongly favor that, by the year 2019, your retirement will be worth exactly the same amount as it's worth today -- at best ...
This is not about the Eurozone falling apart again; not about inflation, deflation or disinflation; not about politics or QE2 or anything that most people will care less about in 10-years. This is a simple matter of history repeating itself, and a cycle that spans across a full generation.
I hope I don't sound condescending when I say ... WAKE UP!
I say it for your own good.
In financial markets, time has to be viewed in an emotional context because investors must adjust to new expectations. Consider the power a few years of market advance or decline has on sentiment ingrained in the mind of the investor. It tricks 85% of them at every turn -- RIGHT?
Now consider what an 18-year cycle does to the mind of an investor. Depending on the generation, he or she is trained to believe a market moves sideways over the long-term, or trends over the long term.
I'm a young buck -- 33-years young -- and some say I'm well read on stock market and economic history, while others (my wife and kids) feel sorry for me for having a "boring" life, reading books, strictly, on the financial markets. No novels, no fables -- unless they are based on the financial markets or they are being read at my children's bedtime.
But a person doesn't have to have a single day of financial market experience to understand my point in the first couple of paragraphs today. One need simply look at a chart of any financial market of the last 2 centuries. In fact, it would probably seem even more obvious to the non-participant that another decade of sideways action is a near certainty.
The Older We Get, The Longer The Hangovers Last
Look at the chart below that dates back to 1901. It's clear that long periods of economic expansion are followed by long periods of consolidation (trading sideways).
What's more interesting is that, if you compare the booms (green) to the consolidation periods that followed (red), you can see that, after very long-term stock market advances, the market generally takes about twice as long to consolidate!
You can even look at the boom and consolidation period within the 1929-'54 "consolidation period" (if you want to call it that), and you can see that the huge gain from 1933-'37 (yellow) took nearly three times as long to consolidate (blue).
From the early 1800's through the post-WWII era, the average cycle (not exclusive to the equity market) has lasted about 18 years. But the length of this cycle seems to have expanded after WWII, possibly due to the significant increase of government interference and commitment to full employment. The expansion of this cycle has caused an even stronger influence on the minds of investors who feel that "times like this" are here to stay. That means it takes longer for these humans to adjust to the new cycle -- a cycle that recently begun.
My Personal Perspective
I started paying close attention to the financial markets between 1992 and 1994 (in the wake of the 1990-1991 recession and S&L crisis.) As far as I could remember, the market had always traded up. In fact, it ran up from the early 80s for about 17 years!
When I went to Wall Street in '95 and started trying to convince people three times my age to buy and hold stocks, I couldn't understand how they could sit on the sidelines or be so cynical and skeptical of the potential for a continued advance. While I quickly educated myself on financial market history, I was completely uneducated in human psychology. But how can you blame someone who sat through the market from 1965 - 1981 -- and with inflation rates reaching over 14% -- for not believing in the stock market?
Take a good, hard look at the chart below.
It's a chart of the Dow Jones Industrial Average from 1965 (when it was at 874) through 1981 (when it was at 875).
So, you could have held a portfolio of stocks that mimicked the Dow for 16 years, and you would have made 1 point.
That’s a long time to wait for a point!
But it gets worse. This period of time, adjusted for inflation, is actually comparable to the 1929 - 1932 market mayhem. And consider the fact that this period began after 24 years of rising prices! (Does any of this sound familiar to you? The market ran higher from 1981 - 2000 where it peaked -- adjusted for inflation -- or made its first double top in nominal terms.)
Where Do I Come From?
Middle Class Queens, N.Y.C. It's the old cliche ...
Raised, with my brother and sister, by my single mother who simultaneously held two jobs and went through college, I delivered newspapers from age 8 (I think) and followed the stock market news in the paper. That's not the only reason I had an eye on the market.
My dad ran a hedge fund in the 80s and used to deliver stock certificates to Bernie Madoff's office in the 60s. I wanted to get an idea of what he was off doing -- although it never quite made sense to me.
