The times they are a-changin’… (4 min read)
The summer of 1969. It was one of those special moments in American history. In July, man first walked on the moon, and then a few weeks later in mid-August the baby boom generation celebrated its coming of age at the now legendary Woodstock music festival.
It seemed then that everyone knew they were living in an extraordinary time. What they couldn’t know was that these events marked the end not just of a decade, but of an era. Arguably, Americans never again managed to rally around a common goal like the 1960s space program. And even the passions that fuelled the anger and protests, the violence, and the assassinations of 1966-8 faded underneath the haze of drugs and free love at the festival in upstate New York.
Even fewer noticed that markets had reached a major turning point. The S&P 500 registered an all-time high of 108.37 on 29 November 1968. Between the creeping scourge of inflation and the twin oil price shocks of 1973 and 1979, the market would not sustain a rally above that level until nearly fourteen years later in mid-August 1982. On an inflation-adjusted basis, the S&P 500 would remain underwater until August 1991.
But why have I brought you back to the sixties? Well, major transitions, whether marked by extraordinary events or largely invisible, are rarely understood for what they are at the time. And I think we can learn from this turning point in history.
When markets took off in August 1982 we knew things were taking a turn for the better. We cheered the baby steps of deregulation that came along, including the gradual lifting of interest rate ceilings on bank deposits and the SEC’s Rule 10b-18, which provided a safe harbour for companies to repurchase stock. But for all our optimism, we never dreamed that bond markets were starting a rally that would take the 10-year Treasury yield from 15.3% to 1.6%; and we were clueless about the havoc that deregulation would eventually unleash.
For a long time we thought that the Fed, led by Paul Volcker and Alan Greenspan, was bringing inflation under control. It wasn’t until the dot-com mania of the late 1990s burst so spectacularly that it started to dawn on some of us that maybe inflation had morphed into something more frightening – a series of asset bubbles appearing misleadingly normal right up until they burst.
From the vantage point of 2019, it is clear that August 1982 was indeed the start of a political, regulatory, and market regime that persisted into at least 2008. You could argue that era ended with the financial crisis. But really, the past decade has resembled a twilight zone where people have struggled mightly to restore the pre-crisis order.
Despite their efforts, though, there are growing signs that we are moving into a new era. Among the signs:
- A rise of authoritarian governments. The breakdown of liberal democracy and the rise of nationalism around the world has been driven in large part by the failure to distribute the benefits of globalization more broadly. But many of these countries are still beholden to voters and the ballot box; they face political instability if leaders can’t deliver. Just ask Maurico Macri, President of Argentina.
- Brexit. Europe and the Eurozone may have survived the 2012 crisis, but Brexiteers look likely to push through Britain’s vote to leave the European Union. The success or failure of this, and the growing nationalism that has come with it, will redefine the European project and give other nationalist countries precedent to demand changes.
- Trade wars. Trump’s tariffs won’t survive his presidency but one way or another the global trading regime is not going back to pre-2016 norms.
- Climate change. Some may still debate whether climate change is real, but the reality is that society’s political capital and economic resources will increasingly be consumed by the struggle to adapt.
- Central banks lose their mojo. Over the past three decades, the central banks were always there to steady markets and even, on occasion, to rescue them. Now, with rates near zero in most of the developed world they risk being exposed as empty suits if (when?) another crisis hits.
- Pension funds become net sellers. In coming years many public and private pension funds will transition from being net buyers to net sellers of assets as benefits exceed premiums. We can expect a major asset allocation shift from equities and from illiquid private equity funds to bonds.
- Japanification becomes the norm. There is much anxiety over falling into a slow or no-growth deflationary environment like Japan. But despite its problems the country has maintained per-capita GDP growth in line with the US and Germany (see charts), and it may be that developed world economies have something to learn from Japan.
- The rise of the Squad. In the US the Squad – four young, first-term congresswomen of colour – have attracted both admiration and derision for their progressive views. What most observers miss is that the Squad will most probably be the future face of Congress as a new generation enters politics.
It would be easy to go on with this list, but the point is that society and markets aren’t playing a new hand in an ongoing game – they’re starting a new game with new deck of cards.
As we noted above, however, perceiving the start of a new era and seeing where it may lead are very different things. That said, there isn’t much to be cheerful about here: it is easy to see how these various factors could lead to a stagnant market for risk assets for the foreseeable future – perhaps a bit like the 1970s.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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