An Investment Strategy for the Worst of Times

An Investment Strategy for the Worst of Times

We live in a strange time. There are political, social, and economic dysfunctions at every turn. We all know the list of dysfunctions, including extreme partisanship, culture wars, inflation, weak growth (and even declining GDP in the first quarter), supply chain collapse, the continuing pandemic, and the war in Ukraine. From week to week and month to month, these dysfunctions don’t heal themselves. They don’t get better. In fact, they get worse.

Most of us have seen bad times before, whether it was the extreme inflation and repeated recessions of the 1970s, the Russian financial collapse in 1998, the dotcom crash of 2000, the global financial crisis in 2008, the pandemic panic and associated stock market crash in 2020, or the war in Ukraine.

Relatively few people alive today have a lived memory of the Great Depression during 1929–40 or the Second World War from 1939–45. But still, we’ve all studied those cataclysmic events and lived with the lessons and the aftermaths.

Despite the misery of those episodes, it wasn’t all doom and gloom at the time. The 1950s and 1960s were a period of unprecedented prosperity, technological innovation, low inflation, low unemployment, and the rise of suburbs that offered Americans a chance at home ownership with individual homes, tree-lined streets, good schools, and a backyard barbeque.

The period of 1983–2000 — under Presidents Reagan, Bush 41, and Clinton — was one of almost continuous growth, low taxes, low inflation, and the introduction of mobile phones, the internet, and efficient search engines.

Once past the impact of the 1998 financial crisis and the 2000 stock market meltdown, the period of 2001–07 was another long episode of steady growth, low inflation, the rise of social media, and prodigious home building and home ownership, despite the bubble characteristics that finally exploded in late 2007 and 2008.

Even after the GFC of 2008, the US had its longest expansion in history from 2009–19 under Presidents Obama and Trump. This long expansion was notably weak (about 2.2% growth per year, compared to the average recovery growth of 3.2% in the post-1980 period), but it was prolonged and characterised by low inflation and low unemployment.

And that’s the point. The US economy hit some potholes (1977–82, 1998–2000, 2008, and 2020), but it always bounced back.

For every pothole, there were long periods of growth and stability

In the 1950s, 1960s, 1980s, 1990s, early 2000s, and after 2009, the US economy — powered by investment, innovation, entrepreneurship, and the plain hard work of its people — promised long-term gains despite short-term pains.

The stock market was along for the ride. The Dow Jones Industrial Average was 201 on 1 January 1950, 622 on 1 January 1960, and 744 on 1 January 1970. The period during 1970–82 was flat overall (with some dips and rallies along the way), but a long-term upward trend resumed after 1982. The Dow Jones was 2,750 at the start of 1990, 11,500 at the start of 2000, and reached 28,250 at the start of 2020.

Of course, these returns aren’t adjusted for inflation or dividends. The volatility is much greater when adjusted for inflation, including large inflation-adjusted losses during 1966–82. The uptrend is also less imposing when presented logarithmically instead of in a linear way. Still, the long-term trend is unmistakable. As goes the economy, so goes the stock market, and both have performed impressively for the past 70 years.

Are the good times over for good?

Is the world now at a point where an accumulation of negative forces, the delayed reckoning from repeated bailouts, and the unleashing of previously pent-up forces — including Russian aggression in Ukraine, communist totalitarianism in China, and financial recklessness in the US — have converged to produce damage on a scale not seen since the end of the Second World War?

If the answer to that question is yes, then we’re not looking at just another pothole on the way to growing prosperity. We’re looking at a paradigm shift of a kind that typically happens only once every hundred years, or even less frequently.

We may be entering a phase that could more properly be compared to the Napoleonic Wars, the Thirty Years’ War, the Black Death, the Crusades, the rise of Islam, and the fall of the Roman Empire, in terms of its pervasive and inescapable impact on society. Life will go on, but it will not be the same. Nothing will be the same.

A similar transition occurred over the course of the First World War. As late as the summer of 1914, the world was largely at peace. A first age of globalisation would bring the goods of the world to your doorstep, gold was good money, and great empires controlled much of the land mass of the globe.

By 1922, the German, Russian, Austro-Hungarian, and Ottoman Empires had all collapsed. (The Chinese Qing Dynasty had collapsed slightly earlier in 1912.) Gold was now confined to bank vaults and wasn’t used in daily transactions. Hyperinflation destroyed wealth in developed economies in Europe during 1919–23.

The 30-year collapse of sterling as a global reserve currency and its replacement by the US dollar had commenced (it would culminate at Bretton Woods in 1944). The seeds of a new world war, worse than the first, had been planted in the Versailles Treaty of 1919 and would come to fruition in Germany in the late 1920s and early 1930s with Adolf Hitler. In short, the great period of globalisation during 1870–1914 was over. What replaced it bore little resemblance to what was replaced. Nothing was the same.

Is the world just going through another bad patch to be followed by continued growth and higher stock prices along the lines we have come to expect? Or is the world entering one of those epochal shifts in which all of the certainties are overturned and new structures — some good and some quite threatening — replace them?


James Woodburn Signature

Jim Richards,
For The Daily Reckoning Australia Weekend