His dad was a Princeton professor and chemist at Pfizer. Let me pause here. My grandparents prospered for two main reasons. One is through the years spent at Pfizer (stock options) and the other is when my father strong-armed his parents to buy a modest position in Merrill Lynch & Co. stock at the all-time low in 1974 when the market crashed. My point here is, if you followed the two stocks for the last few decades, you know the stocks both made insane gains but ultimately "messed the bed" when the 30-year boom ended.
To summarize the rest ... Great grandfather was V.P. at National Lead (bought by Dutch Boy Paint) and his father was actually good friends with Pierpont Morgan, Sr. (J.P. Morgan) with whom he did minor business, and he was President of White Lead (preceding Nat. Lead).
So, when I was 20, after moving to an apartment in Manhattan on the corner of Wall St. & Water St. (across the street from the NYSE and my office), reflecting on my childhood and studying the markets, I found myself wondering how on earth I ended up simultaneously growing up on the "streets of New York" with no money while, at the same time, having exposure to the most powerful people on the planet.
What's My Point?
I believe I have had quite a unique vantage point -- viewing and understanding the history of the market as well as the reality of the stock market from multiple angles -- both long-term and intermediate-term. I believe I've seen this from many angles and therefore have been blessed with objectivity.
I was actually at my (pushing age 90) grandparents' house in Connecticut in Mid-September, 2008 when Lehman collapsed. The week before the market crashed, there I was writing to the members of The Trend Rider that they had to take a huge psychlogical step of withdrawing or at least hedging the majority of their bullish positions, and recommending several put options to play instead.
It was a profound moment in my life as I witnessed the contrast between each of my grandparents' moods as they witnessed one of their main and best performing holdings of 30 years nearly evaporating (Merrill) as their dividend paying portfolio did what the rest of the market did. My grandmother, awake since 6:00 am (4-5 hours early for her), usually witty and chipper, looked like she was going to faint, while my grandfather looked at her and chuckled with the confidence of Warren Buffett.
Now, if you hold your stocks for a couple of generations, you might be able to chuckle confidently when things like this happen. But my grandmother knew that it was the end of an era of a massive leverage-based expansion that had been in existence since I was 5-years old, when my parents split.
Nearly 73 million Americans (or just under 50% of our working population) have a 401(k). But the average 401(k) has a balance of $45,519, and 46% of all 401(k) accounts have less than $10,000. Hardly enough for retirement.
The result? You'll see a reduced standard of living at retirement.
"Don't sweat it! I've got time!"
The next 10 or 15 years will be a period of long-term consolidation for the stock market -- meaning, it will ultimately trade sideways and end up in the same place it started.
If you're like most retirement account holders, you're passive, your 401(k) is largely tied to the general stock market, and you're still in shock, trying to digest what recently happened and what the future holds.
Don't understand the impact that inflation has on real stock market returns? You're not alone. But here's an inflation adjusted 140-year chart of the stock market. Notice how this chart doesn't show a flat market from 1965 - 1981. Now you know why I said this period was actually comparable to the 1929 - 1932 crash.
Also notice that, adjusted for inflation, the stock market peaked in the year 2000. The good news is that means we are already about 10.5 years into the consolidation period. The bad news is that, historically, the market has taken twice as long as the preceding bull market to digest the intense gains. Even if the recent economic expansion, from the early 1980s to the recent 2007 top, takes HALF as much time to consolidate (as opposed to the historic 1.7 to 2.88 of the time), we wouldn't revisit the 2007 high until 2019.
Again, I highlighted this in the "nominal return chart" posted again below for convenience.
(Click the chart to enlarge)
We are right in the middle of a "transitional period" for the economy and virtually all financial markets, so investors are experiencing the highest level of confusion we have seen in generations.
Don't think we will recover and just move on "as usual" -- just forget about that.
Banks are rehabilitating their balance sheets (by not doing any significant lending), and the sector is in the process of de-leveraging. As a result, you are likely to see lower growth, lower investment, and nominal GDP.
The next 16 years may look similar to the the chart below (from 1965-'81). That's FINE, and could be a very profitable market to play in, as long as you aren't considering the "buy and hope" strategy that worked for the last quarter-century.
There are solutions to this nightmare of a problem, but unfortunately only some of you will have the understanding you'll need to adapt to the new economy, and the new market opportunities.
