On January 24, 1848 James Marshall found a few shiny flakes of gold on a riverbank in California.
This was the humble beginning of the California Gold Rush. Word soon spread far and wide. The prospect of quick riches resulted in mass migration. Over 300,000 people made the hazardous journey to California during the Gold Rush – some crossed the Pacific Ocean from China.
Did all 300,000 prosper from the Gold Rush? No. As is the law in life, ‘the minority make the majority’.
A great deal of luck (and hard work) determined the prospectors’ success.
Samuel Brannan was smarter than most; he wanted to bet on a sure thing and not rely on the ‘roll of the dice’.
Brannan was a merchant who cornered the market on pickaxes, pans, waders and all sorts of prospecting gear. He cleverly marketed his business in San Francisco with the repetitive message of, ‘Gold! Gold! Gold from the American River.‘
Brannan shrewdly tapped into the prevailing social mood of greed and made a fortune from being the one ‘selling pans in a gold rush’.
The modern day equivalent of the ‘gold rush’ in financial markets started in 1982.
The following chart of the S&P 500 index (courtesy of Yahoo! Finance) shows the exponential growth of the US market from 1982 to 2000.
Look a little closer and you see from the late 1960s to 1982 the US share market virtually flatlined (100 points in 1968 to 110 points in 1982).
The share market ‘gold rush’ heralded in the same cast of characters – prospectors and pan sellers.
Here is a chart of the ‘prospectors’ participation (courtesy of Elliot Wave Theory).
The Secular Bear Market of 1968 to 1982 crushed society’s animal spirits.
The percentage of US households owning stocks ‘zigged and zagged’ its way down from 35% to 20%. Four out of every five households were OUT of the market.
From 1982 onwards the public’s love affair with shares was rekindled by two factors:
- the beginning of the credit boom and
- the ‘tech boom’ in the 1990s.
At the market peak in 2000, three out of every five households owned shares. The prospectors had well and truly migrated to the market.
The pan sellers could not have been happier. The following chart (from The Big Picture) shows the ‘US Financial Sector profits as a % of All Domestic US Corporate Profits‘ since 1947.
The graph tracks the fortunes of the financial sector through a Secular Bear Market and Secular Bull Market.
Profits plunged from their Dec 1970 peak of 20.67% to an almost negligible 3.37% in March 1982 (the bottom of the Secular Bear Market). Demand for ‘pans’ in the Secular Bear Market was exhausted.
The ‘gold rush’ from 1982 to 2000 saw a massive profit turnaround for the ‘pan sellers’. Profits (as a percentage) rose an incredible nearly fourteen-fold.
Since 2000 the market’s down, up, down, up routine (typical behaviour for a Secular Bear market) has dampened the public’s euphoria for all things share market related. This is reflected in the slight reduction of ‘prospectors’ and in the ‘pan sellers’ profits.
Institutions bestowed with the title ‘too big to fail’ indicate just how dominant the financial sector has become over the past thirty years.
The product development and marketing departments of the institutions work overtime trying to tap into the prevailing social mood.
When markets sustain a sizeable correction and the mood sours, ‘Capital Protected’ products hit the shelf.
Markets run hot – margin lending is suddenly the flavour of the month.
Whatever direction the ‘herd’ runs in, the institutions will chase after them with a product.
The reason for this is obvious – without funds to manage there would be no Funds Management industry. It would be called the NO Funds Management Industry. Who knows, at the end of this Secular Bear Market we may well call it the ‘Barely There Funds Management Business’.
The rivers of gold for the institutions are the management fees charged on products.
If you’d like to find out more about how the (black) magic of compound interest can turn a seemingly reasonable 2.5% management fee into 50% or more of your investment over time, I explore this topic in detail in my last monthly newsletter.
for The Daily Reckoning Australia