How Does A Bear Market Grab You?
I revisited my old stats dating back 50 years ago when the U.S. was mired in deep recession, 1973–’74. Our expression then for the malaise: Who cares? Nobody cares.
Today, pundits debate whether the market should sell at 18 to 20 times forward, 12 month earnings power and whether the FRB remains passive followers of troublesome economic indicators. But it’s time to massage the Fed Funds rate. The yield curve between 2-year and 10 -year Treasuries now so inverted suggests market forces not Fed intentions dominate yield spreads.
I endured the 1973–’74 recession, so deep and nasty for us as active players. Panic in real estate markets was equally hurtful. Owners of co-ops in The Big Apple walked away from their apartments because maintenance expense ran too high to their asset valuation. I bought my first apartment in The Dakota for $87,500. My neighbors, John and Yoko Ono, wanted to scoop up all available offerings in the Dakota, including one for a rehearsal studio as their son Sean, beat his drums with practiced conviction.
I recall deep pain in my gut, trading stocks in the no-man’s land of 19 73–74. Even told my present wife of 50 years that I might have to fold my tent in ‘73. Did she still want to get married? Toni nodded “Yes Oh Yes,” so we tied the knot Valentine’s Day and have lived happily ever after. I got lucky. The silver straddles I put on there in London didn’t destroy me, after all.
But I had to pass on some great Abstract Expressionist paintings, selling in low thousands that now change hands in tens of millions. When you’re early, art puts away even venture capital rates of return. Emeshed in Wall Street, who was I to single out great art buys as well?
Fifty years later, I still recall pain deep in my gut, but not such specific numbers that caused the pain. Today, I own a bunch of 2-year Treasuries yielding 5% , 65 basis points above counterpart 10- year notes. Nobody early on explained such historic yield disparity, going back 30 years. Such negative yield is at a 30-year record. My conservative act is costing me serious money, and raised my stupidity quotient unhappily.
This is akin to our banks last year, holding their advisory clients in the bespoken ratio of equity to debt of 60/40. They dropped 16% for the year but barely criticized for doing the perceived acceptable investment construct.
During 1973–’74 the conceptual investment framework was torn apart. Amid hyper inflation and soaring interest rates, the Dow Jones Averages sold at a discount to book value. Nobody anticipated the rise for interest rates and inflation. Rates rose 250 basis points. Today, the FRB and its followers dwell on quarter point margins. Much too conservative a construct. Such a swing in interest rate swings can move a stock market as much as 50%.
The price-earnings ratio in 1973 collapsed from mid-teens to as low as 11 times earnings. The market actually based out at 570 late in 1972 at 6 times earnings. We reverted back to the days of 1949. All I knew then was nobody had any money. I had just entered CCNY, and hoped to make a living writing short stories. It took exactly 8 months in 1973 to make you thoroughly disgusted with yourself as a savvy money manager.
The deep basic was a market deeply deflated. In 1974–’75 Dow Jones stocks were cutting their dividends. Dupont, General Motors et al. Price-earnings ratios like interest rates tend to move in great tides of rise and fall. I believe we could be entering an early phase of an ebb tide. When earnings disappoint, stock prices are likely to drop violently. Bull markets could run shorter. Today, polite players believe the market should sell at 17 to 20 times earnings. Sounds too pie-in-the-sky to me. Think of our earnings history. Price earnings ratios got battered and fluctuated between seven times earnings in 1975 from the highs of 21 times results.
No rose garden ahead. Our Fed blows in the wind with wishy-washy action. Who can explain why we show a negative yield curve between 10-year Treasuries and 2-year Treasuries? I’ve gone back some 30 years and then my charts go no further.
The answer is the Fed needs to raise an enormous gob of capital next 12 months or so.
Don’t take for granted, the bullish consensus, that the market sells at 20 times rising earnings.
The Fed needs to buy back trillions of its outstanding debt, lower the Fed Funds
rate by a couple of hundred basis points and fund a sizable Federal deficit coming.
No rose garden ahead.
The foreign based Sony, was numero uno in terms of 10-year rate of return. Xerox had already started to fade, in the 16 spot, while Polaroid at 25 was sandwiched between Eli Lilly and Amerada Hess. Not only is nothing forever but it’s dangerous living in the high ground.