Pundits spar over whether the FRB ends quarterly bumps at 4%, maybe 4.5%. Financial history suggests this is foolish quibbling. I see 6% coming, comparable with an embedded inflation rate of 6% or better. My charts, dating back to early postwar years, suggest I, too, may need more residual bullishness beaten out of my hide.
But, don’t cry for me, Argentina. We ain’t going back to demoralized late forties. The chart above makes a good case that we ain’t seen anything so dire, as yet. My trusty graphs, dating back over 50 years, adumbrate scary trajectories are repeatable. When the FRB fought rampant inflation, early eighties, the S&P 500 sold down under 10 times earnings.
Actually, it took out lows set in the country’s early postwar years. This was even before my time on the Street. You didn’t want to own a copper mine if it cost you 85 cents to produce a pound, but world copper quotes ticked at 65 cents.
Budget imbalances took years to correct and pushed the western world into deep recession. High cost of carrying debt, spring of 1974, saw owners walking away from co-ops in New York.
Meanwhile, art at auction bubbled out of control at Sotheby’s, May ‘74 sale. The press of dealers and serious collectors spilled over to several adjoining salesrooms. I was outbid on all the pieces I coveted. When I chatted with dealers – they told me syndicates of European dealers stood flush with Other People’s Money (OPM). I had coveted Christo’s Wrapped Vespa done in 1963. It sold here for $50,000, drawing a round of applause when knocked down to the successful bidder.
Christo’s Wrapped Vespa, 1963
Now, there’s nothing wrong paying $50,000 for a wrapped Vespa. After all, you are rewarding the daring conception of the artist to be provocative, challenging your ideas on what’s art and possibly even puncturing your bourgeois sensibilities. Later, the problem may arise if your wrapped Vespa becomes old hat. You run the risk of looking a bit foolish.
Currently, I view most internet and cloud computer service operators as creators of wrapped Vespas bought with other people’s money. Forces me outside for a breath of fresh air where I can buy stocks at 10 times earnings. Consider: Exxon Mobil, Occidental Petroleum and Hess, great stocks, but ignored by almost all high metabolic players excepting Warren Buffett.
I’ve bought back into Boeing which I owned at the onset of the jet age, early sixties, but sold at the onset of their 737 problems. The average multiplier on banks has wilted to 12 times earnings, but the onset of recession restrains me from more than probes in Citigroup. It trades like cyclicals - Alcoa, Freeport-McMoRan, U.S Steel and Halliburton. The market looks ready to give up on deep cyclicals.
In today’s art world, to gain critical and buyer acceptance, artists have turned revolutionary in subject matter, technique and materials. Think of Andy Warhol’s Marilyn series and Basquiat’s fanciful graffiti-like works. I’ve owned Warhols and Basquiats early on, but turned down their canvases priced under $10,000 decades ago. Now, they change hands at over $100 million.
The art market is easily as capricious and volatile as the Big Board. If you make your picks early on, return can better any successful venture capital play. I never bought a controversial work of art where I didn’t think I’d have to write it off as worthless, that nobody would be so stupid as me to have thrown out serious money for such crapola.
As yet, America isn’t even close to selling at a discount. The market, late in 1974, based out at 570, selling at 6 times earnings. We had reverted to the days of 1949, still fighting for a postwar recovery. Who can know how low bear market territory may beset us today? How absurd it was for professional investors in 1965 to conceive of the Dow Jones Industrial Average heading towards 7 times earnings in 1975!
Tremendous swings in confidence relate to changes in the relationship between the Federal government and the business world. I sense, now, that the Congress and Federal Reserve Board are not in an especially vindictive posture to stamping out inflation and radically changing the tax structure for even super-wealthy individuals and major corporations. If my call is on the money, it means the price-earnings ratio for the market won’t drop much below mid-teens.
To experience the next bull market, you need a broad base of rising earnings, not just technology, now somewhat suspect. Everyone has to believe interest rates do peak soon, that the Fed Funds rate isn’t going much above 4.5%.
Wall Street finally has begun to deal with the high probability that onset of recession is at hand. Cyclical paper like copper, aluminum, oil service and steel can slough off between 5% and 7% daily, while Wrapped Vespa stocks like Tesla, Meta Platforms, Alphabet and Amazon jitterbug lower, too.
The sun won’t come up like a red rubber ball anytime soon.