Tracking the Landmarks
"History does not repeat, but it does rhyme." -Mark Twain
What We Do
Every quarter we frame current events against historical precedent and attempt to map out some scenarios of what may lie ahead for US financial markets and US equities in particular. To organize the lessons of history we study five key categories - they are:
- Asset Valuations (Emphasis on Equities)
- Credit (Money, credit & banking)
- Technology (Efficient division of labor)
- Politics (Regulation, taxes, trade)
- Demographics (Population characteristics)
Our analysis focuses on the long-term outlook (5-10 years).
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2011 Reports
First Quarter – Gold
Goldfinger; When to Own Gold; Four Ways to Trade Gold against Other assets; Prophecy about Gold and Money from the Original Oracle; Is a Return to a Gold Standard a Possibility? Click here to access PDF of first quarter report.
Second Quarter – The Contrarian Case
The Contrarian Case; QEII has Failed to Break Us Loose of the Liquidity Trap; The Bernanke FED: If at First You Don't Succeed...; The FED's next move: Back to the 1940s?; Five year outlook for Bond and Equity Prices; Napier, Grantham, Call the top for US Equities. Click here to access PDF of second quarter report.
Third Quarter – Recession 1.2
Government Intervention is All that Matters; Buckle up for Recession 2.1; Half Way There. Click here to access PDF of third quarter report.
2010 Reports
First Quarter – A Decade of Uncertainty
Scott; Fairness - Is it Meat or is it a Nut?; The Heavy Hand of Government is a Game Changer for the Next Decade; Uncertainty is a Heavy Weight on Asset Prices; Hope for Scott. Click here to access PDF of first quarter report.
Second Quarter – Into the Fourth Turning
Eureka; Into the Fourth Turning; The Greek Cockroach; Unholy Alliance; "Rocking Horse Winner"; "Fingers of Instability"; Investment Positioning. Click here to access PDF of second quarter report.
Third Quarter – Parking the Car Backwards
Parking the Car Backwards; Double Dip? Can you really fall down again if you're still on your knees?; Hamilton, Krugman and the Gallows; Fossil Fuels and the Genetic Drift of Ideas: Keynes vs. Hayek; Investment Positioning. Click here to access PDF of third quarter report.
Fourth Quarter – Logan's Run
Logan's Run; Massive Government Support -- Good for Now, But Beware Withdrawal; Expected 10 Year Equity Returns Look Poor, Again; Reality Check. Click here to access PDF of fourth quarter report.
2009 Reports
February – Cyclical P/E Ratio Analysis: Stocks Are Not Cheap (Yet)
Are US Equities Cheap? Based on the Cyclically Adjusted P/E ratio, not yet, and not until the value of the S&P 500 falls below 675. Even then, invest with at least a 10-year horizon, be patient, and prepare for the possibility of a further 30%-50% decline in the real value of the S&P 500 before the ultimate bottom. Hide in cash and cash equivalents. Click here to access PDF of February report.
March – Five Headwinds and a Bear Market Rally
Five Forces that drove the bull market are now headwinds. These forces are likely to persist, and conditions that can support a long secular bull market are still 10-20 years away. There will be several tradable bear market rallies along the way. One may be at hand: we are buyers when the S&P 500 drops below 675 and again at 600. Click here to access PDF of March report.
April – Debt Fatigue: The One Big Lesson From Japan
Central Banks are not all powerful because they rely on the steady appetite of borrowers to ply their trade. Once every 50-100 years, a major shock shifts psychology to one of debt avoidance. This seriously blunts the tools of central banks and can lead to long periods of debt reduction and very slow growth, as witnessed in Japan since 1990. The events of the past two years put the US at high risk of embracing a similar shift in psychology. If it takes hold, then deflation will characterize the next 5-10 years, not inflation. Click here to access PDF of April report.
May – The Fed and More Pronounced Cycles: Cyclical P/E Ratio Analysis Update
The bear market rally is in full bloom and may last into the summer, possibly longer. An update to our Cyclical P/E Analysis shows that since the Federal Reserve was established in 1913, cycles in equity markets have been longer and more extreme. The data since 1913 suggest that buying the S&P500 at today's valuation would have yielded 10-year inflation adjusted returns of negative 2.4% per year. Even though we believe equities may continue to rally in the near-term, the risk/reward profile for the long term is not favorable and we suggest closing out of long positions established in March. Click here to access PDF of May report.
June – In the Eye of the Storm
The aftermath of the typical financial crisis tends to be a long and muddled affair. The outlook today suggests it is unlikely to be different this time. As in the aftermath of past crises, a sustainable recovery will likely be delayed as long as the banking sector remains impaired and as long as strong headwinds from poor trends in housing and unemployment persist. Click here to access PDF of June report.
July -- Taming the Mind
For fun and for a change of pace, we study the tool between our ears that makes investment decisisons -- the brain. I have been fascinated by neuroscience for years, and in this report we examine some startling experiments that illustrate cognitive biases that could hurt your investment performance. They are not easily tamed, but who knows -- maybe even an awareness of their existence might help in some small way. Click here to access PDF of July report.
August - Navigating the Aftermath of Big Fed Interventions - A Look at 1919
The Federal Reserve first exercised its power to create money and credit in WWI and in the immediate aftermath. This was a significant change for investors and the first large-scale intervention by the central bank. Today we face a similar situation as the Fed has intervened on an unprecedented scale, using tools rarely seen before. The parallels are enlightening. Our conclusion is that this rally could persist for several more months, but could begin to falter when the composition of the Fed's balance sheet stabilizes. Click here to access PDF of August report.
September - Job Growth Must Resume Now or the Rally Will Likely Fizzle.
Don't Dismiss employment as an irrelevant trailing indicator. While it is true that equities bottom before employment bottoms in a recession, the strength of the continuing rally thereafter correlates well with the strength of employment growth. We are at that critical point where history argues that employment must start growing again in the next few months or the rally will fizzle. Click here to access PDF of September report.
October - Command Economy
Pigeons in Bryant Park; Welcome to the Command Economy; It's All About Credit (and Jobs); One Last Dance? Ketchup Arbitrage. Click here to access PDF of October report.
November - Smokey Bear
Up and to the Right; Controlling Cycles; Bernanke Meets Smokey Bear; On the Horns of a Dilemma; Towards a Tenuous New Cycle. This report looks at the consequences of our attempts to control the cycles of nature and, by analogy, we discuss the precarious ballance of our monetary policies. Click here to access PDF of November report.
