To figure out where you are going, it sometimes helps to
know where you have been. This is one of those times.
The last Bull Market began in 1982, and ran almost
uninterrupted for 18 years. During the last 3 of those years, an enormous
bubble – mostly Dot.com/Tech/Telecom – inflated. As that mania began to unwind
in March 2000, few were willing to believe it. The Bulls failed to recognize
the shift, and “pounded the table” all the way from Nasdaq 5100 down to
1100. This is not atypical behavior.
The post-Bubble economic environment was exacerbated by a
modest recession and then by the 9/11 attacks. But in our opinion, the most
significant negative factor was and remains the great 1990s bubble, and its
repercussions. That set the tone for the economic issues of the ensuing decade.
As is typically the case, the aftermath of the popped bubble was extensive.
Huge excess capacity was created at the same time that fantastic productivity
gains were being made. Hiring was frozen, capital expenditures ground to a
halt. The economy had a hangover proportionate to the huge frat party that was
the 1990’s tech & telecom fest.
Market crashes are typically followed by “refractory
periods” of a substantial length of time in which the prior excesses get wrung
from the economy. This process sets up the next healthy expansion. In an ideal
world, the powers that be would recognize this, and allow market forces to work
off this hangover on its own. Alas, most elected and appointed officials lack
the discipline and the will to get out of the way.
The post-crash era saw massive government stimulus: Personal
income taxes were cut, deficit spending soared, interest rates were
dropped to half century lows, money supply increased dramatically, two
wars were prosecuted, corporate dividend taxes were slashed, capital
gains taxes were cut, capital expenditures were granted a special
accelerated depreciation. Massive stimulus from the government included “everything
but the kitchen sink.”
Now, that stimulus is fading. The most vibrant sector of
the economy – the real estate complex – is slowing. Increased energy costs are
a drag on the global economy. Interest Rates and taxes have been going higher.
Earnings momentum, as measured on a year-over-year basis, has been slowing for
5 quarters. Hiring remains anemic, CapEx is unimpressive, LEI are softening,
GDP is fading.
The market has begun recognizing that the first
post-bubble expansion was premature. It has failed to develop organic momentum
of its own. Without further stimulus, this cycle will more likely than not end
over the next 2 or 3 quarters.