Step 1. Immediately break away from the concept that the majority of your equity holdings should be held and forgotten about over the long term. This is the toughest step of all: To be the minority. To not view the world the way 80% of people in the market view the world.
Courtesy of businessinsider.com
Step 2. To make money in the market is to be a trader. When I say "trader" I mean a person who trades trends (and sells options premium when it's flat). An investor, to me, is someone who holds stocks for many years. Over the next decade it will probably pay to "trade" ... even if that means holding for 3-6-18 months at a time.
Step 3. Be in the right sectors of the market -- the ones experiencing "mega-trends" are the easiest to play.
Tycoon has a clear picture of what's going to happen next, and we'll be showing our readers and students how to make "Quantum" returns -- not only by explaining what asset classes hold the most strength and when, but more importantly, by training you and educating you so YOU can find it for yourself.
What are "Quantum returns"?
Well, in 1970, Jim Rogers and George Soros founded the "Quantum Fund." During the following 10 years, the portfolio gained 4,200% while the S&P 500 advanced about 47%. Jim Rogers has been leading the charge as the face of the long-term commodity boom. If you agree with the idea that inflation is coming, then you agree with Rogers.
That's why, when I wrote in the "Tycoons 4 for Q4" report in the first week of October, I talked about how to best take advantage of the agricultural sector. After a short pullback, the sector will likely advance another 25 - 40% over the next year.
We're going to bring you the education you need to make sure you aren't one of the MAJORITY of people who will have a stock account worth the exact same amount as it was 10-20 years prior.
And by the way, we have never had a period of time where the government prints tons of cash (as it has just done), that wasn't followed by inflation.
The U.S. is likely going to end up seeing runaway inflation.
So, even though most people will end up with the same amount of money in absolute terms, the fact is that the money might be able to buy you half as much stuff!
While considering Jim Rogers' performance from 1970 - 1980, and pointing once again to the charts above and the difference between that time period's stock market in nominal terms and inflation adjusted terms, consider that in the 70s there were wars in the Middle East and inflation rates were over 14%, gold gunned higher to over $800, OPEC limited the supply of Oil and the U.S. economy was a mess. Does this sound familiar?
In Closing ...
Some of those reading this article can't envision a market that doesn't advance over the long term. Who can blame you? Many of you weren't watching the market prior to 1981.
But the 24-year trend occurred because of corporate profits that were largely a function of cheaper and cheaper financing, and higher and higher leverage, combined with increasingly complex financial innovation and loose regulation.
Here's what you have to do.
Now that we are IN THE MIDDLE OF the "worst crisis since The Great Depression," you are going to have to do something that investors haven't had to do in 30 years ...
You're going to have to shift your mindset away from the way you've been trained to view the stock market over the last couple of generations (for some, including me, that's as long as you can remember investing), and adapt to the new stock market -- one similar to the market from 1966-83.
After a three-year stock market massacre (from late 1929 to late 1932), we had a massive 4.5-year rebound. The market would rally off of vast government expenditures and monetary chaos.
It was an artificial recovery (similar to what we are seeing today). The economy went downhill again beginning in 1937-38 (followed by a brief rally and another four-year sell-off) because we didn't encourage private enterprise. Familiar?
And the reason I think this time frame is a better comparison is because now we are seeing the same thing:
We have interest rates at nearly zero (and a strong fight by global governments to keep that intact for as long as possible), and massive economic stimulus by the government into the economy. (So, the gains are artificial, and Uncle Sam will eventually stop the massive "stimulus" that's causing the "stabilizing economic mirage.")
When high growth is expected, the market trades at higher P/E ratios. When lower growth is expected, the market trades at lower P/E ratios.
So notice how, after 1938 -- the period in which the government propped up the economy (just like today) -- investors weren't willing to pay high multiples-to-earnings, with the exception of an 18-month period.So I would caution against buying the "low PE" story if you are buying that story for a 5-10 year trade.
Even when the current economy is seeing GDP growth quarter-over-quarter, the big picture is the United States becoming totally addicted to the current policy framework. And that's the key to this whole article. People become addicted and accustomed to a way of life in the financial markets and the economy. It's almost impossible to get people to change their mind without them first feeling severe pain.
What you'll see, just like the late '30s - early '40s, is massive reliance on the government, followed by fiscal policy tightening to fight the inevitable inflation with higher and higher interest rates, and a country where private enterprise has been completely discouraged.
To put it simply, here's an analogy: The economy doesn't REALLY pick up again until the kid, who always had mommy and daddy paying his way, decides he is uncomfortable enough to get up and start a business of his own.
What the heck do we do?
Being forced to have your retirement account pegged to one of the major stock market indices such as the S&P 500 or Dow-30 is a thing of the past! This isn't the old days where your financial hands are tied!
There are plenty of other asset classes that will give us explosive opportunities, and if the stock market is your place of comfort, or if your 401(k) plan is restricted to the stock market, that's perfectly all right, too. You can make huge profits by TRADING the stock market instead of the "buy and hold" strategy that worked for the last few decades.
Before the roaring '90s, the stock market was a place that seemingly was meant for wealthy Tycoons only. We won't go back to that way of thinking, simply because of the access to information and education that you now have at your fingertips.
Tomorrow's market will be a place for different kinds of Tycoons! And you're one of them ...
Look again at the chart from 1965-'81. What do you see?
I see nine opportunities:
- 4 major long-term downtrends (red arrows) -- profitable for bearish positions.
- 4 major long-term up trends (green arrows).
- And perhaps the best part: one zig-zagging sideways trend -- a premium-collector's dream (think options).
Most individual investors will look at their retirement accounts and regular accounts 10-20 years from now, and the value won't be much different from today's value.
You, on the other hand, can make "Quantum returns" in the same time frame, if you know how to view and trade the market.
(Remember, Jim Rogers and George Soros made 4,200% from 1970-'80 when the market gained 47%.)
How'd they do that?
The secret to making "Quantum returns" is to stop believing in "the market." If someone asked you what "the market" is doing, you'd probably tell them about an index of 30 stocks known as "the Dow Jones Industrial Average."
Most investors, who are unsophisticated, believe they are at the mercy of this basket of securities.
GET THAT OUT OF YOUR HEAD RIGHT NOW.
You can free yourself financially if you understand two things:
1. Understand that financial markets are broken down into many different categories.
You can trade stocks, bonds, currencies, etc. If you find, at the time, that equities (stocks) are where the strength is, the first thing you would do is find out which of the global markets are the strongest (U.S., China, Brazil, etc.).
Then you should find out if the strength is in large-cap stocks, mid-cap stocks or small-cap stocks.
If it's in large-cap stocks, is the strength in large-cap value or large-cap growth? If it's large-cap growth, is it in financials, energy, technology, etc? If the strength is in large-cap growth tech, would that be in software, semiconductors, computers, Internet, etc.?
Zooming back out, you have to view the financial market as a place that offers you many choices. You don't have to be in stocks. For instance: When we experience runaway inflation, you'll make huge Quantum returns in commodities.
2. Understand how to identify where the strength or weakness is found.
Whether the strength is in stocks, commodities, bonds or currencies, you can use basic technical analysis to spot the trend. And the trends you'll find will usually stay intact for a significant period of time.
You don't have to find strength in a group to make money -- you can make just as much money by identifying weakness.
If you have a 401(k) that's very restrictive, only allowing you to invest in a hand full of equity funds, don't sweat it! Once you understand how to view the market (one that offers you many choices on where to put your money), you'll know how to work that angle, too.
You can chose to invest in the funds, likely offered by your 401(k) plan, that are more likely to show the most relative strength. And when the market starts reversing lower, you can move out of that fund and into a money market account (which is similar to cash) until strength returns.
Transition to your richest days yet.
Use the current economy's "transition period" that I mentioned to educate yourself on how to break down the market. Make "Quantum returns" and don't sit there with your retirement at the mercy of a couple of indexes that are known as "the market." Those indices are nothing more than a distraction, and are being used to manipulate market psychology like shaking shiny keys to distract a kitten.
Don't fall for it. Don't let them play you. Start studying and play the markets.